Tyler Cowen recently listed three laws, and Kevin Drum responded with variations on Tyler’s Laws. Here was Tyler’s third law:

3. Cowen’s Third Law: All propositions about real interest rates are wrong.

And Kevin’s version:

3. Drum’s Third Law: Really? Isn’t there a correlation between real interest rates and future inflationary expectations? In general, don’t low real interest rates make capital investment more likely by lowering hurdle rates? Or am I just being naive here?

Kevin is reasoning from a price change. When real interest rates fall, investment usually declines as well. Never reason from a price change, always reason from the thing that causes the price change. In the case of real interest rates it’s usually the business cycle. The most common cause of low real interest rates is recessions, and recessions are also associated with low levels of investment.

Can this claim be saved by talking about changes in interest rates “other things equal”? No, because “other things equal” interest rates never change.

Kevin Drum should not feel bad, however, as Nobel Prize winner Robert Shiller recently made the exact same mistake.

Is Tyler Cowen’s Third Law also wrong? In a sense I’ve provided support for his third law, by finding a flaw in Drum’s version. And yet I’m also making claims about real interest rates. Indeed in a sense Tyler is as well. Or is he making claims about claims? I’ll let the philosophers sort this one out.