1、,Capital-Based Macroeconomics,Sustainable and Unsustainable Growth The Macroeconomics of Boom and Bust,2009,Adapted from Time and Money: The Macroeconomics of Capital Structure by Roger W. Garrison London: Routledge, 2001,Austrian Macroeconomics,Capital-Based Macroeconomics,Sustainable and Unsustain
2、able Growth The Macroeconomics of Boom and Bust,2009,Adapted from Time and Money: The Macroeconomics of Capital Structure by Roger W. Garrison London: Routledge, 2001,Austrian Macroeconomics,Capital-Based Macroeconomics is an outgrowth of the Austrian theory of the business cyclea theory set out in
3、1912 by Ludwig von Mises and developed in the 1930s by Friedrich A. Hayek and others.,LUDWIG VON MISES 1881-1973,FRIEDRICH A. HAYEK 1899-1992,The Elements of Capital-Based Macroeconomics,The Production Possibilities Frontier The Loanable-Funds Market The Structure of Production Stage-Specific Labor
4、Markets,Applications of Capital-Based Macroeconomics,Sustainable Growth (supported by saving) Unsustainable Growth (triggered by credit creation),Capital-Based Macroeconomics in Perspective,Capital-Based Macroeconomics in Perspective: Three Views of the Market Economy,Theorizing at a high level of a
5、ggregation, John Maynard Keynes argued that market economies perform perverselyespecially the market mechanisms that are supposed to bring saving and investment into balance with one another. Seeing unemployment and resource idleness as the norm, Keynes called for countercyclical fiscal and monetary
6、 policies and ultimately for a “comprehensive socialization of investment.”,Milton Friedmans monetarism was based on a still higher level of aggregation. The equation of exchange MV=PQ made use of an all-inclusive output variable (Q), putting into eclipse the issue of the allocation of resources bet
7、ween current consumption and investment for the future. Seeing no problems emerging from the market itself, Friedman focused on the relationship between the government-controlled money supply and the overall price level.,Capital-based macroeconomics is distinguished by its propitious disaggregation,
8、 which brings into view both the problem of inter-temporal resource allocation and the potential for a market solution. F. A. Hayek showed that a coordination of saving and investment decisions could be achieved by market-governed movements in interest rates. He also recognized that this aspect of t
9、he market economy is especially vulnerable to the manipulation of interest rates by the central bank.,A Methodological Point:,Before we can even ask how things might go wrong, we must first explain how they could ever go right. F. A. Hayek,Sustainable and Unsustainable Growth The Macroeconomics of B
10、oom and Bust,CONSUMPTION,INVESTMENT,The Production Possibilities Frontier,The Production Possibilities Frontier (PPF) is often used for emphasizing the concept of scarcity and illustrating the implied trade-off and for expositing theories of capital and interest, economic growth, and international t
11、rade. But the PPF rarely appears in macroeconomic constructions.,In capital-based macroeconomics, consumption and investment represent alternative uses of the economys resources.,Under favorable conditions, a fully employed market economy allocates resources to both uses, making the most of the trad
12、e-off.,Featuring the trade-off between consumption and investment provides a contrast to Keynesian constructions, in which these two macroeconomic magnitudes are treated as additive components of private-sector spending.,CONSUMPTION,INVESTMENT,Positive net investment means that the economy is growin
13、g. The PPF shifts outward from year to year, permitting increasing levels of both consumption and investment.,“Investment” in this construction represents gross investment, which includes replacement capital.,Typically, the investment needed just to replace worn out or obsolete capital is something
14、less than total, or gross, investment.,This outward shifting of the PPF represents sustainable economic growth.,The difference between the “replacement” and the “gross” magnitudes constitutes net investment, which allows for the expansion of the economy.,Gross Investment,Replacement Capital,Net Inve
15、stment,Four periods of growth are shownwith consumption, as well as saving and investment, increasing in each period. The actual rate of expansion of the PPF depends upon many factors.,CONSUMPTION,INVESTMENT,For instance, with economic expansion, capital depreciation increases, too. But increasing i
16、ncomes are generally accompanied by further increases in saving and investment.,Watch the economy grow.,Gross Investment,Replacement Capital,Net Investment,CONSUMPTION,INVESTMENT,Suppose people become more thrifty, more future oriented. They reduce their current consumption and save instead.,Importa
17、ntly, a change in saving preferences, which provokes a movement along the initial PPF, affects the rate at which the PPF expands outward.,Four periods of growth are shownwith consumption, as well as saving and investment, increasing in each period. The actual rate of expansion of the PPF depends upo
