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Don Bellante

provided by Gerald O’Driscoll(l977, pp. 115-1 8). An extensive comparison of Friedman’s (mon- The Phillips curve 37.5 etarist) and Hayek’s (Austrian) explanations of the processes that transmit a monetary injection into a self-reversing decrease in unemployment is provided in Bellante and Garrison (1988). A simplified version of the Hayekian description begins with an injection of newly created money by the central bank into the market for loanable funds. This injection lowers the market rate of interest below the Wicksellian ‘naturalrate of interest - the rate

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Mark Skousen

and Friedrich A. Hayek. The Mises-Hayek model offers a plausible cause for the initial downturn in 1929 and the crisis that followed. Mises and Hayek maintain that, as long as market interest rates reflect the natural rate of time preference of consumers, there can be no systematic business cycle. But if the government deliberately lowers interest rates below the natural rate of time preference, resources will be misallocated, changing the level and pattern of investment. An artificial boom begins in the higher-order capital goods industries (mining, manufacturing

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William N. Butos

entrepreneurs. That ‘Mr. Keynes’ aggregates conceal the most fundamental mechanisms of change’ (p. 277) emerges as a persistent theme in Hayek’s critique of the Treatise. The concept fundamental to both Keynes’s and Wicksell’s analyses is the natural rate of interest, that is, the rate which equates saving and investment. For both Keynes and Wicksell, the significance of the natural rate resides in the consequences of a divergence between it and the market rate. Wicksell and most of his followers examine the inflation case of a positive deviation (lagging or lowered market

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Robert J. Batemarco

. 396-404) and refined by EA. Hayek (1928, 1931, 1939), ABCT is unique in including real capital goods among its elements in a manner which does not assume away their essential heterogeneity. Austrian treatment of capital goods owes much to BohmBawerk’s structure of production analysis and the notion of capital complementarity (Lachmann, 1956, pp. 3,117-18). The theory demonstrates the connection between this structure of capital and monetary policy by way of Wicksell’s natural rate of interest theory and Mises’s integration of money into general economic theory

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Steven Horwitz

sustained inflation. A further possible effect of inflation is the beginning of the business cycle. Excess supplies of money leave banks with additional reserves, enabling them to lower their market rates of interest and attract new borrowers. As the Austrian theory of the business cycles argues, these lower market rates will be below the prevailing natural rate of interest (that is, the rate that equates ex ante savings and investment) and will lead entrepreneurs to invest in longerterm projects, thus setting off the cycle (see Rothbard, 1983). Whether or not a

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J. Robert Subrick

have altered their preferred trade-off between present and future consumption. This is the natural rate of interest. It is natural in the sense that it reflects the preferences and constraints Money is non-neutral 119 of borrowers and lenders. Now suppose that the central bank expands the money supply, thereby increasing the supply of credit available. This is the market rate of interest. The market interest rate declines as a result as more credit is available. It is below the natural rate of interest. Saving falls and investment increases at the lower interest

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Kevin D. Hoover

illusion, the New Classical model-established monetary and fiscal policies that act on nominal income do not possess the control over economic performance that was traditionally assumed in the Keynesian model. Monetary policy can affect inflation, market interest rates and exchange rates, but cannot affect relative prices, real interest rates, real exchange rates, employment or real output. The stark assertion of the ‘classical dichotomy’ between the real and monetary economies suggested to some that the new classical macroeconomics was a species of, or perhaps successor

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Richard M. Ebeling

potential borrowers in the market. A money rate below (or above) the ‘natural rate’,8 however, was not neutral in its effects on various prices in the economy. The role of the rate of interest as a capitalization factor meant that a lowering (or raising) of the money rate of interest would enhance (or reduce) to a greater extent the expected profitability of long-term, as opposed to short-term, investments. In the cumulative process, while all prices would be rising (or falling) the effect would be relatively more CHAPTER 5 9/4/03 1:18 PM Page 3 138 Austrian

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Martin T. Bohl and Jens Hölscher

used to be a private good. REFERENCES Buiter, W.H. and N. Panigirtzoglou (2003), ‘Overcoming the zero bound on nominal interests rates with negative interest on currency: Gesell’s solution’, Economic Journal, 113 (490), 723–46. Cole, Arthur Harrison (1938), Wholesale Commodity Prices in the United States: 1700–1861, Cambridge, MA: Harvard University Press. Gesell, S. (1916), The Natural Economic Order, rev. edn 1958, London: Peter Owen. Glaser, D. (1997), ‘An evolutionary theory of the state monopoly over money’, in K. Dowd and R.H. Timberlake (eds), Money and the

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Gregory B. Christainsen

may indeed be many instances where this relationship holds, but Hayek argued that, particularly in the neighborhood of full employment, there are plausible sets of microeconomic conditions, for example if the costs of employing capital goods are rising relative to wage rates, under which increased consumption might cause a decrease in investment. With respect to the relationship between aggregate demand and total employment, Hayek presented a detailed microeconomic analysis that ended up echoing Mill’s dictum that ‘demand for commodities is not demand for labor