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In terms of policy, how would you suggest they put Hayek's macro policy suggestions into practice?

On a similar tack, are their any Austrian responses to what, IMHO, are Sraffa's devastating criticisms of Hayek's Prices and Production?

How would you, as Sraffa put it, suggest that policymakers keep the money rate of interest (as if there were just one money rate) equal to the so-called natural rate? As Sraffa rightly argued, outside of equilibrium there are a multitude of natural rates. So would you, seemingly like Hayek in his reply to Sraffa, suggest that the policymaker keeps the money rate (problematic I know) equal to the natural rates?

Neutral money in Hayek's sense makes no sense outside of equilibrium. Of course, I may well be missing something.

Hi PKS. I'll take a shot at answering this one.

First, you should read my *Microfoundations and Macroeconomics: An Austrian Perspective* (Routledge, 2000) to see why Hayek is right about all of this. I'll try to do it short justice here.

1. There are a number of ways to think about "neutral money." For me, the best is that monetary institutions should minimize the influence on prices that come from the "money side" of the exchange of money for goods. Nothing can do this perfectly, but a monetary regime that avoided inflation and deflation and was as effective as possible at keeping the supply of money equal to the demand to hold it at the prevailing price level would be as close as we could get. Put differently, stabilizing MV would be close enough.

2. The way you do that is through a free banking system. No policy advice to a central bank will enable it to put into practice an attempt to get the market and natural rates together better than would a free banking system. Here too, it's not perfect, but at least it penalizes banks when they deviate from charging market rates that don't match the natural rate.

3. So yes, the right policy is to keep the market and natural rates in synch with each other. And yes, the natural rate is unobservable, but the underlying notion, as a measure of overall time preference, is still crucially important.

I would add that one reason for the disagreement between Sraffa and Hayek is conflicting conceptions of capital and its role in the microeconomy. I'll leave that as a tantalizing thought for further discussion.

(PS: don't ask Boettke any macro questions, it just makes his brain hurt :) ).

Love the low hanging fruit analogy!

I envy people who have not yet encountered Bill Hutt, they have got such a treat ahead of them. For a taste
I have always thought of him as a kind of Austrian and Randy Holcombe included him in his book of Austrians.

At the risk of making Pete's head hurt some more, what he said about dogmatism was made by Popper (can't find the cite when I need it) but it is "methodological dogmatism", to stick with an idea to find out how good it is and not to give up just because people react against it. I tend to agree with Bartley's critique of Popper's formulation in favour of a more detached or zen-like stance that Bartley called pancritical rationalism.

Nice point about individual dogmatism being trumped by open discussin in the community of scientists. That was Popper's point (made in 1945) about the social nature of science which he put in a chapter that also attacked the mentality of central planning and provided a critque (in advance) of the strong program in the sociology of science.

I had a former student over for coffee last night who transfered to Georgetown. She told me about one of her professors, a psychologist named Karl Pribram, 89 years old (born in Vienna in 1919) who did landmark work studying the human brain. He came up with the idea that the brain, and perhaps reality itself is a hologram. Apparently he was ostracized by the physics community for a long time, and treated as a bit of a kook. But as particle physics developed and theoretical physics took on new questions about the nature of the world, suddenly his theory is gaining new traction, and he's being invited now to conferences and taken more seriously. She says he's delighted to finally see the physics community come around to at least taking his ideas seriously. That's commitment. Whether or not he's ultimately proven right or wrong, it's only dogmatism if you take it on faith, it's commitment if you go over the data and analysis and refuse to let the 'conventional wisdom' cause you to reject what your mind says is true.

Good bit on post-modernism. Philosophy can never get around skepticism, and post-modernism is just the latest variant of skeptical thought that's been around for over 2000 years. They'll never go away, they'll always think they are more clever than anyone else, but most of the world will ignore them.

