Re: More money or better distribution?

[Paul Davidson <pdavidson@xxxxxxx>]

At 03:19 PM 8/16/98 -0700, you wrote:
>On numerous occasions I have posted here my position that dQ/dM=0 at all
>times is true. Most [all?] on this list seem to accept that it is true
>"in the long run" but believe it is not true "in the short run."
>Whenever I have questioned this assertion and asked for proof of this
>belief I have not received anything more than an occasional reference to
>some statistical correlation or a muted suggestion that I don't
>understand because I have not adequately studied the issue. Most [Again,
>all?] accept that statistical correlation does not identify cause but
>then go on to call their claim proven by such correlations.
>
>As an aide to understanding their position I have tried a little thought
>experiment that I'd like to hear refuted if it can be done. The task is
>to try to separate the consequences of increasing the money supply from
>the usually requisite change in distribution of wealth that comes with
>that increase. The purpose is to see if a determination can be made of
>which of these factors contribute to the appearance of a short run
>effect on economic growth.
>
>In order to separate the effects let us examine the probable
>consequences of three possible actions:
>(1) Create and distribute previously non existent money [PNEM] to a
>group of people with an above average propensity to consume. [Assumed to
>also be predominantly those with less than average wealth.]
>(2) Distribute the same amount of PNEM to a group of people with an
>above average propensity to save. [Assumed to be predominantly those
>with more than the average amount of wealth.]
>(3) Distribute the same amount of PNEM in proportion to each person's
>holdings of wealth.
>
>Given these conditions, if it is true that increasing the money supply
>contributes to economic growth independent of any associated change in
>the distribution of wealth then there would be no difference in the
>effect of each of these choices. However, if the outcome is determined



The trouble with your illustration is that it attempts to be a "when did
you stop beating your wife" question.  Even worse, however, since you
ASSUME PNEQ --then you are dropping this money into the economy from a
helicopter, i.e., an exogenous money supply whichhas no effect on either
interest rates of the marginal efficiency of capital.  Inhj fact you are
implicitly assuming all spending is consumption and is strictly a function
of wealth

W \hen you understand the concpet of an endogeneous oney expanding to meet
the increased needs of trade you will understand why dQ/dN does not equal
trade -- and why if the banking system does not expand to meet the
increased neds of trade , that is if dM=0, then DQ will be constrained to
zero.

Case closed.

Paul Davidson
Holly Chair of Excellence in Political Economy
Economics Department -- 523 SMC
University of Tennessee
Knoxville, Tennesseee 37996-0550
email: Pdavidson@xxxxxxx;   phone: (423)974-4221;    fax: (423) 974-1686