The Sraffa-Hayek Debate on the Natural Rate of Interest

Abstract:     
F. A. Hayek's Prices and Production based on his hugely successful lectures at LSE in1931 were the first English presentation of Austrian business-cycle theory and established Hayek as a leading business-cycle theorist. Sraffa's highly critical 1932 review of Prices and Production seems to have been instrumental in turning opinion against Hayek and the Austrian theory. A key element of Sraffa's attack was that the idea of a natural rate of interest, reflecting the underlying real non-monetary relationships, undisturbed by monetary factors, was, from Hayek's perspective, incoherent, because, without money, there is a multiplicity of own rates, none of which can be identified as the natural rate of interest. The natural rate could have meaning only if it were defined as an average of the own rates, but, having rejected the use of index numbers, Hayek had foreclosed that option. Hayek's response failed to counter Sraffa’s argument. However, as Ludwig Lachmann later pointed out, Keynes's treatment of own rates in Chapter 17 of the General Theory undercuts Sraffa's criticism. Own rates, in any intertemporal equilibrium, cannot deviate from each other by more than expected price appreciation or depreciation plus the cost of storage and the service flow provided by the commodity, so that the net anticipated yield from holding assets are all are equal in intertemporal equilibrium. Thus, the natural rate of interest, on Keynes's analysis in the General Theory, is well-defined, at least up to a scalar multiple reflecting the choice of numeraire. However, Keynes’s revision of Sraffa’s own-rate analysis provides only a partial rehabilitation of Hayek's natural rate. Since there is no unique price level in a barter system, a unique money natural rate of interest cannot be specified. Hayek implicitly was reasoning in terms of a constant nominal value of GDP, but barter relationships cannot identify any path for nominal GDP, let alone a constant one, as uniquely compatible with intertemporal equilibrium.

Number of Pages in PDF File: 20

Keywords: barter economy, business cycles, Fisher, Hayek, intertemporal equilibrium, Keynes, money, natural rate, own rate, Sraffa

JEL Classification: B22, B30, E30, E31, E32, E43, E52

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