Re: More money or better distribution?

["William B. Ryan" <william_b_ryan@xxxxxxxxxxx>]

John O'Donnell:

1.  You misuse mathematics by writing dQ/dM = 0, where Q is the level of
economic activity, and M is the quantity of money.  Such an equation is
meaningful only if either Q or M is the actual dependent variable of the
other, which you specifically deny.

If the relation between two variables is truly functional, even if one
is constant, changing the value of that constant may profoundly effect
the result.  The most dramatic example of this is the value assigned to
the speed of light.  Newton and his contemporaries had assumed that the
speed of light is infinite.  If infinity is substituted for c in
Lorentz's transformations, they become identical to those of Galileo.

But Q and M are neither constant nor static.

Let me suggest a line of argument that Paul Davidson avoids, probably
because of his fixation with "non-ergodicity."

The only thing we can be certain of is that economic processes are
individually dependent variables of time.  Taking time out of the
equation can lead to much error.

If Q and M are plotted against time from historical data and
superimposed on the same graph, you will find that they are indeed
closely correlated.  Mere correlation does not infer the chain of
causation, which must be determined by other means.

2.  Keynesians and Monetarists concur that money is non-neutral, that
money matters.  They differ in their understanding of the nature of the
existing system, and the utility of various reforms.

Your assertion that monetary growth may affect distribution but not Q
more closely resembles certain premises of the trade-cycle theory of the
"Austrian" economist Ludwig von Mises.

3.  It is almost beyond dispute that the existing money supply is
largely endogenous, and cannot be otherwise--in which case money must be
a dependent variable of Q.

Such money naturally arises from transactions in trade.  Every
institution that grants loans is operating on the basis of fractional
reserves, even if its reserves are putatively one-hundred percent.
Credit is being created whenever a business sells to its customers on
open account, which is greatly facilitated if the business can factor
its receivables to a third party.  It was the generalization of this
concept that was the great innovation of banking.

Davidson said that the case is closed.  Very nearly, it is.

4.  But money can also be the independent variable.  Keynes admitted as
much in the General Theory, where he said that banknotes could be buried
in mines and then dug up, thus stimulating the economy.

http://www.geocities.com/CapitolHill/Senate/7018/



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