Time and Money: The Macroeconomics of Capital Structure London: Routledge (2000) by Roger Garrison and edited for UNYP Macroeconomics course by Dan Stastny Instructions: This text will be used both for chapter on capital in the first part of the course and in the chapter on fluctuations in the third part of the course. Even though it appears in full, not all of it is needed at this course level. Thus the editing consists in changing the font sizes to indicate what parts are essential for what chapters. For the chapter on capital (first part of the course), the essential text is font size 12 or larger. For the chapter on fluctuations (third part of the course), the essential text is size 10 or larger. Text in the font size 8 can be skipped altogether, as it deals with or refers to concepts and problems that go beyond the sco pe of the UNYP Macroeconomics course.
**** The insights of the old Austrian School provide as basis for a new macroeconomic framework for dealing with the perennial issues of economic growth and business cycles. With attention to the time element in the economy's production process, the logic and the graphics of capital -based macroeconomics highlight the contrast between genuine economic growth and unsustainable expansions. Constructed to capture the insights of Ludwig von Mises ( 1953) and Fried rich A. Hayek ( 1967), this interlocking graphical framework demonstrates the coherence of Austrian macroeconomics and constitutes a viable alternative to the more conventional macroeconomic constructions.
CAPITAL THEORY: IT’S ABOUT TIME Whether packaged as New Classicism or New Keynesianism, modern macroeconomic theorizing has become increasingly sterile and i rrelevant. Internal consistency has been gained at the expense of applicability to actual cyclical episodes. This unfortunate trend has developed as a result of the inadequate treatment of that troublesome time element in macroeconomic relationships and, more pointedly, to the neglect of the issues of capital structure and of intertemporal coordination. The remedy suggested here entails reintroducing the time element in the form of a thoroughgoing capital-based macroeconomics.
Macroeconomics in the Austrian tradition owes its uniqueness to the Austrian capital theory on which it is based. There are critics within the tradition, however, who take „Austrian Macroeconomics“ to be a term at war with itself. The Austrian label usually denotes (1) subjectivism, as applied to both values and expectations, and (2) methodological individualism with its emphasis on the differences among individuals–differences that account for the give and take of the marketplace and for the very nature of the market process. These essential features of Austrianism stand in contrast to the features of the macroeconomics that has evolved over the last several decades. Conventional macroeconomics has developed a reputation for abstracting from individual market participants and focusing primarily, if not exclusively, on aggregate magnitudes, such as the economy’s total output and its 更多相关文档免费下载请登录: 中文 word 文档库
employment of labor. Even when the incentives and constraints relevant to individuals are brought into view, the focus is on the so-called representative agent, which deliberately abstracts from the interactions among the different agents and hence represents, if anything, the averages or aggregates of conventional macroeconomics. The graphical analysis presented here allows us to deal with the enduring issues of macroeconomics without losing sight of the market process that gives rise to them. To base macroeconomics on capital theory–or, more precisely, to base it on a theory of the market process in the context of an intertemporal capital structure–is to maintain a strong link to the ideas of the Austrian school. Entrepreneurs operating at different stages of production make decisions on the basis of their own knowledge, hunches and expectations, informed by movements in prices, wages, and interest rates. Collectively, these entrepreneurial decisions result in a particular allocation of resources over time. The intertemporal allocation may be internally consistent and hence sustainable, or it may involve some systematic internal inconsistency, in which case its sustainability is threatened. The distinction between sustainable and unsustainable patterns of resource allocation is, or should be, a major focus of macroeconomic theorizing. Systematic inconsistencies can cause the mar ket process to turn against itself. If market signals–and especially interest rates –are „wrong,“ inconsistencies will develop. Movements of resources will be met by „countermovements,“ as recognized early on by Mises ( 1953, p. 363). What initially appears to be genuine economic growth can turn out to be a disruption of the market process attributable to some disingenuous intervention on the part of the monetary authority.
Though committed to the precepts of methodological individualism, the Austrian economists need not shy away from the issues of macroeconomics. Some features of the market process are macroeconomic in their scope. Production takes time and involves a sequence of stages of production; exchanges among different producers operating in different stages as well as sales at the final stage to consumers is facilitated by the use of a common medium of exchange. Time and money are the common denominators of macroeconomic theorizing. While the causes of macroeconomic phenomena can be traced to the actions of individual market participants, the consequences manifest themselves broadly as variations in macroeconomic magnitudes. The most straightforward concretization of the macroeconomics of time and money is the intertemporal structure of capital–hence, capitalbased macroeconomics. Capital-based macroeconomics rejects the Keynes-inspired distinction between macroeconomics and the economics of growth. This unfortunate distinction, in fact, derives from the inadequate attention to the intertemporal capital structure. Conventional macroeconomics deals with economywide disequilibria while abstracting from issues involving a changing stock of capital; modern growth theory deals with a growing capital stock while abstracting from issues involving economywide disequilibria. With this criterion for defining the subdisciplines within economics, the thorny issues of disequilibrium and the thorny issues of capital theory are addressed one at a time. Our contention is that economic reality mixes the two issues in ways that render the one-at-a-time treatments profoundly inadequate. Economywide disequilibria in the context of a changing capital structure escape the attention of both conventional macroeconomists and modern growth theorists . But the issues involving the market’s ability to allocate resources over time have a natural home in capital-based macroeconomics. Here, the short-run issues of cyclical variation and the long-run issues of secular expansion enjoy a blend that is simply ruled out by construction in mainstream theorizing.
THE ELEMENTS OF CAPITAL-BASED MACROECONOMICS
Three elementary graphical devices serve as building blocks for an Austrian-oriented, or capital-based, macroeconomics. Graphs representing (1) the market for loanable funds, (2) the production possibilities frontier, and (3) the intertemporal structure of production all have reputable histories. The first two are well known to all macroeconomists; the third is well-known to many Austrian economists. The novelty of the capital-based macroeconomics presented here is in their integration and application. Auxiliary graphs that link markets for capital goods and markets for labor can extend the analysis and help establish the relationship between our capital-based macroeconomics and the more conventional labor-based macroeconomics. The fundamentals of capital-based macroeconomics is set forth with the aid of a three-quadrant, interlocking graphical framework. Once assembled, our graphical construction can be put through its paces to deal with issues of secular growth, intertemporal preference changes, and policy-driven expansions. These graphics are not offered as a first step toward the determination of the equilibrium values of the various macroeconomic magnitudes. Rather, 2
this framework is intended to provide a convenient basis for discussing the market process that allocates resources over time. (A framework and the discussion of the issues stand in the same relationship to one another as a hat rack and the hats.) The explicit attention to intertemporal allocation of resources allows for a sharp distinction between sustainable and unsustainable growth. The underlying consistency (or inconsistency) between consumer preferences and production plans will determine whether the market process will play itself out or do itself in. Our graphical framework demonstrates the coherence of the Austrian macroeconomics that was inspired early in the last century by Mises, who drew ideas from still earlier writers. It also sheds light on contemporary political debate. Nowadays candidates for the presidency and other high offices vie with one another for votes on the basis of their pledges to „grow the economy“; opposing candidates differ primarily in terms of just how they plan to grow it. The political rhetoric overlooks the fundamental issues of the very nature of economic growth. Is growth something that simply happens when the economy is left to its own devices? Or, is it something that a policy maker does to the economy? Is the verb „to grow,“ as used in economic debate, an intransitive verb or a transitive verb? Capital-based macroeconomics provides us with reasons for associating this fundamentally intransitive Figure 1 verb with sustainable growth and its transitive variant with unsustainable growth. That is, the economy grows, but attempts to grow it can be self-defeating.
