Danby seminar

[pdavidso@xxxxxxxxxxxxxxxxxx (Paul Davidson)]

>To: pktnet
>From: pdavidso@xxxxxxxxxxxxx (Paul Davidson)
>Subject: Danby seminar
>
>
>
>Subject Danby seminar, cranks and other miscellaneous items
>
>I have waited to see the response to the Danby paper and was surprised by
the lack of it. Bruce, however, did raise some interesting issues and Hubert
Hieke's comments were quite relevant.
>
>I think the Danby paper is very good but does not go far enough to trace
out some important implications.  Moreover it still has vestiges of a
classical appendix -- and like the appendix, not only is this  useless for
the vitality of the analysis but when inflamed it can be a serious threat to
the body!
>
>But first a brief response to Greg and his cranks message. First Greg
conflates (like most mainstream economists) the concept of equilibrium with
the concept of market clearing.  Clearing is a sufficient but not a
necessary condition for equilibrium for reasons I have already explained on
the net. ... Those who wish to turn Keynes and his General Theory into a
radical economics should read Chapter 24 of the GT and especially pages
377-81 where Keynes notes "...the forgoing theory is moderately conservative
in its implications..."
>
>Now on to Greg's comments that about hard currencies (from the core
countries) vs soft currencies.  The belief in a "central tendency" that
determines relative currency values based on differential productivity
growths (that Greg Attributes to Anwar) is another classical appendix-- AND
as Basil Moore would readily tell you that such an idea of separating cycle
from trend is just plain wrong and can not be justified econometrically.
(Basil has already written on this -mainstream nonsense of analyzing
cyclical gyrations around a long-run central tendency. -- and  I thoroughly
concur with him)
>
>
>1. Danby's first section is an excellent introduction. Problems begin to
arise when Colin introduces the notion of a "commodity money".The concept of
a commodity money which Colin accepts, is however, a misleading one. What is
required is to understand what money is as a concept -- and as Schumpeter
noted there are two antithetical concepts of money in the literature. (I
think this also underlies Colin's uncritical use of Yeager's arguments that
are scattered throughout Colin's manuscript. If ever there was a
wrong-headed monetarist it is Yeager.)
>
>As I state in a paper I will be giving at the Chicago meetings:
>
>"As Schumpeter noted {History of Economic analysis, 1954, Oxford University
Press, New York, p. 288) at least since Aristotle's time, there have been
two views regarding the nature of money in a money-using market oriented
entrepreneurial economy: the Chartalist view and the Monetarist (or
Metallist) view. The latter assumes that the institution of money evolved
from barter relationships where producible goods always traded for other
producible goods. Ultimately, in this Monetarist view one commodity
(normally a metal) became the embodiment of the other goods traded for any
specific good. Thus, behind the Monetarist conceptualization of money is the
idea that money merely represents the trading of one specific producible
commodity for all other producible commodities. From this there develops the
idea that the use off such a (producible) commodity-based money is more
efficient than direct barter for it avoids what Clower called "the double
coincidence of wants".
>	According to Schumpeter [    , p. 56], Plato can be considered the "first
known sponsor" of the second 'fundamental ' theory of money -- an
anti-monetarist theory that we now call Chartalism. For Plato money comes
into being only once a society has organized itself along continuous market
lines and it is at least social custom supported by social behavior or
legislation that gives money its unique importance in a system where as
Clower noted "goods trade for money and money trades for goods, but goods do
not trade for directly for goods".
> 	Although these two distinct conceptual streams can be traced through the
centuries-old  development of economic thought, and in the nineteenth
century involved the debate between the currency school and the banking
school, the vast majority of economists over the years have either
explicitly or implicitly accepted the  monetarism vision of money at the
back of their minds. Certainly the most famous economists of the 18th and
19th century -- Adam Smith and Karl Marx -- both accepted the Monetarist
view as did Petty Locke and Mill. Followers of the chartalist view since
Plato are-- with one except-- far less well known.. Perhaps the only names
recognizable to current economists are John Law, Georg Frederick Knapp and
John Maynard Keynes.
>	Although most economists can recognize that the Monetarist vision of money
involves the conceptual idea of a barter exchange of a (ultimately commodity
backed) money for a producible commodity, the meaning of Chartalism is far
less clear. In fact, Schumpeter defines the chartalist view as merely the
negative of the Monetarist conception (where Schumpeter equates Metallism
with Monetarism). This negative connotation is designed to immediately put
the impartial observer off the idea that Chartalism is a "good" view..