A thought-provoking post. Some comments:

1 Commitment

I don't have any disagreement with Pete B's opinion, but I think it's worth pointing out that a commitment is ideally to an individual (unique) theoretical structure that sometimes combines parts of different research programs (in the Lakatosian sense) or applies an established program to a new field of application. However, students may have to develop competence in a specific program first (e.g. an understanding of Menger-Mises-Hayek-Kirzner may be the requirement for "Austrian competence"). Subsequently, productive creativity is often best served by not being dogmatically attached to all parts of the above combination, but importing ideas from other discrete programs; witness Lavoie with hermeneutics; Langlois with NIE and Witt with evolutionary theory. It runs in the other direction too: some economists have managed to integrate a partial Austrian perspective coming from non-Austrian approaches (e.g. Buchanan, Burczak, J. Potts) One of my favorite economists, Brian Loasby, even manages to combine A. Smith, Marshall, Hayek, Popper, Shackle and Penrose into a mix that is both persuasive and insightful.
The other side of the coin is that one may be well-advised to use the "mainstream" conclusions of one's chosen approach as "default assumptions" when dealing with areas that lie outside of one's immediate interest: an example could be to assume the Mises-Hayek business cycle theory to be true if business cycles are peripheral to one's interests.

3 Speak truth to power

While I agree with Pete's first paragraph, I'm not sure if it's really that important to communicate with politicians at all. Shouldn't we expect attempts to persuade reluctant politicians to have prohibitive opportunity costs in the generic case? The only reason for getting involved in politics that I can think of is when you already generally agree with a certain politician (as a subset of libertarians agree with Ron Paul), or if you agree with a politician on an issue that you consider both a priority and which is controversial, and then align yourself with a compatible politician even if you dont like his or her other policies (for example, in my case foreign non-intervention or free migration would qualify as issues that are both controversial and prioritized).

Nice post Dr. Boettke; it's full of juicy morsels and some great quotes, of which I'll attribute to you at a later date. I'm reminded of a lecture in Dr. Randy Simmons' Law and Economics course at USU where he said something to the line of "find out the rules of the game, then play by them..." Granted if we could change some of the rules and create the right incentives, the world would be a much better place.

Sraffa's point is that there are multiple natural rates (one for each commodity) outside of equilibrium. They would only be equal to one another in equilibrium (hence one could talk of THE natural rate). If we are in disequilibrium, however, your answer about free banking and the - question-begging - THE natural rate (unobservable yes) raises the following question: There are (outside of equilibrium) multiple market rates each of which are equal to one of the different natural rates. Therefore there are numerous different money growth rates (a free banking system or central bank) could engineer that would keep THE market rate (again question-begging) equal to one of the natural rates? So which natural rate is it to be?

It seems that you can defend free banking & the monetary equilibrium view without all Hayek's macro baggage (market rate, natural rate, etc).

Is there a good Austrian response to Sraffa? I only found one reference in your index (not on this topic) - I will read your book though. And no reference to Sraffa in Garrison's macro book.

Thanks for the response.

Karl Pribram the psychologist had an uncle, also called Karl Pribram (1877-1973) who was an Austrian-born economist.

Pribrams prolific body of work on neurophysiology may not have much to offer economists but a possible exception to that is a book that he wrote in collaboration with George Miller and Eugene Galanter when they were together at the Stanford Centre for Advanced Study in Behavioural Sciences circa 1959. The book is "Plans and the Structure of Behavior" with the central motifs being the Image (borrowed from a book that Boulding wrote at the Centre in 1955) by and the Plan. The Image is our knowledge of the world and the Plan is the guide that we use to act in the world. The idea of the plan, and the way that plans are formed, ranked and revised, turns out to be a powerful device to explore many aspects of behavior, like the role of instincts, learning skills, including language, some nondynamic aspects of personality, and heuristics.

PKS - my book discussion won't suffice as a response to Sraffa. I meant it more as a recommendation for an alternative approach.

As for Austrian responses to Sraffa specifically, I'm trying to remember if there's a good one out there. Garrison might have taken him on in a paper or two outside of his book. And I can't remember if Lachmann dealt with him directly.

Anyone? Bueller? Anyone?

My name is a link to a paper critiquing Austrian business cycle theory from a Post Keynesian perspective. Section 2 is a survey. A more recent version of this paper is under review from some journal.


The interesting debate has not been the exchange between Hayek and Sraffa, but between Keynes and Hayek (see Hayek's book "Contra Keynes and Cambridge"). Very few economists take Sraffian (Neo-Ricardian) economics seriously anymore. I will make this post short and point you to Blaug's book "The Cambridge Revolution: success or failure?" In that book he is careful to note some important contributions that Neo-Ricardians have made, such as capital reswitching, but taken as a whole, their approach is just as sterile as the mainstream approach they are attacking. Sraffians are concerned with income distribution (not production or exchange) and to do this they focus all of their efforts on attacking the way neoclassical economists measure the means of production (capital and labor). Abstract assumptions are made, and equilbiria results obtain.