Figure 3 The market for loanable funds „Loanable funds“ is a commonly used generic term to refer to both sides of the market that is brought into balance by movements of the interest rate broadly conceived. The supply of loanable funds, which represents the willingness to lend at different interest rates, and the demand for loanable funds, which represents the eagerness to borrow, are shown in Figure 1. For use in macroeconomics, two modifications to this straightforward interpretation are needed, both of which are common to macroeconomic theorizing. First, consumer lending is netted out on the supply side of this market. That is, each instance of consumer lending represents saving on the part of the lender and dissaving on the part of the borrower. Net lending, then, is saving in the macroeconomically relevant sense. It is the saving by all income-earners made available to the business community to finance investment, to facilitate capital accumulation, to maintain and expand the economy’s capital structure. Second, though narrowed to exclude consumer loans, the lending and borrowing represented in the supply and demand for loanable funds is broadened to include retained earnings and saving in the form of the purchasing of equity shares. Retained earnings can be understood as funds that a business firm lends to (and borrows from) itself. Equity shares are included on the grounds of their strong family resemblance, macroeconomically speaking, to debt instruments. The distinction between debt and equity, which is vitally important in a theory of the structure of finance, is largely dispensable in our treatment of the structure of capital. The supply of loanable funds, then, represents that part of total income not spent on consumer goods but put to work instead earning interest (or dividends). Böhm-Bawerk, who drew heavily from the classical tradition, thought of the loanable funds market as the market for „subsistence“ –a term that is avoided here only because of the classical inclination to take the subsistence fund as fixed and to see it as a stock of consumption goods for sustaining the labor force during the production period. In view of the netting out of consumer lending and the broadening to include retained earnings and equity shares, „lo anable funds“ may be better understood as „investable resources,“ a term that emphasizes the purpose of the borrowing. This understanding is consistent with that of Keynes (1936, p. 175): „[According to the classical theory], investment represents the demand for investable resources and saving represents the supply, whilst the rat e of interest is the ‘price’ of investable resources at which the two are equated.“ Beyond the adjustments mentioned above, we should recognize that there remains a small portion of income which is neither spent nor lent. The possibility for holding funds liquid puts some potential slippage into our construction. Money holdings constitute saving in the sense of their not being spent on current consumption, but this form of saving translates only in an indirect way into loanable funds. Our graphical construction can easily allow for variation in liquidity preferences and hence in the demand for money: To the extent that an increase in saving is accompanied by an increase in liquidity preferences, it does not substantially increase the supply of loanable funds and hence has little effect on the rate of interest. However, in contrast to its role in Keynesian macroeconomics, this particular slippage is not a primary focus of the analysis.
Consistent with our understanding of the supply of loanable funds, the demand for loanable funds represents the 更多相关文档免费下载请登录: 中文 word 文档库
borrowers’ intentions to participate in the economy’s production process. Investment in this context refers not to financial instruments but to plant and equipment, tools and machinery. More broadly, it refers to the means of production, which include goods in process as well as durable capital goods and human capital. In some contexts investment could include even consumer durables (automobiles and refrigerators), in which case only the services of those consumer durables would count as consumption. However, to align the market for loanable funds with other elements in the graphical analysis, consumer durables themselves are categorized as consumption rather than investment. While our graphical apparatus is most straightforwardly interpreted on the basis of a goods-in-process conception of investment goods, our discussion often allows for alternative conceptions. The demand for loanable funds reflects the willingness of individuals in the business community operating in the various stages of production to pay input prices now in order to sell output at some (expected) price in the future. With consumers spending part of their incomes on the output of the final stage of production and saving the rest, the market for loanable funds facilitates the coordination of production plans with consumer preferences. Individual investment decisions in the business community tend to bring into uniformity the interest rate available in the loan market more narrowly conceived and the interest rates implicit in the relative prices of outputs in comparison with inputs of the stages of production. The market process that allocates resources intertemporally consists precisely of individuals taking advantage of profit opportunities in the form of interest-rate discrepancies implied by the existing pattern of input and output prices. And, of course, exploiting the intertemporal profit opportunities reduces the discrepancies. In the limit and with the unrealistic assumption of no change in the underlying economic realities, all wealth holders would be earning the market rate of interest. In reality, of course, some amount of discoordination is inherent in the very nature of the market process. The market for lo anable funds registers the expected rate of return net of the losses that this discoordination entails. For this reason, the loan rate of interest is not a „pure“ rate. It reflects more than the underly ing time preferences of market participants. On the demand side, changes in the level of „expected losses from discoordination“ are identified in conventional macroeconomics as changes in the level of „business confidence.“ But business confidence, or, alternatively, business optimism and pessimism –or the waxing and waning of „animal spirits,“ to use Keynes’s colorful phrase–seem to call for a psychological explanation. In capital-based macroeconomics, the expected losses from discoordination call for an economic explanation. Thus, the normal assumption will be: no change in the general level of business confidence (of expected loss from discoordination), except in circumstances where our analysis of the market process suggests that there is a basis for such a change. On the supply side of the market for loanable funds, a similar contrast between conventional macroeconomics and capital -based macroeconomics can be made. Savers, who can partially insulate themselves through diversification from particular instances of discoordination in the business co mmunity, may nonetheless be concerned about the general health of the economy. Diversified or not, savers who want to put their savings at interest must bear a lenders’ risk. What manifests itself on the demand sid e of the loan market as a loss of business confidence manifests itself on the supply side as an increase in liquidity preference. Savers may prefer, sometimes more so than others, to hold their wealth liquid rather than to put it at interest. But like business confidence, liquidity preference–or, all the more, Keynes’s fetish of liquidity–seems to call for a psychological explanation. By contrast, lenders’ risk, which is the more appropriate term in capital-based macroeconomics, calls for an economic explanation. The normal assumption, especially in the light of opportunities for diversification, will be: no change in lenders’ risk –except, again, in circumstances where our analysis of the market process suggests that there is a basis for such a change.
This interplay between the market for loanable funds and markets for investment goods, the discussion of which anticipates other elements of our graphical analysis, is brought into view here so as to warn against too narrow a conception of the interest rate. In the broadest sense, the equilibrium rate of interest is simply the equilibrium rate of intertemporal exchange, which manifests itself both in the loan market and in markets for (present) investment goods in the light of their perceived relationship to (future) consumer goods. The market for loanable funds, however, warrants special attention. The most direct and obvious manifestation of intertemporal exchange, the loan rate that clears this market is vital in translating the intertemporal consumption preferences of income earners into intertemporal production plans of the business community. And, significantly, this same loan rate is also crucial in translating stimulation policies implemented by the monetary authority into their intended–and their unintended– consequences. The supply and demand for loanable funds, shown in Figure 1, identifies a market-clearing, or equilibrium, rate of interest i eq, at which saving (S) and investment (I) are brought into equality. This is the conventional understanding of the loanable-funds market. In application, however, one feature of this market, critical to its incorporation into capital-based macroeconomics, involves an understanding that is not quite conventional. Mainstream theorizing relies on two separate and con flicting constructions–one for the short run and one for the long run. In macroeconomics as well as in growth theory, „to save“ sim ply means „not to consume.“ Increased saving means decreased consumption. Resources that could have been consumed are instead made available for other purposes –for investment, for expanding the productive
capacity of the economy. In long-run growth theory, where problems of disequilibria are assumed away, the actual utilization of saving for expanding capacity and hence increasing the growth rate of output (of both consumer goods and investment goods) is not in doubt. In the conventional macro economics of the short run–especially in Keynesian macroeconomics, where economywide disequilibrium (the Keynesians would say unemployment equilibrium) is the normal state of affairs–the actual utilization of saving by the investment community is very much in doubt. Decreased consumption now is likely to be taken by members of the business community as a permanently lower level of consumption. Saving can depress economic activity all around. The well known „paradox of thrift“ is based squarely on this all-but-certain cause-and-effect relationship between increased saving and decreased economic activity. This particular contrast between the short -run effect and the long-run effect of an increase in saving is undoubtedly what Robert Solow (1997) had in mind when he identified as a major weakness in modern macroeconomics the lack of real coupling between the short run and the long run. Significantly, our understanding of saving in capital-based macroeconomics lies somewhere between the understandings of neoclassical growth theory and of Keynesian macroeconomics. It entails, to use the title phrase of recent article by Solow (2000), a „Macroeconomics of the Medium Run.“ As in many other issues, the Austrians adopt a middle-ground position (Garrison, 1982). People do not just save (S); they save-up-for-something (SUFS). Their abstaining from present consumption serves a purpose; saving implies the intent to consume later. SUFS, our unaesthetic acronym, stands in contrast to the conventional di stinction between „saving,“ the flow concept
Saving in capitalbased macroeconomics means the accumulation of purchasing power to be exercised sometime in the future. It is true, of course, that individual savers do not indicate by their acts of saving just what they are saving for or just when they intend to consume. (They may not know these things in any detail themselves.) But this is only to say that the economy is not a clockwork. Future consumer demands are not determinate. The future is risky, uncertain, unknowable. The services of entrepreneurs, each with his or her own knowledge about the present and expectations about the future, are an essential requirement for the healthy working of the market economy. Increased saving now means increased consumption sometime in the future and hence increased profitability for resources committed to meet that future consumption demand. (so much per year–from now on?) and „savings,“ the corresponding stock concept (the accumulation of so many years of saving–to what end?).