>	Let us see if we can provide a better perspective. The Monetarist vision
of money as an efficient evolution of a barter system to avoid the double
coincidence of wants has imbedded in it the belief in the neutrality of
money. In his vision of money Friedman [1974, p. 27] notes
>	"we have accepted the quantity-theory presumption, and have thought it
supported by the evidence we examined, that changes in the quantity of money
as such in the long run have a negligible effect on real income, so that
nonmonetary forces are 'all that matter' for changes in real income over the
decades and money 'does not matter'. On the other hand, we have regarded the
quantity of money, plus the other variables (including real income itself)
that affect k as essentially 'all that matter' for the long-run
determination of nominal income."
>In other words, money is presumed to be neutral -- at least in the long
run. " For shorter periods of time" Friedman [1974, p. 27] allowed that
changes in the quantity of money could affect real income as people adapted
their expectations to the equilibrium outcome. When Lucas added rational
expectations to Friedman's old momnetarism vision, however Lucas closed the
loop and assured that money would be neutral in both the short run and the
long run.
>	Hence if we follow Schumpeter's guide any form of Chartalism must argue
that money is never neutral either the short-run or the long run. Our
question is how can Charalist be so sure of the noneutrality of money even
in the long run? After all if in the long run we will all be dead, then we
cannot invoke any evidence culled from the human experience to statistically
prove that in the long run money is still not neutral.
>
>As soon as Colin uses the commodity money he is constraining the
applicability of the analysis to the short-run where even (some) Monetarists
permit moneyy to be non-neutral. This may partly explain the difficulties
between Bruce, Hubert and Colin.
>.
>2.Colin mentions the need for "a deep foreign exchange market" that is
well-organized.  But any well orgainzed continuous market requires a "market
maker". Colin recognizes the central bank as thre maker under a fixed
exchange rate regime -- but even unde a flexible regime their must be some
"market maker" -- usually private sector banks -- and hence underlying these
private market makers is the central bank.  Thus the idea of a "pure float"
is basically inconsistent with the concept of an organized market.  (See
Hicks last book on a Thoery of Markets)
>
>In section 2.2 Colin incorrectly states that "under the commodity money
system...there is no central bank and the money accepted by foreigners is
the same as that used nationally". There are two problems with this
statement (1) In the absence of a central bank the treasury will operate as
the market maker. For example, under the gold standard 2-way convertibility
is required. This means that tge government makes both the market for gold
and the market for the local currency -- a buffer stock policy.
>
>Colin then USES A VARIANT of the specie-flow mechanism to explain the
adjustment mechanism when a current account imbalance occurs -- and he,
incorrectly in my view, implies that if this is permitted then a complete
adjustment will occur. I disagree for reasons spelled out in detil in
Chapter 13 of my POST KEYNESIAN MACROECONOMIC THEORY book, especially pp.
213-19.
>
>3. What is meant by "dollarization"? If you accept the Chartalist vision
then the State gets to name what is the "money" of contractual settlement---
and the US dollar can be used only in cases like Panama where the law of
contracts permits it.  Normally by dollarization  we mean that some
contracts (often contracts for large sums or for payments over a specified
period of time -- rents, debts, etc) are specified in dollars but
enforceable in the local currency at the spot exchange rate reigning on each
date that a payment is due. (E.g., Uruguay) (Of course as long as there is
an organized market in foreign exchange, the seller (recipient of payment)
may accept either the local currency or the US dollar-- but if the buyer
reneges on the contract, the State will enforce payment only in whatever the
domestic law of contracts provides.
>
> (An interesting historical case illustrating the problem is when the US
went off the gold standard, Congress passed legislation abrogating the "gold
cluase " (specifying that payment could be required in gold) in all
pre-existing contracts and the Supreme Court held that this aborgation was
constitutional. Thus enforcement could only be made in dollars -- no matter
what the contract called for.)
>
>Of course, individals can make any agreement they want to for payment --
including swapping goods for goods e.g., in a baby sitting cooperative
arrangement-- and as long as both parties abide by their agreement, the stae
is not involved.  Hence, sometimes when "dollarization" is discussed people
mean only spot transactions where the exchange is mutual and immediate.
>
>Despite these few critical comments, I thought Colin's paper was an
excellent beginning--and await to see him develop more policy implications
from it.
>
Paul Davidson
Economics Department -- 523 SMC
University of Tennessee
Knoxville, Tennesseee 37996-0550
email: Pdavidson@xxxxxxx;   phone: (423)974-4221;    fax: (423) 974-1686