Publication in Russian on the Zen blog
https://dzen.ru/a/ZrZOS5K2djNvXWqF
When there is a divergence between the bank rate and the marginal productivity of capital, a disequilibrium in the money market occurs, which can initiate a cumulative process that affects the real sector of the economy.
The business cycle is thus the result of financial shocks that are transmitted to the real sector.
The Austrian economists Hayek and Mises indirectly developed Knut Wicksell's ideas about the divergence of the real interest rate and the bank rate. This real interest rate can be approximately equal to the marginal productivity of capital or, for simplicity, the rate of profit. This real rate should not be confused with the Fisher rate of interest, i.e., the one studied in macroeconomics textbooks.
While there are many factors that lead to the business cycle, I believe that the main cause in recent history is the excessive expansion of credit, which led to an improper coordination of investment and savings as a result of the aforementioned divergence.
This expansion was caused by the actions of central banks or, earlier in history, by imperfect information and expectations in the money market, so that the demand and supply of money were out of equilibrium.
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The purpose of this post is to explain the cause of the business cycle. The economic cycle, or business cycle, is the oscillation between high employment and high output and low employment and low output. This filters out frictional unemployment and structural unemployment, so we are left with cyclical unemployment, the causes of which are explained in different ways and perhaps each theory has some degree of explanatory value. But the principle of business cycles is that the cause of business cycles is an imbalance in the economy. The money market creates real shocks that spread to other sectors, an imbalance in the demand for and supply of money or loanable funds creates shock effects in the real sector, which is the cause of the business cycle or the root cause. What does this mean in the financial market for money and loanable funds? A bank is primarily an intermediary between savers and investors, and this ensures the demand and supply of money or loanable funds, in fact the bank through direct investment (shares) and bonds creates effects in the real sector. The key component of the money market, or the supply and demand for loanable funds, is the interest rate. The interest rate is nothing more than the price of money, simply put, its terms and its purpose is to coordinate these funds. In a market, this is coordinated quickly and efficiently. But if there is some external influence, such as government interaction, government mandate, government control, then there can be disequilibrium tendencies, as you can see in other markets, such as control over the real estate market. When you have control over the real estate market, you have an equilibrium that creates non-price rationing that distorts the market. Similarly, the government controls the interest rate. The central bank sets the interest rate, the banks set their rate accordingly, which is what we get in the retail and investment markets. So if the central bank misjudges the price of money relative to what it should be, that will again lead to distortion and disequilibrium, because it is not controlled solely by supply and demand. Market competitive equilibrium, of course, can be controlled in some cases, but that's a different story, that's what's called free money, where the supply and demand for money is controlled by the market, but in our system, and in most developed systems in the world, the central bank tries to stabilize the business cycle by developing the interest rate and bringing it into line with what it thinks is right. What is the right interest rate? You have to understand that there are two different types of interest rates, the nominal interest rate and the real interest rate. The nominal interest rate is what you see in the bank. And the real interest rate is the nominal interest rate minus the inflation rate. Economists know that this is the Fisher interest rate. He was an economist in the early 20th century, and this is what the economics textbooks tell you. I'm going to tell you an alternative story, unlike the textbook. There is the nominal interest rate that you see in the bank, and there is what is called the real interest rate. The real interest rate is the marginal productivity of capital, rent, the return on capital, let's just call it the rate of return, and it's the relationship between the nominal interest rate, which is observable and what everyone sees in the bank, and this marginal productivity of capital, this rate of return, that determines which way the cycle is going to go. For example, if the bank charges a ten percent interest rate on new business loans, and I am an entrepreneur and I can make eight percent profit, then I am probably not going to borrow money, I am not going to go to the bank for a loan. But if I can make twenty percent profit, I will go to the bank any day of the week and pay money at ten percent and make twenty percent profit. The marginal productivity of capital, the total capital, is very difficult for the central bank to estimate, they think in theoretical terms, but what they have to do is compare the marginal productivity of capital with the bank interest rate. And if they can do that, then the situation will be closer to equilibrium, because the rate of profit will be equal to the interest rate, and we will again reach zero economic profit. We are not talking about accounting profit, but obviously entrepreneurs want more accounting profit and more economic profit, so they hope that it will be higher than the bank interest rate. Now a cumulative process has been launched and is unfolding, living its own life, so we get into a boom or bust cycle, which is the cause of the equilibrium in the money markets, in the loan market, created by the Central Bank. This causes shocks in the real sector, which have consequences and affect business, and this is the explanation of economic (business) cycles.
Дефицит предложения, инфляция и процентные ставки.
https://dzen.ru/a/ZqpipSxErWWc3k36
Supply shortage, inflation and interest rates
Российский денежно-кредитный кризис. Падение Банка России.
https://dzen.ru/a/ZquIcI6VwQBISjNs
Russian monetary crisis. The fall of the Bank of Russia
Людвиг фон Мизес - философ и преподаватель, актуальный австрийский экономист, труды которого востребованы сегодня как никогда.
Фридрих фон Хайек - величайший социальный мыслитель 20 века, блестящий австрийский экономист, лауреат нобелевской премии по экономике.
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Publication in Russian on the Zen blog
https://dzen.ru/a/ZrZOS5K2djNvXWqF
