To: pdavidson@xxxxxxx
From: Basil Moore <bjm@xxxxxxxxxxxxxxxx>
Subject: Fwd: gross substitution
Paul
OK, I accept that K. was here talking as if money has zero elasticity of
production.
But since credit money is not constant or given, and can be increased
without the use of labor, K's argument is at least misleading, and I could
even argue 'wrong'.
As we now know, money is not a commodity like other commodities. It is
rather a social convention, like language, (which is also "produced" by
labor).
K. was arguing that since people wanted more money, and since additional
quantities could not be produced by labor, this was the cause of AD
deficiency.The argument was exactly like that of an excess demand to hoard
land.
This leads people naturally to think that the supply of money is too
small, so the government or CB should produce (create) more.
But the real reason for AD insufficiency is not because the supply of
money is too small, but because the rate of interest is too high.
Additional credit money can always be created. The problem is not because
the supply of money is given. The supply of credit money is
demand-determined, by the demand for bank credit. If interest rates are
lowered by the CB, this will lead to an increase in the demand for bank
credit, and an increase in the MS and in AD.
Agreed??
Basil
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Date: Thu, 08 Mar 2001 12:33:44 -0500
To: pkt@xxxxxxxxxxxxxxxx
From: Paul Davidson <pdavidson@xxxxxxx>
Subject: gross substitution
Sender: pkt-owner@xxxxxxxxxxxxxxxx
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At 06:55 AM 3/8/01 -0500, Basil wrote:
Paul
I am not sure you are correct here.
You are of course correct about elasticity of supply in classical vision
being the first derivative of the production function.
But this GT p. 230 quote and others clearly seem to imply that Keynes
in the GT used a zero elasticity of production as a fancy way of saying
that the supply is fixed??
Remember the supply of M was one of his key exogenous variables in the GT?
In the GT K. simply assumed that M was under the control of the CB. Even
though in the Treatise he had clearly shown credit money was endogenous,
in the GT he was focusing on effective demand, to the exclusion of
"monetary details".
I think we should simply recognize that on this point Keynes was wrong.
Nobody's perfect.
Basil
(Except perhaps Sibs and Louise (:-))
yes, no one is perfect -- and Keynes made many minor errors in the GT --
including one in his equations in chapter 19. But , as i have just
pointed out to Kazuhiro -- this elasticity discussion is tied directly to
the production function and has nothing to do with exogenous vs
,endogenous.. For example on p. 230 discussing the "elasticity of
production [of money] meaning, in this context, the response of the
QUANTITY OF LABOUR APPLIED TO PRODUCING IT" (emphasis added) Also on p.
231 "not only is it impossible to turn more labour on to producing money
... " And on p. 235 "Unemployment develops, that is to say, because
people want the moon[ written before NASA developed rockets that could
get people to the moon] --men cannot be employed when the object of
desire (i.e. money) is something that cannot be produced....There is no
remedy but to persuade the public that green cheese [ who has a high
elasticity of production in the production function] is practically the
same thing [as money used for a liquid store of value] and then have a
green cheese factory (i.e., a central bank) under public control".
I hope this convinces you and others that Keynes was talking in terms of
the fact that money
(and other lioquid assets that have the same "essentia" elasticity
properties) is a nonproducible is what causes unemployment. Also see
Hahn on the this same point. in the 1977 book MICROFOUNDATIONS OF
MACROECONOMICS edited by Geoff Harcourt.
Paul