April 20, 2007 4:14 PM
by Weekend Edition
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In contemporary policy discussions, the interest rate occupies center stage if only because the much-watched federal funds rate is the Federal Reserve's sole surviving policy target. (A quarter-century ago, the Fed lost the ability to target the money supply — or even to identify a distinctly relevant monetary magnitude.) By its very nature an extra-market institution, the Federal Reserve is expected to exert a countervailing force. It is to move against market forces that, presumably, would otherwise be disruptive. In accordance with the Keynesian vision, market interest rates fail to coordinate saving and investment decisions, leaving saving decisions dependent only on incomes and leaving investment decisions dominated by Keynes's "animal spirits."
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Comments (6)
I don't think that orthodox economists are totally blind to considerations of structural change of economy and growth. It's true that economics has been so long time concerned with the equilibrium so that inflation and unemployment have been main subjects of research and policy objectives.
Austrian tradition is superior to previous in a sense that time has always been one of the main elements in the economic analysis.
Austrians also know that malinvestments cause distortions in the economic structure and often it's impossible to move those resources to other sectors. That is reason why governments economic policies which subsidize foolish programs are value destructive.
Published: April 21, 2007 10:49 AM
This is the best article that I read here for a long time.
Published: April 22, 2007 1:09 PM
Another great article from Roger Garrison. I have learned so much from him.
I have read some very Austrian-like papers from Fed economists, but their influence doesn't seem to percolate upwards to the FOMC. I think that may be because at the top levels, monetary policy is more about politics than economics.
As for determining when we're in a period of sustained growth or a bubble, I think assets should give us a clue. As Machlup wrote, the stock market should grow very slowly. It will grow rapidly only under rapid monetary growth. I think the same could be said for housing and any other asset. So watch asset prices carefully!
Published: April 22, 2007 7:01 PM
Roger Garrison's article is the most interesting discussion of Austrian business cycle theory I have read in a long time. I especially enjoyed his discussion of intemporal neglect by mainstream economists, and his clear explanation of fundamental differences in the Austrian outlook and that of conventional macroeconomics.
Also, Professor Garrison's discussion of the dynamics of "accomodating growth", by preventing a rise in the natural rate in response to adaptations of new technology is a new and valuable insight to me. I have a clearer understanding of the dynamics of the boom of the ninties (and the twenties, as well).
Many thanks for a great article!
Published: April 22, 2007 10:24 PM
Great article. I hope this type of excellent analysis goes mainstream in the next decade.
I wonder if the natural rate of interest wouldn't create a boom / bust pattern by itself. After all, if people suddenly become more present oriented, it could cause the liquidation of many investments. And I am not so sure that, even with a 100% reserve system (to put the most stringent hypothetical case) that we would not have booms and busts. They'd probably be less violent for sure ... but that is probably all that could be said.
Published: April 23, 2007 4:34 PM
Excellent article. Thank you.
Published: April 25, 2007 9:37 AM