In short, Lachmann erred when he chose to write about the Hayek-Sraffa exchange and not on the Keynes-Hayek exchange. (And yes, Dr. Horwitz, Lachmann did deal with Sraffa directly; see his Austrian economics under fire paper and his monograph Macroeconomic Thinking and the Market Economy. Come on! You are supposed to be a Lachmannian! (: ).

The Post Keynesians, on the other hand, have much more to offer Austrians than the Neo-Ricardians. And Neo-Ricardians are very different from Post Keynesians. The two are not the same! Joan Robinson and Nicholas Kaldor, it is true, associated with both groups, but American Post Keynesians emphatically do not. In fact, in King's "History of Post Keynesian economics since 1936" he correctly notes that Old Institutional Economics (Veblen, Ayres, etc.) has come to replace Sraffian economics in the larger post keynesian program.

Hello everybody,

I am actually re-reading Mr. Horwitz's book on Austrian macroeconomics. I am a big fan and think an answer to Sraffa's critique is there - perhaps only hidden. Mr. Horwitz puts great emphasis on the fact that Wicksell's 'in natura'-definition of the natural rate is "unacceptably unrealistic" (p. 80). In a barter economy, "the kinds of intertemporal exchanges we see in a monetary economy, not to mention the very capital goods that are the ultimate objects of those exchanges, would simply not exist" (ibid.). Unable to solve the calculation problem, the transformation of a manifold set of ordinal preference rankings into a cardinal mindset, no economy can evolve very much beyond Smith's "early and rude state of society." In a barter economy there will be no banking system which could lower or heighten the interest rate. Here saving comes close to the Keynesian ideal of pure hoarding (as was emphasized by Hayek). There is no loan market and if there is, it is only consumer loans traded (hard to imagine without money) and "investors" (Crusoe and Friday!) are confronted with different natural rates ... and they will choose the most profitable among them. That's it. But as Prof. Horwitz's argues, the natural rate of interest rests on a great, but fallacious capital theory. Further, the natural rate has to be understood in value terms, not in physical. It is a phenomenon of a monetary economy and disappears in Sraffa's barter challenge. Heterodox economics often accuses neoclassical as well as Austrian theory to misjudge the nature of the economy. This is a straw man. But money does not break the scarcity nexus, it just loosen it (p. 85). And this is what Sraffa always refused. Scarcity is alien to Sraffa's thinking, at least beyond the niche left open by Marshall. Sraffa really disliked the marginal revolution and never showed any understanding or interest in methodological individualism. In contrast to Mr. Horwitz who makes use of Myrdal's argument in respect to the weakness of Wicksell's natural rate, I would turn to the best theory of interest ever produced and accepted as such by Hayek in The Pure Theory of Capital in 1941: Irving Fisher's The Theory of Interest (1930). Here, the natural rate disappears in favour of the rate of return over cost (Keynes greatly misunderstood this approach. His investment theory is clearly opposed to the Fisher-Hayek approach). The rate of return over cost, or the rate of profit, is based on the opportunity cost principle and does not fall victim to any of those paradoxes which plague the theory of capital. In contrast to Keynes' approach, where a money-determined rate of interest directly determine the investments realized by simply cutting out project with a marginal efficiency of capital below the rate of interest, Fisher's rate of interest allows to choose between different kinds of investments, the profitability of which tends to be equalized by changing the composition of investment. The rate of interest and the rate of profit have to be in harmony with each other, but increasing the money rate does not simply cut out investment spending, but leads to a different choice between investment opportunities. If the nature of technology would be such that shorter investment periods would involve greater expenditures on capital goods the longer periods, the amount of investment would increase with increasing rates of interest. But nature has chosen differently (and reswitching perfectly fits this story).

I wonder what Dr. Watson would think of your excellent remarks.

Thank you for speaking, Dr. Boettke. Your speech was very well received from we remote associates. We just wished that you had time to give us more.

Matt M. would do well to read Sraffa's review of Hayek's P&P before dismissing him. Matt is right, in so far as it goes, that Sraffa is a neo-ricardian and so on, but that has little to do with his 1931 paper. Sraffa blows up Hayek's 1931 book on its terms. That is why it is such a devastating blow to Hayekian macro. There is a very good reason why so many once-Hayekian students (and junior faculty) at LSE abandoned Hayek for Keynes.