The market process does not work „automatically,“ as commonly assumed in growth theory, and it does not „automatically“ fail, as implied by the Keynesian paradox of thrift. To help identify instances in which the market process works–or fails to work–requires the perspective offered by the production possibilities frontier, which is the second element in capital-based macroeconomics.
Production Possibilities Frontier
The production possibilities frontier (PPF) appears in all introductory textbooks but is never integrated into either Keynesian or classical macroeconomic analysis. Typically, the PPF makes its appearance only in the preliminary discussions of scarcity. Following Samuelson, the older texts (and some new ones) identify the alternative goods to be produced as guns and butter. In its simplicity, the guns-and-butter construction allows us to see that we can have more wartime goods but only if we make do with fewer peacetime goods. The two alternative outputs are negatively related to one another. And while some of the economy’s resources are suitable for producing either output, some are better suited to meeting our wartime needs, some to meeting our peacetime needs. When it becomes necessary for the economy to change its mix of outputs, it must use resources better suited for one output for producing the other. Hence, we must forego ever-increasing quantities of peacetime goods in order to produce additional quantities of wartime goods. Figure 2 shows a guns-and-butter PPF with its increasingly negative slope.
The PPF is sometimes used for comparing different countries in terms of their economic performances over time. For this purpose, the fundamental trade-off between consumer goods and capital goods is presented in a PPF format. In this application, we simply call attention to the fact that the economy grows to the extent that it uses its resources for the production of capital goods rather than for the production of consumer goods. While the trade-off in any given year is made on the basis of that year’s PPF, the year-to-year expansion of the PPF itself depends on just how that trade-off is made. For instance, post-war Japan, whose location on the PPF reflected a considerable sacrifice of consumer goods in favor of capital goods (or exportable goods), grew rapidly from the mid 1950s through the mid 1970s, as depicted by large year-to-year outward shifts in the frontier itself; the United States, whose location on the PPF reflected sacrifices in the other direction, grew more slowly. Compare in Figure 3 the location of Japan and the United States on their respective (and normalized) PPFs with the corresponding rates of expansion. The same PPF that illustrates the possibilities of growth in the face of scarcity can easily be adapted for use in our capital-based macroeconomics. Any one year’s production of capital goods is simply the amount of gross investment for that year. Accordingly, our PPF shows the trade-off between consumption (C) and investment (I). This construction allows for an obvious link with the supply and demand for loanable funds, and it also gives us a link to the more conventional macroeconomic theories which use these same aggregates, (C, I, and S) as their building blocks. 更多相关文档免费下载请登录: 中文 word 文档库
Unlike the investment magnitude in conventional constructions, however, our investment is measured in gross terms, allowing for capital maintenance as well as for capital expansion. There is some point on the frontier, then, for which gross investment is just enough to offset capital depreciation. With no net investment, we have a stationary, or no-growth, economy. Combinations of consumption and investment lying to the southeast of the nogrowth point imply an expansion of the PPF; combinations lying to the northwest imply a contraction. Contraction, Stationarity, and Expansion are shown in Figure 4.
Keynes clearly recognized that once full-employment has been established, the classical theory (in which he included Austrian theory) comes into its own. The purpose of featuring the PPF in capital-based macroeconomic analysis is to give full play to those classical and Austrian relationships. The PPF for a given year constrains consumption and investment to move in opposite directions along the frontier. More strictly speaking, comparative-statics analysis entails combinations of consumption and investment that lie on a given PPF. But as we shall see, the actual movement from one combination to the other may involv e a bubbling up above the frontier or a dipping down into its interior. The constraint represented by the PPF, for capital-based analysis as well as for macroeconomic applications generally, is not absolute. Consumption and investment can move together beyond the frontier but only temporarily; in real terms, points beyond are not sustainable. And, of course, in conditions where malfunctioning markets
have economywide consequences, consumption and investment can move together inside the frontier; where scarcity is not bindin g, idleness can be traded for more of both kinds of output. Using the PPF as an elementary component of capital-based macroeconomics leaves unspecified (within a wide range) the particular temporal relationship between this year’s investment and the corresponding consumption of future years. In a simple two-period framework, an increase in investment of ΔI in period 1 permits an increase in consumption of ΔC = (1+r)ΔI in period 2, where r is the real rate of return on capital. In an equally simple stock -flow framework, in which infinitely-lived investment goods yield a stream of consumption services, an increase in investment of ΔI in period 1 permits an increase in consumption of ΔC = rΔI for each and every successive year.
