gross substitution

[Paul Davidson <pdavidson@xxxxxxx>]

If anyone had read my Post Keynesian Macroeconomic Theory book , they would
know that to reach his GENERAL THEORY, Keynes had to remove three
restrictive classical axioms: The ergodic axiom, the neutral money axiom,
and the gross substitution axiom.

{as Jamie Galbraith has pointed out, Keynes fashioned the title of his book
after Einstein's General Theory of Relativity where Einstein derived a more
general theory than the classical theory by removing some axioms that
restricted classical Newtownian theory}

In Chapter 17 of the GT Keynes explicitly notes that one of "the essential
properties" of money is that it has an elasticity of substitution of zero
with producible goods.  Well a zero elasticity of substitution is logically
incompatible with the gross substitution axiom.  Therefore according to
Keynes, a money-using economy can not be developed from any system
utilizing gross substitution as one of the basic axioms.


Unfortunately, however, if Keynes was a student in any PRINCIPLES of
Economics course taught in America he would flunk economics since he would
be denying a basic economic  principle -- namely that everything is a
substitute for everything else -- so that ONLY relative prices have to
change to clear ALL markets.
It follows from the gross substitution axiom  alone that observed
unemployment is because the money wage is fixed rather than flexible.  It
also follows from the gross substitution axiom that if all exchange rates
were flexible there can NEVER be a balance of payments problem and there
will always be global full employment.

And if you believe these fables derived from the gross substitution axiom,
I have a bridge that links Brooklyn and Manhattan that I would like to sell
to you.

Paul


Paul Davidson
Holly Chair of Excellence in Political Economy
University of Tennessee
SMC523
Knoxville, Tennessee 37996-0550
office phone# (423)974-4221
fax# (423)974-1686
home phone # (423)573-9160
email: pdavidson@xxxxxxx
http://econ.bus.utk.edu/Davidson.html