Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, Second Edition.
Chapter 5 : Bank Credit Expansion and Its Effects on the Economic System
The term first-order economic goods has traditionally referred to those consumer goods which, in the specific, subjective context of each action, constitute the goal pursued by the actor in performing the action.
The achievement of these goals, consumer goods, or first-order economic goods, is necessarily preceded by a series of intermediate stages represented by “higher-order economic goods” (second, third, fourth, etc.). The higher the order of each stage, the further the good is from the final consumer good.
This picture might help in better understanding the concept. On the left we have the early stages of production, or stages furthest from consumption. On the right we have the final stages of production, or stages closest to consumption.
Critics of the ABCT believe that CCC constitutes a strong rejection of the austrian theory of capital. Apart from the empirical evidence of ABCT, one problem with the assumptions of the reswitching theory is that it assumes that ABCT is all about the change in capital-intensiveness following a change in interest rates. ABCT does not even depend on the change in interest rates per se, nor even on a “single” natural interest rate as some wrongly believed; Sraffa being just one of them. But as the reswitching technique theory implies the possibility of capital reversing, which is to say, the association between the nature of the production techniques employed and rate of interest is not a monotonic one. That is, a decline in interest rates might lead to a lengthening in the structure of production through more capital-intensive techniques, when at the same time a further decline in interest rates will trigger a drop in the length of the structure of production through less capital-intensive techniques. In other words, that relationship is an U-shaped.
The Pure Theory of Capital
by Friedrich A. Hayek, 1941.
The Cambridge Capital Controversy (CCC) is sometimes cited as one of the strongest refutation of the Austrian Business Cycle Theory, considered by Mark Blaug as “the final nail in the coffin of the Austrian theory of capital”.
We must first point out that the “reswitching controversy” is empirically refuted. From Zonghie Han and Bertram Schefold (2005) :
An empirical investigation of paradoxes: reswitching and reverse capital deepening in capital theory
This paper examines the empirical relevance of the capital controversy. The price model of Sraffa and the dual models of the price and quantity systems of von Neumann become the basis of the investigation. In the course of the controversy, it proved easy to construct theoretical examples which contradicted the fundamental neoclassical hypothesis of an inverse capital demand function. This paper presents empirical examples for the first time. Thiry-two input-output tables from the OECD database serve as data. As a result, one envelope is found which involves reswitching. Reverse substitution of labour or reverse capital deepening are observed in about 3.65% of tested cases: they involve at least two switchpoints.
Theoretically, Guido Hülsmann, in “The structure of production reconsidered”, had investigated the issue. He explains that the interest rate and the production structure are not necessarily negatively related (i.e., a lower interest rate is related to a lenghtening of the structure of production) even though the interest rate still affects relative spending, as theorized by austrians. He proposes to develop and enrich the theory of the structure of production. He lists 8 possible scenarios, each of them having different implications. He finally investigates the implication of the consumer credit and the variation of monetary conditions. The former simultaneously thins and lengthens the structure of production. The latter has no systematic impact on the structure of production.
J’ai regroupé dans ce seul post toutes les références confirmant empiriquement la théorie autrichienne des cycles économiques. Les passages, calculs et graphiques importants de ces études sont cités. Au total, une dizaine d’articles et une cinquantaine d’images.
La théorie autrichienne des cycles économiques (ABCT) est l’analyse, par l’école autrichienne, des cycles économiques , à savoir des phases d’expansion suivies des phases de récession. Peut-être que l’oeuvre décrivant le mieux les effets de la surexpansion monétaire est l’ouvrage phare de Jesús Huerta de Soto :
Money, Bank Credit, and Economic Cycles.
Au vu de la répétition des erreurs du passé et des remèdes inadéquats, il est important de bien comprendre pourquoi les théories environnantes sont inexactes et non conformes à l’évidence empirique. Tout le contraire de l’ABCT.
Dr. Hayek on Money and Capital – by Sraffa
If money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might be at any one moment as many “natural” rates of interest as there are commodities, though they would not be “equilibrium” rates. The “arbitrary” action of the banks is by no means a necessary condition for the divergence; if loans were made in wheat and farmers (or for that matter the weather) “arbitrarily changed” the quantity of wheat produced, the actual rate of interest on loans in terms of wheat would diverge from the rate on other commodities and there would be no single equilibrium rate.
Money and Capital: A Reply – by Hayek
I think it would be truer to say that, in this situation, there would be no single rate which, applied to all commodities, would satisfy the conditions of equilibrium rates, but there might, at any moment, be as many “natural” rates of interest as there are commodities, all of which would be equilibrium rates; and which would all be the combined result of the factors affecting the present and future supply of the individual commodities, and of the factors usually regarded as determining the rate of interest. There can, for example, be very little doubt that the “natural” rate of interest on a loan of strawberries from July to January will even be negative, while for loans of most other commodities over the same period it will be positive.
Let us take Mr. Sraffa’s case in which the farmers “arbitrarily changed” the quantity of wheat produced – which I understand, from what follows, to mean that they, for example, so increased the supply of wheat that its price fell below its cost of production and, as a consequence of its temporary abundance, loans of wheat were made at a much lower rate of interest than loans of other commodities. But would that fall in the rate of interest on wheat-loans cause anyone to start roundabout processes of production for which the available subsistence fund is not sufficient ? There is no reason whatever to assume this. In so far as people live on wheat, they will actually be provided with food for a longer period; and in so far as the lower price of wheat will induce people to eat more of it – instead of something else – these other goods will also be available for a longer period of time, and interest in terms of these goods will also fall. The effects will be just the same as if a corresponding amount of wheat had been saved, and when, as a consequence of the fall in the price of wheat, its output falls again, the accumulation of capital made possible by the surplus of wheat will supply cease.