Neither of these overly simple conceptions of intertemporal transformation give adequate play to capital in the sense of a collection of heterogeneous capital goods that can be combined in different ways to yield consumable output at various future dates. In neither is there any non-trivial meaning to the notion of a capital structure or any scope for a restructuring of capital. To allow for the sort of problems that make the Austrian approach to macroeconomics worthwhile, a substantial portion of the economy’s capital goods must be remote from consumable output, some more so than others. Capital must be heterogeneous, and the different capital goods must be related to one another by various degrees of complementarity and substitutability. The expression for intertemporal transformation in capital-based macroeconomics is itself changeable and lies somewhere in the intermediate range between the simple two-period conception and the simple stock-flow conception. Dealing more specifically with possible patterns and likely patterns of movements of, along, beyond, and within the frontier requires a specific account of the intertemporal structure of production, which is the third element of capital-based macroeconomics. The Intertemporal Structure of Production Attention to the intertemporal structure of production is unique to Austrian macroeconomics. Elementary textbooks on macroeconomics all contain some mention of a sequence of stages of production, but only to warn against double counting in constructing the more aggregative national income accounts. The farmer sells grain to the miller; the miller sells flour to the baker; the baker sells cases of bread to the grocer, and the grocer sells individual loaves to the consumer. The emphasis in such examples is on the value dimension of the production process and not on the time dimension. One method of calculating total output is to subtract the value of the inputs from the value of the output for each stage to get the „value added“ and then to sum these differences to get the total value of final output. Simply adding the outputs of the farmer, the miller, the baker, and the grocer would entail some double, triple, and quadruple counting. Capital-based macroeconomics gives play to both the value dimension and the time dimension of the structure of production. The relationship between the final, or consumable, output of the production process and the production time that the sequence of stages entails is represented graphically as the legs of a right triangle. In its strictest interpretation, the structure of production is conceptualized as a continuous-input/point-output process. The horizontal leg of the triangle represents production time. The vertical leg measures the value of the consumable output of the production process. Vertical distances from the time axis to the hypotenuse represent the values of goods-in-process. The value of a half-finished good, for instance, is systematically discounted relative to the finished good–and for two reasons: (1) further inputs are yet to be added and (2) the availability of the finished good lies some distance in the future. Alternatively stated, the slope of the hypotenuse represents value added (by time and factor input) on a continuous basis. The choice of a linear construction here over an exponential one maintains a simplicity of exposition without significant loss in any other relevant regard. Although the goods-in-process example is the most straightforward way to conceptualize the triangle, our interpretation of this Hayekian construction can be extended to include all forms of capital that make up the economy’s structure of production. We can take into account the fact that mining operations are far removed in time from the consumer goods that will ultimately emerge as the end result of the time-consuming production process, while retail operations are in relative close temporal proximity to final output. Figure 5 shows the Hayekian 更多相关文档免费下载请登录: 中文 word 文档库
triangle and identifies five stages of production as mining, refining, manufacturing, wholesaling, and retailing. The identification of the individual stages is strictly for illustrative purposes. The choice of five stages rather than six or sixty is strictly a matter of convenience of exposition. To choose two stages would be to collapse the triangle into the two-way distinction between consumption and investment–the distinction that gets emphasis in the PPF. To choose more than five stages would be to add complexity for the sake of complexity. Five gives us the just the appropriate degree of flexibility: A structural change that shifts consumable output into the future, for instance, would involve an expansion of the early stages (with the first stage expanding more than the second), a contraction of the late stages (with the fifth stage contracting more that the fourth), and neither expansion nor contraction of the (third) stage that separates the early and late stages. The time dimension that makes an explicit appearance on the horizontal leg of the Hayekian triangle has a double interpretation. First, it can depict goods in process moving through time from the inception to the completion of the production process. Second, it can represent the separate stages of production all of which exist in the present, each of which aims at consumption at different points in the future. This second interpretation allows for the most straightforward representation of the relationships of capital-based macroeconomics. The first interpretation comes into play during a transition from one configuration to another. The double labeling of the horizontal axis in Figure 5 is intended to indicate the double interpretation: „Production Time“ connotes a time-consuming process; „Stages of Production“ connotes the configuration of the existing capital structure. To illustrate the time element in the structure of production with an reference to the so-called smoke-stack industries may seem counter to trends in economic development over the past few decades. Mining and manufacturing may be in (relative) decline and the service and information industries on the rise. The mix of goods and services may be changing in favor of services, and human capital may have more claim on our attention than does heavy equipment. But as long as we think in terms of t he employment of means, the achievement of ends, and the time element that separates the means and the ends, the Hayekian triang le remains applicable. The continuous-input/point-output process that is depicted by the Hayekian triangle takes time into account but only as it relates to production. Adopti ng the pointoutput configuration gives us a straightforward link to the consumption magnitude featured in our PPF quadrant. But point output implies that consumption takes no time. Explicit treatment of consumer durables would involve extending the time dimension beyond the production phase of such durabl e goods. Similarly, explicit treatment of durable capital goods employed in the various stages of production would require additional complicating modifications to the configuration. Durable consumption goods and durable capital goods are obvious and, in some applications, important features of the market process. But to include these features explicitly would be to add complexity while clouding the fundamental relationships that are captured by the simpler construction.
The graphical depiction of a linear sequence of stages is not intended to suggest that the production process is actually that simple. There are many feedback loops, multiple-purpose outputs, and other instances of nonlinearities. Each stage may also involve the use of durable–but depreciating–capital goods, relatively specific and relatively nonspecific capital goods, and capital goods that are related with various degrees of substitutability and complementarity to the capital goods in other stages of production. Insights involving these and other complexities are best dealt with by careful and qualified application of Hayek’s original construction. Even in the simple triangular construction, however, the reckoning of production time is anything but simple. While the verti cal and horizontal dimensions of the triangle are intended to represent value and time separately, the relevant time dimension is not measured in pure time units. Instead, the t ime dimension measures the extent to which valuable resources are tied up over time. Production time itself, then, has both a value dimension and a time dimension. Two dollars worth of resources tied up in the production process for three years amounts to six dollar-years (neglecting compounding) of production time. The complex unit of dollar-years is not foreign to capital theory. It measures Gustav Cassel’s (1903) „waiting“ and underlies Böhm-Bawerk’s ( 1959) roundaboutness. These two related concepts have been in for much misunderstanding and criticism. The dimensional complexity of an intertemporal production process is what gave play to the technique-reswitching and capitalreversing debates of the 1960s and accounts for most of the thorny and controversial issues of capital theory. It was precisely these thorny issues that underlay the eagerness of macroeconomists in the 1930s to drop capital theory out of macroeconomics. If our objective were to set out the issues of the 1960s controversy, we would have to forego the simple Hayekian triangle in favor of an exponential function to allow for the compounding of interest, without which the controversies do not emerge. Thus, the key element of capital-based macroeconomics, the Hayekian triangle, is not intended to rid capital theory of its thorniness but rather to put those thorns aside in order to highlight the macroeconomic aspects of intertemporal equilibrium and intertemporal disequilibrium. Nor is it intended to help determine quantitatively the precise amount of waiting or the precis e degree of roundaboutness that characterizes the structure of production. Rather, it is intended to indicate the general pattern of the allocation of resources over time and the general nature of changes in the intert emporal
pattern. To this end, the still-unresolved–and possibly unresolvable–issues of capital theory can be kept at bay. The focus, instead, is on the most fundamental interrelationships among the separate elements of capital-based macroeconomics.
CAPITAL STRUCTURE AND SECULAR GROWTH
Having accounted separately for each of the three elements of capital-based macroeconomics, the basic interconnections among these elements follows almost without discussion. Figure 6 represents a wholly private economy or the private sector of a mixed economy whose public-sector budget is in balance. It shows just how the supply and demand for loanable funds, the production possibility frontier, and the intertemporal structure of production relate to one another. The loanable-funds market and the PPF are explicitly connected by their common axes measuring investment. The PPF and the structure of production are explicitly connected by their common axes measuring consumption. A critical connection between the structure of production and the loanable funds market is not quite as explicit as the others. The slope of hypotenuse of the Hayekian triangle reflects the market-clearing rate of interest in the market for loanable funds. „Reflects“ is as strong a connection as can be made here. With a continuous-input construction, the slope of the hypotenuse reflects more than the interest rate. The value-differential across any given stage is partly attributable to inputs being added in that stage and partly attributable to the change in temporal proximity to final output. However, as applied to the private sector and under given institutional arrangements, the slope of the hypotenuse and the market-clearing rate of interest will move in the same direction. That is, a lower (or higher) rate of interest will imply a shallower (or steeper) slope. The location of the economy on the PPF implies full employment, or, equivalently, the „natural“ rate of unemployment. The mutual compatibility of the three elements implies that the market-clearing interest rate is the „natural“ rate of interest. (Note that the natural rate of interest cannot be defined solely in terms of the loanablefunds market.) In its simplest interpretation, Figure 7 represents a fully employed, no-growth economy, such as depicted in terms of the PPF alone in Figure 4. Resources devoted to gross investment, I fe, are just sufficient to offset capital depreciation. This investment is distributed among the various stages of production so as to allow each stage to maintain its level of output. There is no net investment. Income earners continue to consume C fe and to save an amount that just finances the gross investment. The rate of interest reflects the time preferences of market participants. These steady-state interrelationships provide a macroeconomic perspective on Mises’s Evenly Rotating Economy and constitute a macroeconomic benchmark for the analysis of secular growth and cyclical fluctuations.
