Re: Circular Flow and The Multiplier

["eperez" <eperez@xxxxxxxxx>]

(i) Regarding Schumpeter, Kahn wrote:

Schumpeter's suggestion that my 'share in the historic
achievement cannot have fallen very far short of co-authorship' is claerly
absurd. Perhaps it was inspired by unconscious hostility to Keynes....Keynes
had found a solution to the basic problem for which Schumpeter had for, a
great part of his life, searched in vain" (1984, p.178).

(ii) Did Tobin's Nobel lecture really drive "the final nail in the coffin of
Keynes' theoretical aspirations in the GT"?.
What about the recent and on-going work by Godley (1999) and Lavoie
(2001) inspired on Tobin's work? Isn't it a promising PK approach to linkink
monetary and real variables?.

From:           	"Gunnar Tomasson" <tomasson@xxxxxxxx>
To:             	"POST KEYNESIAN THOUGHT" <pkt@xxxxxxxxxxxxxxxx>
Subject:        	Re: Circular Flow and The Multiplier
Date sent:      	Fri, 25 May 2001 19:37:17 -0100
Send reply to:  	pkt@xxxxxxxxxxxxxxxx

Esteban:

Thanks for the Patinkin/Knight reference!

Harry:

As indicated by Estaban, "the multiplier analysis belongs to another
[non-circular flow] tradition".

In the annals of 20th century economics, the difference between the two
traditions is reflected in Schumpeter's (a) resounding intellectual
endorsement of Keynes' approach in the 'Treatise on Money' and his (b)
intellectual aversion - bordering on loathing - to Keynes' approach in the
General Theory.

In my view, it is an intellectual travesty - both dishonest and
self-serving - for Keynes' disciples to make light of Schumpeter's disdain
for the latter by ascribing it to "jealousy" on Schumpeter's part that
Keynes "succeeded" where he had "failed" - namely, in hitting all the right
analytical notes whereby the intellectual dead-wood of the past was cleansed
away to make room for modern macroeconomics.

After Keynes had sent him a copy of the 'Treatise', Schumpeter sent him a
thank-you note in which he hailed the work as "a landmark achievement" - one
for the history books insofar as economics was concerned.  No "jealousy"
there but only rejoicing that a fellow pioneer had made an important
contribution along the lines of Schumpeter's own 'Theory of Economic
Development' which had been all but disregarded by his peers.

Yet, in his book on "Keynes' Monetary Thought" (or some such title), Don
Patinkin reflected the consensus among modern economic scholars when he
declared the 'Treatise' a bad - really bad - piece of work.

In his Preface to the General Theory, Keynes wrote that the chief weakness
of his approach in the 'Treatise' was its essentially static nature (I do
not have his exact words at hand as I write this) - in the General Theory,
his disciples agree, Keynes went a long way towards developing a model that
embraced also the essential dynamic aspects of economic activity in
monetized entrepreneurial market economies.

All this would be fine except for one - enormously important - thing:

It is logically impossible to integrate such static and dynamic aspects in a
unitary conceptual framework.

Leaving aside the epistemological grounds for this conclusion, let me just
note how Paul A. Samuelson and James Tobin - writing some three decades
apart - addressed the task at hand in this respect:

(1)  In the opening pages of his 'Foundations of Economic Analysis',
Samuelson advanced the "hypothesis" that real-world market economies were
"systems in 'stable' equilibrium or motion" - which is another way of
hypothesizing that that the static and dynamic aspects of economic activity
can in fact be integrated in a unitary conceptual framework.

(2)  In his survey article on the mainstream "asset-portfolio" approach to
monetary theory in the inaugural issue of 'The Journal of Money and Banking'
(?) in 1969, James Tobin acknowledged that mainstream theorists had not yet
succeeded in integrating the economy's "income account" and the "capital
account" in a unitary conceptual framework.

When I came across Tobin's article some 20 years ago, I sent him brief
comments and suggested that there was a very good reason for the failure of
mainstream economists in this respect - namely, that it is logically
impossible to place static and dynamic aspects of economic theory in a
unitary conceptual framework.

Tobin did not dispute the point.

