Re: Colander and New Keynesian Economics

[rrotheim@xxxxxxxxxxxx (roy rotheim)]

Paul Davidson writes:
>
> FROM:  Paul Davidson
> "      Economics Department
> "      523 Stokely Management Center     974-4221
> Dear Barkley; What do real money balances have to do witth anything in a world
> of uncertainty? Are we to divide current money balances by the present price
> level, when making decisions about how much to buy tomorrow? Or by tomorrow's
> price level? Paul Davidson
>
> Have a good day!
>
Paul Davidson is absolutely correct here.  This is especially true at
the macroeconomic level where phrases such as real money balances,
real wage rates, and real rates of interest have no operational
significance.  Each is a compound phrase where numerator and
denominator are not independent unless output is fixed and no change
is occurring.  As such, there is no macroeconomic meaning to labor or
capital markets with independent supply and demand curves mediated by
some real price; nor is there a "money" market with independent supply
and demand curves mediated by some "real" price.  Keynes pointed out the
theoretical inappropriateness of such conceptualizations (an aggregate
labor market only made sense at the point of full employment
equilibrium; an aggregate capital market is nonsense at any rate of
interest, said Keynes) in ch. 19 of the General Theory, when he
accused orthodox macroeconomic arguments of being reduced to an
"ignoratio elenchi."  In the case of labor, for example, it is
possible for any firm to offer lower money wages to its workers and
expect a reduction in the real wage because ones workers do not
normally purchase the product they produce (or at least not in
sufficient amounts), and so the price of the product is independent of
the money wage paid to workers.  Such an assumption about the
independence of numerator and denominator is not valid in the
aggregate; moreover those conditions which assure the interdependence of
the money wage and the price of wage goods also cause an
interdependence among the factors influencing the conditions of supply
and demand for labor.  Thus the ignoratio elenci. (I've written a few
articles on these points which I'll be glad to share if anyone is interested)

	And that's what is so wrong about most new Keynesian
macroeconomic analyses. Excepting the literature on coordination
failures and strategic complementarities (which has some limited
merit, IMHO) nKm models are based on aggregate market concepts:
market in real output with downward sloping aggregate demand curve
(didn't we already have this out on pen-l last year?  perhaps the
discussion was archived??); an aggregate labor market (in which we
pose questions about the causes of sticky money and real wages --
that's Pigou, folks, not Keynes); and aggregate capital markets (in
which the real rate of interest does not fall because of asymmetries
in information between savers and investors).  I have a draft of a
paper on this which I call "On Butterflies Wings and Hurricanes: the
New Keynesian Macroeconomics" which I gave in Novemeber at the Post
Keynesian Study Group at University College-London, which should be
available for reading in about a month.     Roy
Roy J. Rotheim                  INTERNET: rrotheim@xxxxxxxxxxxxxxxxxx
Department of Economics         BITNET:   rotheim@xxxxxxxxxxxxxxxx
Skidmore College                PHONE:    (518) 584-5000 Ext.2350
Saratoga Springs                FAX:      (518) 584-3023
New York 12866

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