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While a no-growth economy allows for the simplest and most straightforward application of our graphical analysis, an expanding economy is the more general case. Secular growth occurs without having been provoked by policy or by technological advance or by a change in intertemporal preferences. Rather, the ongoing gross investment is sufficient for both capital maintenance and capital accumulation. The macroeconomics of secular growth is depicted in Figure 7, which shows an initial configuration (t0) plus two successive periods (t1 and t2). As in Figure 4, the growth in Figure 7 is depicted by outward shifts in the PPF–from t0 to t1 to t2. But we now see what must be happening with the other two elements of the interlocking construction. The rightward shifts in both the supply and the demand for loanable funds are consistent with the absence of any intertemporal preference changes. Savers are supplying increasing amounts of loanable funds out of their increasing incomes; the business community is demanding increasing amounts of loanable funds to maintain a growing capital structure and to accommodate future demands for consumer goods that are growing in proportion to current demands. With ongoing shifts in the supply and demand for loanable funds, the equilibrium rate of interest, which also manifests itself as the ongoing rate of return on capital generally, remains constant. Historically, increasing wealth has typically been accompanied by decreasing time preferences. Accordingly, shifts in the supply of loanable funds will likely outpace the shifts in demand, causing the interest rate to fall. Our treatment of secular growth abstracts from this relationship between wealth and time preferences. The unchanging rate of interest of Figure 7 translates into an unchanging slope of the hypotenuse for the successive Hayekian triangles. The interest rate allocates resources among the stages of production so as to change the size but not the intertemporal profile of the capital structure. As the economy grows, more resources are committed to the time-consuming production process, and more consumer goods emerge as output of that process. Over time and with technology and resource availability assumed constant, the increases in both consumption and saving implied by the outward expansion of the PPF is consistent with the conventionally conceived long-run consumption function. That is, consumption rises with rising income, but it rises less rapidly than income since saving, which equals–and enables–investment, rises, too. The macroeconomics of secular growth provides a more realistic baseline for analyzing particular changes in preferences or po licies. In putting the graphics through their paces, however, the secular component of growth will be kept in the background. Changes in intertemporal preferences as well as policy changes will be analyzed on the assumption that we begin with a no-growth economy. With this simplifying assumption, the movement of the macroeconomy from one equilibrium to another will sometimes involve an absolute reduction in some macroeconomic magnitudes. Current consumption, for instance, might decrease while the economy’s capacity to satisfy future consumer demands is being increased. In the fuller context of ongoing secular growth, the absolute decrease in consumption would translate into a reduced rate of increase in consumption. More generally, the macroeconomic adjustments required by some particular parametric or policy chang e are to be superimposed (conceptually if not graphically) onto the dynamics of the ongoing secular growth.
The macroeconomics of secular growth as depicted in Figure 7 does not keep track of the relationship between the money supply and the general level of prices. Money and prices can be kept in perspective, however, with the aid of the familiar equation
of exchange, MV = PQ. For a given money supply (M) and a given velocity of money (V), the increases in both consumption and investment (C+I =Q) imply decreases in the general price level (P). That is, secular growth is accompanied by secular price deflation. Unlike the deflationary pressures associated with an increase in the demand for money (or a decrease in the supply of money), growth-induced deflation does not imply monetary disequilibrium. Quite to the contrary–and as argued by Selgin (1991), Garrison (1996), and Horwitz (2000), equilibrium in a growing economy lies in the direction of lower prices and wages. The downward market adjustments in the prices and wages take p lace in the particular markets where the growth is actually experienced, with the result that the average of prices is reduced.
Secular growth characterizes a macroeconomy for which the ongoing rate of saving and investment exceeds the rate of capital depreciation. A change in the growth rate–or more generally–in the intertemporal pattern of consumable output may occur as a result of some change in the underlying economic realities. Advances in technology and additions to resource availabilities, as well as preference changes that favor future consumption over present consumption, impinge positively on the economy’s growth rate. Such parametric changes have a direct effect in one or more of the panels of our capital-based macroeconomic framework and have indirect effects throughout. In the following section, the change in the sustainable growth rate attributable to a change in intertemporal preferences is offered as preliminary to our discussion of the unsustainable growth induced by policy actions of the monetary authority. CHANGES IN INTERTEMPORAL PREFERENCES
Sustainable growth can be set in motion by changes in intertemporal preferences. Our framework is well suited to trace out the consequences of such a preference change. It is convenient simply to hypothesize an autonomous economywide change in intertemporal preferences: People become more thrifty, more future oriented in their consumption plans. In reality, of course, intertemporal preference changes are undoubtedly gradual and most likely related to demographics or cultural changes. For instance, baby boomers enter their high-saving years. Or increasing doubts about the viability of Social Security cause people to save more for their retirement. Or education-conscious parents begin saving more for their children’s college years. The essential point is that intertemporal preferences can and do change and that these changes have implications for the intertemporal allocation of resources. The assumption underlying labor-based macroeconomics is that there is a high degree of complementarity between consuming in one period and consuming in the next. On the basis of this assumption, it is believed, changes in intertemporal preferences can be safely ruled out of consid eration. By contrast, capital-based macroeconomics allows for some degree of intertemporal substitutability of consumption. Rejecting the assumption of strict intertem poral complementarity does not imply– as Cowen (1997, p. 84), for one, suggests that it does–that the actual changes experienced are frequent and dramatic. Quite to the contrary, the claim is that over time even small changes have a significant and cumulative effect on the pattern of resource allocation. More pointedly, capital -based macroeconomics suggests that if the interest rate reports a small change when none actually occurred (or fails to report a small change that actually did occur), the consequences can be cumulative misallocations that eventually lead to a dramatic correction.
In Figure 8 an increase in thriftiness–in people’s willingness to save–is represented by a rightward shift in the supply of loanable funds. The implied decrease in current consumption is consistent with a change in the intertemporal pattern of consumption demand: People restrict their consumption now in order to be able to consume more in the future. The implication of higher consumption demand in the future was expressed earlier SUFS: saving-up-for-something. This understanding of the nature of saving gives rise to a key macroeconomic question: How does the market process translate changes in intertemporal preferences into the appropriate changes in intertemporal production decisions? To presupp ose, following Keynes, that reduced consumption demand in the current period implies proportionately low consumption demands in subsequent periods is wholly unwarranted. It would follow trivially that for an economy in which the expectations of the business community were governed by such a presupposition, the market process would experience systematic coordination failures whenever saving behavior changed. This rather telling aspect of the Keynesian vision begs the question about the viability of a market economy in circumstances where intertemporal preferences can change and raises the more fundamental question of how the current intertemporal pattern of resource allocation ever got to be what it is.
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Straightforwardly, the change in credit-market conditions results in a decrease in the rate of interest and an increase in the amount of funds borrowed by the business community, as depicted by the solid point marking the new equilibrium in the loanable-funds market. The corresponding solid point in the PPF diagram shows that the resources freed up by the reduced consumption can be used instead for investment purposes. Note the consistency in the propositions that (1) there is a movement along the PPF rather than off the PPF and (2) there is no significant income effect on the supply of loanable funds. If consumption decreased without there being any offsetting increase in investment, then incomes would decrease as well and so too would saving and hence the supply of loanable funds. The negative income effect on the supply of loanable funds would largely if not wholly negate the effects of the preference change. Keynes’s paradox of thrift would be confirmed: increased thriftiness leads not to an increased growth rate but to decreased incomes. Making matters worse, the decreased incomes and hence decreased spending may well induce a pessimism into the business community, which would result in a leftward shift in the demand for loanable funds. These and other perceived perversities are central to Keynes’s vision of the macroeconomy. In our capital-based macroeconomics, allowing a shift of the supply of loanable funds to move us along a given demand, allowing a lower interest rate to induce a higher level of investment, and allowing the economy to stay on its production possibilities frontier are just mutually reinforcing ways of acknowledging that markets, even intertemporal markets, need not function perversely. The mutually reinforcing views about the different aspects of the market system is what Keynes had in mind when he indicated at the close of his chapter on the „Postulates of Classical Economics“ that those post ulates all stand or fall together. Figure 8 reflects the view that our postulates
The altered shape of the Hayekian triangle shows just how the additional investment funds are used. The rate of interest governs the intertemporal pattern of investment as well as the overall level. The lower interest rate, which is reflected in the more shallow slope of the triangle’s hypotenuse, favors relatively long-term investments. Resources are bid away from late stages of production, where demand is weak because of the currently low consumption, and into early stages, where demand is strong because of the lower rate of interest. That is, if the marginal increment of investment in early stages was just worthwhile, given the costs of borrowing, then additional increments will be seen as worthwhile, given the new, lower costs of borrowing. While many firms are simply reacting to the spread between their output prices and their input prices in the light of the reduced cost of borrowing, the general pattern of intertemporal restructuring is consistent with an anticipation of a strengthened future demand for consumption goods made possible by the increased saving. It is not actually necessary, of course, for any one entrepreneur–or for entrepreneurs collectively–to explicitly form an expectation about future aggregate consumption demand. stand together. The market works. But just how the intertemporal markets work requires that we shift our attention to the int ertemporal structure of production.
