November 3, 2015

Pointer: Theory of interest

Interest rate mania by Peter Radford on RWER-blog


Imagine, you ask a meteorologist what the natural temperature is and he answers: Well, that’s simple: it’s the temperature at which the weather settles into its Goldilocks comfort zone. Not too hot. Not too cold. Just right.

Somehow, the sentence makes sense, but by reading it a second and third time it becomes clear that you still don't know in degrees Celsius what the natural temperature is. The same holds for the natural rate of interest (See intro).

Why does the sentence make sense? Because it is a prolix tautology and a tautology is always true — true but worthless. Life is life, and tomorrow it either rains or it does not rain are the best-known tautologies.

Standard economics is essentially endless vacuous tautologous sitcom talk about various natural rates and the equilibrium of this or that market which comes about by ‘demand and supply’ which is the ultimate tautology.

Heterodoxy is meant to go beyond this standard wish-wash and not to repeat it. All the more so, because the underlying intuition of the interest rate as equilibrating/equalizing saving and investment is utterly false, to begin with.

As it happens, there is a debate focusing on Keynes’ I=S on David Glasner’s blog Uneasy Money, see Keynes on the Theory of Interest and Keynes and Accounting Identities.

What we in fact have is not so much an interest rate mania but an analytical interest rate black hole that devours even Peter Radford.