Re: GT and microfoundations

["Alan G. Isaac" <aisaac@xxxxxxxxxxxx>]

Paul,

Since I remain curious about your meaning,
I repeat my question of a month ago.
There are several possible meaning of
`the neutrality of money'. Which are
you talking about?

1. A monetary economy operates just like
an economy that is not monetized.
(Almost nobody holds this version nowadays,
although some economists still work with
the older real-business-cycle models.)

2. Monetary policy changes have no
effect on the real economy.
(Very few economists believe this,
and the growth rate of the money
supply matters for real outcomes in
many ``New Classical'' models.)

3. One-time, modest, changes in the
level of the money supply have no
important effects on consumption and
production decisions after a few years.
(Many economists believe this, and
there are many circumstances in which
it is not a bad first approximation.
Of course we would have to discuss what
it even means, since money is endogenous,
but we could pin that down.)

4. Even large, sustained increases in the
growth rate of the money supply (such as
those that have occurred in countries which
are money-financing large fiscal deficits)
have no important effects on production and
consumption decisions after a few years.
(This is usually called the long-run
superneutrality of money, and very few
economists believe in it even as a rough
first approximation---although over a
range of modest inflation rates, many would
be more receptive to the idea.)

So for PKs to seriously distinguish themselves
from the mainstream (on the neutrality of money issue),
they are going to have to hold that (3) is false.
The problem is that (3) is often a good approximation
for policy purposes, even though it can be badly
wrong at times. So in order not to sound silly
---as you know, I think good PK ideas have often
been buried in rhetorical excessess---it is important
to draw this distinction in a nuanced way.

Cheers,
Alan Isaac






Paul Davidson wrote:

> > The ultimate cause of involuntary unemployment equilibrium was not
> > nested in the inflexibility of the price and wage system -- as Keynes
> > notes [GTp.257] "For the classical theory has been accustomed to rest
> > the supposedly self adjusting character of the economic system on the
> > assumed fluidity of money wages; and when there is a rigidity, to lay
> > on this rigidity the  blame for maladjustment...My difference from
> > this theory is primarily a difference of analysis." In other words, it
> > was the demand for liquidity that was the ultimate cause of a lack of
> > effective demand -- and the lack of sufficient liquidity could always
> > validate a shortage of effective demand -- even in an open system--
> > even if wages and prices were instantaneously flexible and there were
> > no monopoly elements in the system.  Hence the policy conclusion is
> > that it is not monopoly power (due to market power, assymetric
> > information, truculent labor unions minimum wage legislation, etc that
> > can be the cause of unemployment, it is liquidity conditions-- so that
> > money matters in both the short and long run --- money is never
> > neutral!
>
> Bull's eye, Paul!
>
> -----
> Sven R Larson
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