The triangle depicts relative changes in spending patterns attributable to increased savings; it does not show the ultimate increase in output of consumption goods made possible by increased investment. To visualize the intertemporal pattern of consumption that follows an increase in thrift, we must superimpose the relative changes depicted in Figure 8 onto the secular growth depicted in Figure 7. Figure 8 by itself suggests an actual fall in consumption. The two figures taken together suggests a slowing of the growth of consumption while the capital restructuring is being completed followed by an acceleration of the growth rate. The growth rate after the capital restructuring will be higher than it was before the preference change. The rate of increase in consumption may go from 2 percent to percent to percent. This pattern of output is consistent with the hypothesized change in intertemporal preferences. 12
Figure 9 differs from Figure 8 only by its including some auxiliary diagrams that track the movement of labor during the capital restructuring. The increased saving can be seen as having two separate effects on labor demand. The two concepts at play here, already discussed in the context of the Hayekian triangle itself, are derived demand and time discount. (1) Labor demand is a derived demand. Thus, a reduction in the demand for consumption goods implies a proportionate reduction in the labor that produces those consumption goods. For stages of production sufficiently close to final output, this effect dominates. The demand for retail sales personnel, for instance, falls in virtual lockstep with the demand for the products they sell. (2) Like all factors of production in a time-consuming production process, labor is valued at a discount. The reduction in the interest rate lessens the discount and hence increases the value of labor. In the late stages of production, this effect is negligible; in the earliest stages of production, it dominates. The two effects, then, work in opposite directions–with the magnitude of the timediscount effect increasing with temporal remoteness from the final stage of production. Together, they change the shape of the Hayekian triangle. The intersection of the two hypotenuses (that characterize the capital structure before and after the intertemporal preference change) marks the point where the two effects just offset one another.
The structure of production in Figure 9 is cut at three different points to illustrate the workings of labor markets. Labor experiences a net decrease in demand for the stage between the intersection of the hypotenuses and final output; labor experiences a net increase in demand for the stage between the intersection of the hypotenuses and the earliest input. Initially the wage rate falls in the late stage and rises in the early stage. After the pattern of employment fully adjusts itself to the new market conditions (with workers moving from the late stage to the early stage) the wage rate returns to its initial level. Also shown is the labor market for a stage of production that is newly created as a result of the preference changes. The supply of and demand for labor at this stage did not intersect at a positive level of employment before the reduction of the interest rate; after the reduction, some employment is supplied and demanded. The pattern of demand in our stage-specific markets for labor is consistent with that shown by Hayek ( 1967, p. 80) as a „family of discount curves,“ with which he tracks the differential changes in labor demand in five separate stages of production. Labor in this reckoning is treated as a wholly nonspecific factor of production, but one that has to be enticed by higher wage rate to move from one stage to another. That is, the short-run supply curve is upward-sloping, the long-run supply curve is not. This construction requires qualification in two directions. First, skills that make a particular type of labor specific to a particular stage would have to be classified as (human) capital, an integral part of the capital structure itself. Workers with such skills would not move from one stage to another. Instead, they 更多相关文档免费下载请登录: 中文 word 文档库
would enjoy a wage-rate increase or suffer a wage-rate decrease, depending upon on the particular stage. Second, the auxiliary graphs depicting movements of nonspecific labor could also depict the movements of nonspecific capital. These capital goods will simply move from one stage to another in response to the differential effects of the time discounting. For instance, trucks that had been hauling sawhorses and lawn furniture may start hauling more sawhorses and less lawn furniture. In general and for any given stage of production, the specific factors undergo price adjustments; the nonspecific factors undergo quantity adjustments. This understanding allows full scope, of course, for both price and quantity adjustments for the various degrees of specificity that characterize the different kinds of capital and labor. In putting our capital-based macroeconomic framework through its paces, however, it is often convenient–and is consistent with convention–to treat labor as a nonspecific factor that is employed in all stages of production. It is neither so predominantly concentrated in the early stages of production that the wage rate rises when the interest rate falls nor so predominantly concentrated in the late stages that the wage rate falls along with a falling interest rate. Of course, in particular applications, if labor is for some reason believed to be disproportionally concentrated in early stages or in late stages, then Figure 9 must be modified to show the corresponding change in the wage rate. Finally, we can note that the treatment of labor in Figure 9 warns against any summary treatment of the labor market. The market’s ability to adjust to a change in the interest rate hinges critically on differential effects within the more broadly conceived market for labor. In the late stages of production, wages fall and then rise in response to a reduced interest rate; in the early stages, wages rise and then fall. (The opposing transitional adjustments in wage rates are shown by the hollow points in the auxiliary labor-market diagrams in Figure 9.) These are the critical relative wage effects that adjust the intertemporal structure of production to match the new intertemporal preferences.
THE MACROECONOMICS OF BOOM AND BUST Understanding the market process that translates a change in intertemporal preferences into a reshaping of the economy’s intertemporal structure of production is prerequisite to understanding the business cycle, or more narrowly, boom and bust. Capital-based macroeconomics allows for the identification of the essential differences between genuine growth and an artificial boom. The key differences derive from the differing roles played by savers and by the monetary authority. The intertemporal reallocations brought about by a preference change, as illustrated in Figures 8 and 9, did not involve the monetary authority in any important respect. The different aspects of the market process that transformed the macroeconomy from one intertemporal configuration to another were mutually compatible, even mutually reinforcing. Equilibrium forces were taken to prevail whether the central bank held the money supply constant, in which case real economic growth w ould entail a declining price level, or (somehow) increased the money supply so as to maintain a constant price level but without the monet ary injections themselves affecting any of the relevant relative prices. Our understanding of boom and bust requires us to take monetary considerations explicitly into account for two reasons. First, the relative-price changes that initiate the boom are attributable to a monetary injection. The focus, however, is not on the quantity of money created and the consequent (actual or expected) change in the general level of prices. The nearly exclusive attention to this aspect monetary theory was the target of early criticism by Hayek ( 1975a, pp. 103-109). Rather, following Mises and Hayek, our focus is on the point of entry of the new money and the consequent changes in relative prices that govern the allocation of resources over time. A second reason for featuring money in this context is very much related to the first. The different aspects of the market process set in motion by a monetary injection, unlike the market process discussed with the aid of Figures 8 and 9, are not mutually compatible. They work at cross purposes. But money –to use Hayek’s imagery–is a loose joint in an otherwise self-equilibrating system. The conflicting aspects of the market process can have their separate real effects before the conflict itself brings the process to an end. The very fact that the separate effects are playing themselves out in inter temporal markets means that time is an important dimension in our understanding of this process. Dating from the early work of Ragnar Frisch (1933), it has been the practice to categorize business cycle theory in terms of the impulse (which triggers the cycle) and the propagation mechanism (which allows the cycle to play itself out). Describing the Austrian theory of the business cycle as monetary in nature on both counts is largely accurate. Money, or more pointedly, cre dit expansion, is the triggering device. And although in a strict sense the relative price changes within the intertemporal structure of production constitute the proximate propagation mechanism, money –because of the looseness that is inherent in the nature of indirect exchange–plays a key enabling role.
