Re: elasticity of production

[dequech@xxxxxxxxxxxxxx]

Dear Kazuhiro,

The definition of elasticity of production in chapter 20 is as follows:
"the rate at which output in any industry increases when more effective
demand in terms of wage-units is directed towards it" (Keynes, 1936:
282-83). There is no reference to labour in this definition, whereas labour
is mentioned in the definition given in chapter (I've already quoted it).
That's is the difference I mentioned.
Chapter 20 is about the employment function. Employment is connected to
effective demand via output (because labour is needed to produce the goods
demanded), and the relation between employment and output is the production
function. This is why I said that in Keynes the elasticity of production is
tied to production (as the name suggests).

Basil and you, if I understand you both correctly, were arguing that with
endogenous money the supply of money is not fixed and grows in response to
demand. Thus, I suggested that the definition given in chapter 20 is the
one that you and Basil could use to make your point, since it relates
demand to production and, therefore, to supply. I thought that what you
wanted was to relate variations in money demand to variations in money
supply. Since, as Basil put it, money is supplied rather than produced, you
would need to adapt the definition for your purposes, emphasizing supply
rather than output. In contrast, the definition in chapter 17 refers to
labour, which, I imagined, was not what you and Basil were concerned with.
Paul and I were saying that the most important thing about Keynes's
discussion of money's elasticity of production is that no or very little
labour will be employed in response to an increase in money demand, and
this does not change if money is endogenous or exogenous.

Now, as I said, the relation between changes in the quantity of an asset
and its own-rate is a different question, and Keynes was a bit confusing
when he related this question to the elasticity of production.

Money being endogenous doesn't change the fact that no or very little
labour will be employed in response to an increase in money demand, but it
does change the possibility of the money supply responding to an increase
in money demand.

This brings me to your statements:
>Money is produced relatively easily, irrespective of the elasticity, in
contemporary credit economy, and then
>own-rate of interest of money must decline as well as other assets do.
However, we are in the world which is far from
>full employment.
>Does it mean that own-rate of interest of money isn't function of its
quantity in credit money?

In my view, the own-rate of money can still be a function of its quantity
and yet we can still have unemployment. The interest rate does not need to
fall. As the controversy among Post Keynesians shows, there are different
ways of incorporating endogenous money in one's theory. Unlike the more
radical endogenous money Post Keynesians, one may not assume that the money
supply is completely determined by demand and that banks will necessarily
accommodate all of the money demand. So, the quantity of money may not
increase, and the rate of interest may not fall, and therefore unemployment
may not fall, if banks prefer liquidity and refuse to satisfy the liquidity
preference of the non-banking public. Actually, the liquidity of everybody
(banks and non-banks) increases, the interest rate will increase. This
reasoning would help to explain why there is unemployment in a world of
endogenous money.
As I said to Basil, however, this is a different discussion.

Cheers,
David Dequech