Incidentally, I must thank Matt for pointing me in the direction of Greg Hill's work. Great stuff. It was Hill who pointed me towards Sraffa's 31 papers.


I am happy to see that someone else is reading Greg Hill's work! He is excellent, and I am surprised more economists don't give his work the attention it deserves.

Now I must admit that I have not read Sraffian economics as closely as my dismissive remarks merit. I can, however, point you to another excellent article on Sraffian economics entitled "The Sraffian Schools" written by Alessandro Roncaglia in 1991 in the Review of Political Economy, 3.2. It is important to understand what Sraffa was trying to do and, more importantly, what his followers have indeed done. This article will be very helpful in putting Sraffian economics in context for you. Now on the Hayek-Sraffa exchange, you are correct in noting Sraffa's rejection of the Hayekian natural interest rate. But why did he find this concept so unsatisfactory? My impression is that Sraffa's insistence on the importance of multiple natural interest rates illustrates the necessity of creating a "composite commodity" that can serve as the invariant standard (measure) of value.

Now let me respond more directly to your latest post.

1.) I have read Sraffa's review of Hayek's P & P book, in addition to his rejoinder to Hayek's reply article. I have also read Caldwell's excellent introduction as well as other academic articles that have covered the details of this exchange, including Lachmann's "Austrian Economics under Fire" and Lawlor and Horn's "Notes on the Hayek-Sraffa Exchange." The reason why I pointed out that Sraffa was a neo-Ricardian was because his attack on Hayek's capital theory is conducted on neo-Ricardian terms. Lachmann's paper on this exchange makes this exact point. It follows that the cogency of Sraffa's attack stands or falls according to the relevance of neo-Ricardian economics. And I don't think Sraffa, as you argue, destroyed Hayek on his own terms. Hayek in his reply article seemed confused about what Sraffa was getting at. Essentially, Hayek argued that it is important to understand the equilibrium implications of non-monetary analysis, while Sraffa "denie[d] that existing theories of equilibrium provide any useful description of the non-monetary forces at work." To attack Hayek on his own terms would involve a detailed analysis showing how his own logic is confused and inconsistent. Sraffa did not really do this. But others did. And these are not Sraffians, but Post Keynesians.

2.) And this brings me to my next point. Yes, a lot of Hayek's former students abandoned him to study with Keynes. People like Kaldor, Lerner and Shackle all flocked to Keynes, leaving Hayek in the dust. But I am not sure how Sraffa fits into this. Kaldor, Lerner and Shackle were never really influenced by Sraffa.

Now there are all kinds of Post Keynesians. But essentially Post Keynesians deal with a monetary economy with complex financial arrangements. This is the hallmark of Post Keynesian economics. Central to this is uncertainty, since the returns on any investment project, usually financed by debt, are uncertain, people place a premium on the possession of money to either meet uncertain calamities or execute *expected* profitable opportunities. The existence of money assures unemployment in an uncertain world. This is Post Keynesian economics. And this is very different from Sraffian economics.

I am happy to see that you are reading Greg Hill's work. But where did he ever cite the work of Sraffa? Email me at if you want to discuss these things in greater detail.

Oh, and one more thing. My point in all this is that the important exchange was not between Hayek and Sraffa, but between Keynes and Hayek. And to my knowledge no economist on either side (Post Keynesian or Austrian) has really written about this debate. This would be a good research or dissertation topic. By 2012, if it hasn't been done, then I will do it.

Hi Matt,

Quick for now (stuff to do): Hill cites Sraffa in one of his CR piece reviewing Caldwell's book (p.76).

On the invariant measure (composite standard). Sraffa says that is how Wicksell would save the problem of keeping the money rate equal to the natural rate (assuming away problems about appropriate index number etc) right? I don't think he is actually advocating that. He asks how Hayek would have it done outside of equilibrium.

More later. I'll email you also. Thanks. Do you have your own blog?

Could someone post a link, or otherwise show where Sraffa's reply to Hayek can be found.

Also, what is wrong with the reply Garrison gave?

All that I can see that is suspicious is that he seems to assume that the change in price of capital occurs more quickly than other things.

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