Figure 10 depicts the macroeconomy’s response to credit expansion. Intertemporal preferences are assumed to be unchanging. The money supply is assumed to be under the control of a monetary authority, which we will refer to as the Federa l Reserve. The supply of loanable funds includes both saving by income earners and funds made available by the Federal Reserve. The notion that new money enters the economy through credit markets is consistent with both the institutional details of the Federal Reserve and with the history of central banking generally. Students of macroeconomics find themselves learning early on the differences among the three policy tools used by the Federal Reserve to change the money supply: (1) the required reserve ratio set by the Federal Reserve and imposed on commercial banks, (2) the discount rate set by the Federal Reserve and used to govern the level of direct short-term lending to commercial banks, and (3) open market operations through which the Federal Reserve lends to the government by acquiring securities issued by the Treasury. These tools differ from one another in terms of the frequency of use, the intensity of media attention, and the implication about the future course of monetary policy. Of overriding significance for our application of capital-based macroeconomics, however, is the characteristic common to all these tools. The three alternative policy tools are simply three ways of lending money into existence. Reducing the required reserve ratio means that commercial banks have more funds to lend, which means they will have to reduce the interest rate to find additional borrowers. Lowering the discount rate will cause banks to borrow more from the Federal Reserve –with competition among the banks reducing their lending rates as well. Central bank purchases of Treasury securities constitute lending directly to the federal government, which, like other instances of increased lending, puts downward pressure on the interest rate. We see the direct effect of lending money into existence, the impulse, on the supply side of the loanable-funds market in Figure 10. The extent of the credit expansion (the horizontal displacement of the supply of loanable funds) is set to match t he increase in saving shown in Figures 8 and 9. This construction gives us t he sharpest contrast between a preference induced boom and a policy-induced boom. The new money in the form of additional credit is labeled ΔM c in recognition that monetary expansion may not translate fully into credit expansion. Some people may choose to increase their holdings , or hoards, of money (by ΔM h ) in response to policy-induced changes in the interest rate. Such changes in the demand for cash balances, while certainly not ruled out of consideration and not without effects of their own, are of secondary importance to ou r capital-based account of boom and bust. The initial effect on the rate of interest is much the same for both the preference -induced boom of Figure 8 and the policyinduced boom of Figure 10. An increased supply of loanable funds causes the interest rate to fall. The telling difference between the two figures is in terms of the relationship between saving and investment. In Figure 8, investment increases to match the increase in saving. But in Figure 10, these two magnitudes move in opposite directions. Pa dding the supply of loanable funds with newly created money drives a wedge between saving and investment. With no change in intertemporal preferences, the actual amount of saving decreases as the interest rate falls, while the amount of investment, finance d in part by the newly created funds, increases. We can trace upward to the PPF to get a second perspective on the conflicting movements in saving and investment. Less saving means more consumption. Market forces reflecting the preferences of income -earners are pulling in the direction of more
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consumption. Market forces stemming from the effect of the artificially cheap credit are pulling in the direction of more inv estment. One set of forces is pulling north (parallel to the C-axis); the other set pulling east (parallel to the I-axis). The two forces resolve themselves into an outward movement–toward the northeast. Increases in the employment of all resources, including labor, beyond the level associated with a fully employed economy cause the economy to produce at a level beyond the PPF. Is it possible for the economy to produce beyond the production possibilities frontier? Yes, the PPF is defined as sustainable combinations of consumption and investment. Why is it that the opposing market forces do not simply cancel one another, such that the economy is left sitting at its original location on the PPF? There are two ways to answer this question both of whic h derive from Hayek’s notion of money as a loose joint. First, because of the inherent looseness, t he decisions of the incomeearner-cum-consumer-saver and the separate (and ultimately conflicting) decisions of the entrepreneur-cum-investor can each be carried out at least in part before the underlying incompatibility of these decisions become apparent. The temporary success of monetary stimulation policies as experienced by all central banks of all western countries is strong evidence of the scope fo r real consequences of the sort shown. Second, and equivalently, the movement beyond the PPF is in fact t he first part of the market process through which the opposing forces do ultimately cancel one another. Figure 10 shows that the initial phase of the market process triggered by credit expansion is driven by the conflicting behav ior of consumers and investors and involves the overproduction of both categories of goods. The wedge between saving and investment shown in the loanable funds market translates to the PPF as a tug -of-war (with a stretchable rope) between consumers and investors. Conflicting market forces are trying to pull the economy in opposite directions. Understanding subsequent phases of this process requires that we assess the relative strengths of the combatants in this tug -of-war. As the rope begins to stretch, the conflict is resolved initially in favor of investment spending–because the investment community has more to pull with, namely the new money that was lent into existence at an attractive rate of interest. In the Austrian analysis, while an increased la bor input–and a general overproduction–is undoubtedly part of story, there is also a significant change in the pattern of the capital input. The movement beyond the frontier gives way to a clockwise movement; the unsustainable combination of consumption and investment takes on a distinctive investment bias. We have seen that a change in intertemporal preferences sets in motion a process of capital restructuring, as depicted by the Hayekian triangles of Figure 8. Credit expansion sets in motion two conflicting processes of capital restructuring, as depicted in Figure 9. The tug-of-war between investors and consumers that sends the economy beyond its PPF pulls the Hayekian triangle in two directions. Having access to investment funds at a lower rate of interest, investors find the lo nger-term investment projects to be relatively more attractive. A less steeply sloped hypotenuse illustrates the general pattern of reallocation in the early stages of the structure of production. Some resources are bid away from the intermediate and relat ively late stages of production and into the early stages. At the same time, income earners, for whom that same lower interest rate discourages saving, spend more on consumption. A more steeply sloped hypotenuse illustrates the general pattern of reallocat ion in the final and late stages of production. Some resources are bid away from intermediate and relatively early stages into these late and final stages. Mises (1966, pp. 559, 567, and 575) emphasizes the „malinvestment and overconsumption“ that are characteristic of the boom. In effect, the Hayekian triangle is being pulled at both ends (by cheap credit and strong consumer demand) at the expense of the middle –a tell-tale sign of the boom’s unsustainability. Our two incomplete and differentially sloped hy potenuses bear a distinct relationship to the aggregate supply vector and aggregate demand vector suggested by Mark Skousen (1990, p. 297) and are consistent with the expositions provided by Lionel Robbins ( 1971, pp. 30- 43) and Murray Rothbard ( 1972, pp. 11-39). In sum, credit expansion sets into motion a process of capital restructuring that is at odds with the unchanged preferences and hence is ultimately ill-fated. The relative changes within the capital structure were appropriately termed malinvestment by Mises. The broken line in the upper reaches of the less steeply sloped hypotenuse indicates that the restructuring cannot act ually be completed. The boom is unsustainable; the changes in the intertemporal structure of production are self -defeating. Resource scarcities and a continuing high demand for current consumption eventually turn boom into bust. At some point in the process beyond what is shown in Figure 10, entrepreneurs encounter resource scarcities that are more con straining than was implied by the pattern of wages, prices, and interest rates that characterized the early phase of the boom. Here, changing expectations are clearly endogenous to the process. The bidding for increasingly scarce resources and the accompanying increased demands for credit put upward pressure on the interest rate (not shown in Figure 10). The unusually high (real) interest rates on the eve of the bust is accounted for in capital-based macroeconomics in terms of Hayek’s ( 1975b) „Investment that Raises the Demand for Capital.“ The „investment“ in the title of this neglected article refers to the allocation of resources to the early stages o f production; the „demand for capital“ (and hence the demand for loanable funds) refers to complementary resources needed in the later stages of production. The inadvisability of theorizing in terms of the demand for investment goods–and hence of assuming that the components of investment are related to one another primarily in terms of their substitutabili ty–is the central message of Hayek’s article. Though without reference to Hayek or the Austrian school, Milton Friedman coined the term „distress borrowing“ (Brim elow, 1982, p. 6) and linked the high real rates of interest on the eve of the bust to „commitments“ made by the business community during the preceding monetary expansion. While Friedman sees the distress borrowing as only incidental to a particular cyclical episode (correspondence), capital-based macroeconomics shows it to be integral to the market process set in motion by credit expansion. Inevitably, the unsustainability of the production process manifests itself as the abandonment or curtailment of some product ion projects. The consequent unemployment of labor and other resources impinge directly and negatively on incomes and expenditures. The period of unsustainably high level of output comes to an end as the economy falls back in the direction of the PPF. Significantly, the economy does not simply retrace its path back to it s original location on the frontier. During the