18、n many factors.,For instance, with economic expansion, capital depreciation increases, too. But increasing incomes are generally accompanied by further increases in saving and investment.,Watch the economy grow.,With the increased saving (and investment), the economy grows at a faster rate.,Watch th
19、e movement along the PPF.,CONSUMPTION,INVESTMENT,Now watch the economy grow.,Increased thriftiness makes the difference.,Lets compare the high-growth economy with the original low-growth economy.,INVESTMENT,Note the difference that an initial increase in saving makes in the pattern of consumption an
20、d investment.,Without an initial increase in saving, consumption and investment increase modestly from period to period.,With an initial increase in saving, investment increases at the expense of consumption, after which both consumption and investment increase dramatically from period to period.,CO
21、NSUMPTION,INVESTMENT,Starting with the fourth period, the initial saving pays off as a higher level of consumption than would otherwise have been possible.,CONSUMPTION,The Production Possibilities Frontier shows us what is possiblegiven the state of technology, resource constraints, and (intertempor
22、al) preferences.,Remaining to be shown is how the “possible” can actually happen in a market economy. How can intertemporal preferencesand especially changes in intertemporal preferencesget translated into accommodating decisions in the investment community?,The key price signal is the rate of inter
23、est, which is broadly associated with the market for loanable funds.,In actual application, of course, account must be taken of a spectrum of interest rates, the variations deriving from considerations of risk, uncertainty, and maturity structure.,S,RATE OF INTEREST,SAVING (S) INVESTMENT (D),D,The M
24、arket for Loanable Funds,Loanable-funds theory was a staple in pre-Keynesian macroeconomics.,With the interest rate serving as the price, loanable-funds theory is a straightforward application of Alfred Marshalls supply-and-demand analysis.,Saving constitutes the supply of loanable funds.,Both Eugen
25、 von Bhm-Bawerk and John Maynard Keynes recognized that the relevant interest rate should be a broadly conceived one and that the correspondingly broad market being equilibrated is the market for investable resources.,Demand reflects the business communitys willingness to borrow and undertake invest
26、ment projects.,Investable Resources,S,RATE OF INTEREST,SAVING (S) INVESTMENT (D),D,The Market for Loanable Funds,Loanable-Funds theory was most closely identified with Dennis Robertson, a contemporary of Keynes and a critic of Keyness alternative theoryhis liquidity-preference theory of interest.,Si
27、r Dennis H. Robertson (1890 1963),S,RATE OF INTEREST,SAVING (S) INVESTMENT (D),D,The Market for Loanable Funds,Loanable-Funds theory was most closely identified with Dennis Robertson, a contemporary of Keynes and a critic of Keyness alternative theoryhis liquidity-preference theory of interest.,On t
28、he suggestion of Roy Harrod, who was a sympathetic expositor of the Keynesian system, Keynes included in his General Theory (p. 180) a graphical rendering of the loanable-funds market.,This is the only diagram to appear in his book. Keyness purpose was to show explicitly just what about pre-Keynesia
29、n thought was being discardednamely, its loanable-funds theory.,RATE OF INTEREST,SAVING (S) INVESTMENT (D),D,The Market for Loanable Funds,The Austrian economists based much of their theorizing about saving, investment, and the interest rate on the loanable-funds framework, though they rarely includ
30、ed a graphical rendering of it.,If people become more future-oriented, they increase their saving, causing the interest rate to fall and thereby encouraging the business community to undertake more investment projects.,S,With a given technology, saving and investment are prerequisite to genuine (sus
31、tainable) economic growth.,Watch the saving curve shift rightward.,S,CONSUMPTION,INVESTMENT,RATE OF INTEREST,SAVING (S) INVESTMENT (D),D,The loanable-funds market shows how the interest rate brings saving and investment in line with one another. The production possibilities frontier shows how the tr
32、adeoff is struck between consumption and investment. Market adjustments in output prices, wage rates, and other input prices keep the economy functioning on its PPF.,The loanable-funds market and the production possibilities frontier tell mutually reinforcing stories.,INVESTMENT,RATE OF INTEREST,SAV
33、ING (S) INVESTMENT (D),D,S,CONSUMPTION,These two elements of capital-based macroeconomics show the pattern of movements in consumption, saving, investment, and the interest rate that are consistent with a change in intertemporal preferences.,The lower interest rate establishes a new equilibrium in t
34、he loanable-funds market, as the economy moves along the PPF in the direction of more investment and less (current) consumption.,As before, we let people become more future-oriented. They save more, which transmits a signal (a lower interest rate) to the business community.,Watch the saving-induced
