Reply To: Annoying Article


Here are a few brief points of rebuttal:

1. Human action is forward looking, not backward looking. Therefore, how capital came into existence cannot matter for human action today. The price of a piece of equipment today cannot be affected by the “embodied” labor from its production in the past.

2. Austrians do not claim that capital is “embodied” time. They argue that the value of capital is in advancing a person in time toward the end he aims to attain in the future.

3. In claiming that the pure rate of interest is uniform across both the credit markets and the capital structure, Austrians do not assume “perfect knowledge” or overlook the distinction between “real” capital and financial capital. Austrians argue that savers have the alternatives of investing in either the credit markets or production process and therefore, they will arbitrage away any difference in the pure rate of interest between the two alternatives.

4. Contrary to the author, if people become more uncertain of the future and as a consequence hold more money, this results in a higher purchasing power of money and not a higher rate of interest.

5. Austrians argue that both the pure rate of interest and the amount of saving-investing are determined by time preferences. Any of a number of factors can change the rate of time preference and therefore, change the pure rate of interest and the amount of saving-investing. Austrians make no claims about any relationship between “real” interest rates and the amount of saving-investing.

6. Regardless of whether there are unemployed resources or not, people in society always must make a choice between allocating resources into shorter production processes (“consumption “) and longer production processes (“investment”).

7. Technology is not “embodied” memory. It is knowledge of production. Technology, applied in production, is an objective feature of capital goods and not of labor.

8. The capital structure as used in Austrian economics is not a metaphor but a stylistic description of the real economy.