period of overproduction, investment decisions were biased by an artificially low rate of interest in the direction of long -term undertakings. Hence, the path crosses the frontier at a point that involves more investment and less consumption than the original mix. Had investors been wholly triumphant in the tug-of-war, the economy would have been pulled clockwise along the frontier to the hollow point, fully reflecting the increase in loanable funds. The vertical component of this movement along the PPF would represent the upper limits of forced saving. That is, contrary to the demands of consumers, resources would be bid away from the late and final stage and reallocated in the earlier stages. The horizontal co mponent of the movement along the PPF represents the overinvestment that corresponds to this level of forced saving. (Had consumers been wholly triumphant in the tug-of-war, the economy would have been pulled counterclockwise along the frontier, fully reflecting the policy-induced decrease in saving. The vertical component of this movement along the PPF represents the upper limits of the corresponding overconsumption.) Since the counterforces in the form of consumer spending are at work from the beginning of the credit expansion, the actual forced saving and overinvestment associated with a credit expansion are considerably less than the genuine saving and sustainable investment associated with a change in intertemporal preferences. (Notice also that the actual forced saving is not inconsistent with the actual overconsumption that characterized an earlier part of the process.) The path of consumption an d investment shown in Figure 10 has the economy experiencing about half the movement along the PPF as was experienced in the case of an intertemporal preference change. The only substantive claims suggested by our depiction is that the direction of the movement will be the same (in Figure 10 as in Figure 9) and that the magnitude will be attenuated by the counterforces. Alternatively stated, our construction suggests that the counterforces are at work but do not work so quickly and so completely as to prevent the economy from ever moving away from its original location on the PPF. This is only to say that a market economy, in which the medium of exchange loosens the relationships that must hold in a barter economy, does not and cannot experience instantaneous adjustments. Although the point at which the adjustment path crosses the PPF is a sustainable level of output, it is not a sus tainable mix. Here, capital-based macroeconomics highlights a dimension of the analysis of an unsustainable boom that is simply missing in conventional macroeconomic analysis . With its exclusive focus on labor markets and its wholesale neglect of injection effects, the economy’s return to a sustainable level of output leaves the mix of output unaltered. In the conventional analys is, then, prospects for a „soft landing“ seem good. Considerations of the economy’s capital structure, however, cause those prospects to dim. There is no market process that can limit the problem of malinvestment to the period of overinvestment. We could not expect–or even quite imagine–that the economy’s adjustment path would entail a sharp right turn at the PPF. Almost inevitably, some of the malinvestment in early stages of production would involve capital that is sufficiently durable and sufficiently s pecific to preclude such a quick resolution. Further, the conventionally understood interaction between incomes and expenditures that initially propelled the economy beyond the PPF and then brought it back to the PPF would still be working in its downward mode as the adjustment path crosses the frontier. There would be nothing to prevent the spiraling downward of both incomes and expenditures from taking the economy well inside its PPF. And leftward shifts in the supply and demand of loanable funds can com pound themselves as savers begin to hold their savings liquid and as investors lose confidence in the economy. That is, self-reversing changes in the capital structure give way to a self-aggravating downward spiral in both income and spending. This increase in liquidity preference–or even a seemingly fetishistic attitude toward liquidity–is not to be linked to some deep-seated psychological trait of mankind but rather is to be understood as risk aversion in the face of an economywide crisis. The spiraling d ownward, which is the primary focus of conventionally interpreted Keynesianiam, was described by Hayek as the „secondary deflation“ –in recognition that the primary problem was something else: the intertemporal misallocation of resources, or, to use Mises’ term, malinvestment. Through relative and absolute adjustments in the prices of final output, labor, and other resources, the economy can eventually recover, but there will be inevitable losses of wealth as a result of the boom-bust episode. The Austrian theory of the business cycle is sometimes criticized for being too specific, for not applying generally to monetary disturbances whatever their particular nature (Cowen, 1997, p. 11). We can certainly acknowledge that the bias in the direction of investment is directly related to the particular manner in which the new money is injected. Credit expansion implies an investment bias. Lending money into existence, as we have already noted, accords with much historical experience. We can certainly imagine alternative scenarios. Suppose, for instance the new money makes its initial appearance as transfer payments to consumers. The story of a transfer expansion (Bellante and Garrison, 1988) has a strong family resemblance to the story of a credit expansion, but it differs in many of the particulars. The output mix during a transfer expansion would exhibit a consumption bias. The initial increase in consumer spending would favor the reallocation of resources from early stages to late stages of production, but considerations of capital specificity would limit the scope for such reallocations. Thus the temporary premium on consumption goods woul d result in an increase in the demand for investment funds to expand late-stage investment activities. Both consumption and, to a lesser extent, investment would rise. The economy would move beyond i ts production possibilities frontier, and the rate of interest would be artificially high. Subsequent spending patterns and production decisions would eventually bring the economy back to its frontier. As in the case of credit expansion, the intertemporal discoordination could give way to a spiraling downward into recession. The recovery phase would differ in at least one important respect. Excessive late-stage investments are by their very nature more readily liquidated than excessive early-stage investments. If only for this reason, we would expect a transfer expansion to be less disruptive than a credit expansion. Figure 11, „A Generalization of the Austrian Theory,“ shows three possible cases of monetary expansion: credit, credit -and-transfer, and transfer. The family of cases exhibits both symmetry and asymmetry. The general adjustment paths of the credit expansion and the transfer expansion are largely symmetrical about the path o f the neutral (credit-and-transfer) expansion. But the potential for a severe depression as gauged by the kind and extent of intert emporal discoordiantion translates into an asymmetry. It is undoubtedly greatest for a credit expansion (because early-stage capital can take more time to liquidate) and least for a neutral expansion (because there is no systematic intertemporal discoordination). The early treatment of the intertemporal effects of monetary expansion was offered (by Mises and Hayek) not as a completely g eneral account but rather as the most relevant account. The very terminology used here to make the distinction between the different kinds of monetary expansion–the relatively familiar „credit expansion“ and the relatively unfamiliar „transfer expansion“ –suggest that the former is still the more relevant. And though specific, the case of credit expansion is readily generalizable in a way that the alternative theories in which the possibility of a bias favoring investment or consumption is simply assumed away at the outset are not.
A SUMMARY VIEW Capital theory and monetary theory are intertwined in a way not recognized in mainstream macroeconomics. The nature and significance of money-induced price distortions in the context of a time-consuming production processes was the basis for my
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early article „Time and Money: the Universals of Macroeconomic Theorizing“ (1984). Macroecon omic theorizing, so conceived, is an account of the economy’s intertemporal market mechanisms. It answers the fundamental question „How do these intertemporal market mechanisms work?“ before it addresses the follow-on question „What can go wrong?“ Capital-based business-cycle theory is a story about how the economy’s production process that transforms resources into consumable output can get derailed. The troubles that characterize modern capital-intensive economies, particularly the episodes of boom and bu st, may best be analyzed with the aid of a capital-based macroeconomics. This view is bolstered by the judgment of Fritz Machlup (1976) that Hayek’s contribution to capital theory was fundamental as well as path -breaking and by the belief that a macroeconomic framework that features the Austrian theory of capital can compare favorably to the alternative frameworks of mainstream macroeconomics.
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