35、decrease in the interest rate and the corresponding movement along the PPF.,INVESTMENT,RATE OF INTEREST,SAVING (S) INVESTMENT (D),D,CONSUMPTION,Even the possibility that a market economy could work in this way is at odds with Keynesian theory. Note that more investment is undertaken as consumption f
36、alls.,This is only to recognize, of course, that movements along the PPF necessarily entail opposing movements of consumption and investment. According to Keynes, however, any reduction in consumer spending would result in excess inventories, which in turn would cause production cutbacks, worker lay
37、offs, and a spiraling downward of income and expenditures. The economy would go into recession, and the business community would commit itself to less, not more, investment. This is Keyness “Paradox of Thrift.”,S,INVESTMENT,RATE OF INTEREST,SAVING (S) INVESTMENT (D),D,CONSUMPTION,If retail inventori
38、es were a “representative” investment, then Keynes would be right. Here, the derived-demand effect dominates. Reduced consumer spending means reduced inventory replacement. In general, late-stage investments move with consumer spending. However, the interest-rate effect dominates in long-term, or ea
39、rly-stage, investments. A lower interest rate can stimulate industrial construction, for instance, or product development. To keep track of changes in the general pattern of investment activity, we need to consider the structure of production and stage-specific labor markets.,S,The temporally define
40、d stages are arrayed graphically from left to right, the output of the final stage constituting consumable output.,Early-stage investment activity is exemplified by product development.,The Structure of Production,Capital-based macroeconomics disaggregates capital intertemporally. Consumable output
41、is produced by a sequence of stages of production, the output of one stage feeding in as input to the next.,STAGES OF PRODUCTION,CONSUMPTION,PRODUCT DEVELOPMENT,INVENTORY MANAGEMENT,Late-stage investment activity is exemplified by inventory management.,CONSUMPTION,The Structure of Production,STAGES
42、OF PRODUCTION,For pedagogical convenience, the initial capital structure is shown as having five stages. With growth, the number of stages will increase.,Although all five of these stages are in operation during each time period, resources can be tracked through the structure of production over time
43、.,Watch the resources, or “goods in process,” move through the stages.,CONSUMPTION,The Structure of Production,STAGES OF PRODUCTION,For pedagogical convenience, the initial capital structure is shown as having five stages. With growth, the number of stages will increase.,Although all five of these s
44、tages are in operation during each time period, resources can be tracked through the structure of production over time.,Watch the resources, or “goods in process,” move through the stages. NOTE: Hayek introduced his triangle in 1931, when Henry Ford was still producing the Model A. If only Hayek had
45、 had PowerPoint, he could have shown how the abstract triangle aligns with real world output.,STAGES OF PRODUCTION,CONSUMPTION,Together, the sequence of stages form a Hayekian triangle, a summary depiction of the economys intertemporal structure of production. In a growing economy, the triangle incr
46、eases in size along with the outward expansion of the production possibilities frontier.,STAGES OF PRODUCTION,CONSUMPTION,INVESTMENT,Together, the sequence of stages form a Hayekian triangle, a summary depiction of the economys intertemporal structure of production. In a growing economy, the triangl
47、e increases in size along with the outward expansion of the production possibilities frontier.,Watch the PPF and the Structure of Production expand together.,CONSUMPTION,STAGES OF PRODUCTION,CONSUMPTION,When people choose to save more, they send two seemingly conflicting signals to the market:,Decre
48、ased consumption dampens the demand for the investment goods that are in close temporal proximity with consumable output. This is the derived demand effect. 2. A reduced interest rate, which means lower borrowing costs, stimulates the demand for investment goods that are temporally remote from consu
49、mable output. This is the time-discount, or interest-rate, effect.,STAGES OF PRODUCTION,CONSUMPTION,Derived demand and time discount are in conflict only if “investment” is conceived as a simple aggregateas it is in Keyness C + I + G. In capital-based macroeconomics, capitaland hence investmentis co
50、nceived as a structure. Changes in the demand for investment, then, can add differentially to (and/or subtract differentially from) the several stages of production that make up the structure. Keyness theorizing in terms of an aggregate rather than in terms of a structure underlies Hayeks claim that “Mr. Keyness aggregates conceal the most fundamental mechanisms of change.”,
