As Free Advice readers know, I have had my differences with Scott Sumner. But in a recent exchange he told me: “I’d encourage you to brush up on the Wicksellian theory of interest rates, it might help you to better understand my argument.”
More generally, it seems that all the cool bloggers are talking about natural interest rates now. Here’s a good summary post from Tyler Cowen (HT2 von Pepe).
==> I am actually somewhat familiar with this concept. For example, check out this paper I prepared for a Liberty Fund conference a few years ago, which drew heavily on work from my (2003) dissertation. You see “natural rate” jumps out quite a bit, including the very first sentence of the paper.
==> The reason for that, of course, is that Mises-Hayek business cycle theory is founded upon the market interest rate being pushed below the natural rate. And any well-read Austrian can go further, and say that that term comes from Knut Wicksell. From my recent book Choice:
…Mises drew on Bohm-Bawerkian capital theory, the interest theory of Swedish economist Knut Wicksell (1851-1926), and the earlier work of the British Currency School on the role of banks in economic crises, in order to advance what Mises called the circulation credit theory of the trade cycle. This is nowadays known as Austrian business cycle theory, the teaching of which is a major objective of the present book. (Murphy, Choice, p. 8)
==> As Scott himself acknowledges, the original Wicksellian approach said the natural rate would keep prices stable. So since prices have been rising since 2009, we can only conclude that actual interest rates have been… (I’ll let you guys fill in the blank.)
I will return to Scott’s thermostat analogy at some point soon, because if that’s the analogy he wants to use, he’s dead in the water. Any normal human being would reject Scott’s approach to monetary policy as crazy in the house-heating analogy that Scott himself picked.
In the meantime, in case Scott sees this post and thinks I’m wrong, all I can say is: Brush up on your Robert Lucas, and then I’m sure you’ll see how I’ve been right all along.
P.S. That last line is a joke, for those of you who are wit-challenged. I’m saying that Scott telling me to go read Wicksell is like me telling him to go read Lucas.