> When you refer to “a variety of different inflation-adjusted interest rates,
> which differ in terms of risk, illiquidity, the term to maturity, and tax
> treatment”, that is exactly what I mean. Because: who knows what the hell
> that means? ...
It's a _vector_ of data.
> The “real rate of interest” ... turns out to be a theoretical relationship, a
> statistical
> artifact, not a directly observable rate of interest applying to anything
> real.
The elements of the vector of nominal interest rates are very
observable; one can get data almost every day. The "real" versions are
estimates, based on a relatively simple (and uncontroversial) theory.
(There are really _two_ real interest rates, i.e., _ex post_ and _ex
ante_. It's the latter that's more difficult to measure, since
expected inflation rates are themselves estimates.)
Interest rate changes are very correlated with each other, despite
differences in risk, illiquidity, and tax treatment, while differences
in in the term to maturity premium are relatively predictable. (And
when it's not, it can be useful knowledge.) For most purposes, it's
okay to refer to "the" nominal or "the" real interest rate. But it
does depend on one's purpose. Data are not collected for their own
sakes.
People don't write on and on about "interest rates" just for the heck
of it. They have to be put in context.
real interest rates aren't directly observable, but some of the
estimates are highly correlated with economic behavior (e.g., the
estimated real mortgage interest rate on a standard 30-year mortgage).
More importantly, if an economist calculates a "real" rate and it's
_not_ correlated with a relevant economic behavior (e.g., business
fixed investment), that says a lot. if the economist does the
calculation as well as he or she can (rather than rejecting the
concept based on abstract philosophizing) and the correlation still
doesn't show up, that says a lot. It is especially noteworthy when
textbooks continue to assert that there _is_ a correlation.
> In my view, this is a problem with a lot of economics: actual costs and
> ideal prices are conflated with each other.
there's nothing especially "ideal" about interest rates, real or nominal.
> The next problem is: if the “real rate of interest” is just a statistical
> artifact derived from some composite of observed interest rates, how then
> can it influence real economic behavior, other than perhaps by influencing
> market expectations?
"the" real interest rate is an estimate of an unmeasured (or perhaps
even unmeasureable) number that likely influences real-world economic
behavior (especially in housing, at least in the US). It's not the
estimate that affects behavior, but the number that it's an estimate
of. If the theory has some validity, at least, the better the
estimate, the more strong the correlation is with the behavior. (The
theory is very simple, by the way: people respond to costs.)
> And, if this real interest rate is near-zero, how can
> it influence anything much?
it's _changes_ of real interest rates that are important. If the
estimated real rate falls to zero, that means that in
inflation-adjusted terms, it's free to borrow (ignoring fees). All
else constant, that encourages borrowing to spend on tangible assets
to rise.
> I am sure that the movement of interest rates does affect investment
> activity, but those interest rates concern the actual credit costs incurred,
> not the “real interest rate” which has very little reality.
It's short-had again: "real" means "inflation-adjusted." Due to their
healthy skepticism, economists are more and more likely these days to
put the word "real" in quotation marks.
What do you mean by "actual" in the phrase "actual credit costs"? does
that mean that you ignore the increased prices of tangible assets that
occurs when we have inflation?
> So, I think we should distinguish between “real economics” which is based on
> what actually happens, and “vulgar economics” which is based on imaginary,
> stylized data and imaginary, stylized concepts.
"what actually happens" is not something that's easy to know. The data
do not speak for themselves. (It's _always_ partly a matter of
interpretation.) So people use abstract ("imaginary") concepts in an
effort to understand "what actually happens."
I prefer Marx's use of the word "vulgar," referring instead to ideas
which suffer from commodity fetishism.
--
Jim Devine / "Reality is that which, when you stop believing in it,
doesn't go away." -- Philip K. Dick
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