Instead, he referred me to his Nobel lecture around the mid-1970s in which
he elaborated what he had come to "like" - namely, the "stock-flow-stock"
approach to monetary theory.  That is to say, a non-unitary framework for
monetary analysis.

In other words, James Tobin's Nobel lecture may be said to have driven the
final nail in the coffin of Keynes' theoretical aspirations in the General
Theory - validating Schumpeter's intellectual loathing thereof.

Gunnar




----- Original Message -----
From: "eperez" <eperez@xxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Friday, May 25, 2001 4:11 PM
Subject: Re: Circular Flow and The Multiplier


> According to Patinkin (Essays in and on the Chicago Tradition)
> it was Frank Knight that came up with the circular flow model
> in its modern form (of course it has precursors in Quesnay...). In that
book, if
> I recall correctly, he reproduces some of the drawings by Knight.
> The multiplier analysis belongs (I think) to another tradition.
> Keynes made use of it in 1933 (Means to Prosperity). Equal to 2 according
> to JMK (CW vol IX p.343). JMK stated that applying the reasoning of the
> Mult. to loan-expenditure projects there was no dilemma betwen "increasing
> employment and schemes for balancing the budget (p.347)."There is no
> possibility of balancing the budget except by increasing national income,
> which is much the same thing as increasing employment".(Ibid),
>
>
>
>
>
> Date sent:      Fri, 25 May 2001 11:58:06 +0100
> To:             pkt@xxxxxxxxxxxxxxxx
> From:           Harry Veeder <eo200@xxxxxxxxxxxxxxxxxxx>
> Subject:        Circular Flow and The Multiplier
> Send reply to:  pkt@xxxxxxxxxxxxxxxx
>
>  From the thread  Re: WWW -- Harrod home-page (fwd)
> Gunnar Tomasson wrote:
>
> >James:
> >
> >Re. the following:
> >
> >>  it seems a rather barren quest to determine who
> >>  was "first."
> >>  Much more important is our current understanding of the concept and
> >>  its practical role in policy.
> >
> >The 10th (1976) edition of Samuelson's 'Economics' explains and defines
the
> >multiplier concept as follows:
> >
> >"Modern income analysis shows that an increase in investment will
increase
> >national income by a multiplied amount - by an amount greater than
itself!
> >Investment spending - like any independent shifts in governmental,
foreign,
> >or family spending - is high-powered, double-duty spending, so to speak.
> >
> >"This amplifed effect of investment on income is called the "multiplier"
> >doctrine; the word "multiplier" itself is used for the numerical
coefficient
> >showing how much above unity is the increase in income resulting from
each
> >increase in investment."
> >
> >"The multiplier is the number by which the change in investment must be
> >multiplied in order to present us with the resulting change in income."
(p.
> >226)
> >
> >And what does all this mean?
> >
> >It means that analysis of an economy's income and expenditure accounts -
> >"modern income analysis" - reveals a greater than one-to-one ratio
between
> >entries labeled "income" and "investment".
> >
> >Yet, "investment" in factor inputs to the economy's production process is
> >another label for "income" received by suppliers of factor services - as
in
> >the Circular-Flow view of the economic process.
>
> I  don't know enough economics to be able judge the correctness of
> the "multiplier",
> but if the "circular flow" model makes no distinction between the
> nature of investment and
> the nature of income then there is something wrong with the circular
> flow model.
>
> It is one thing to identify  investment and consumption as equivalent
instances
> of "spending", but it is another thing to identify income and investment
> as equivalent instances of a circular "flow".
>
> The circular flow model does not seem to respect the individual's freedom
> to save OR invest out of his income if income and investment boil down
> to the same thing.
>
>
> >Thus, it would seem to follow that the concept of a multiplier greater
than
> >one is rooted in the definitions used by national accountants WITHOUT
regard
> >to the underlying - elementary - economics involved.
> >
>
> I would say the multiplier and the circular flow model seem to clash.
>
> Harry Veeder
> --------------------------------------------------------------------------
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> Esteban Pérez
> Economic Affairs Officer
> Economic Commission for Latin America and the Caribbean
> United Nations
> Av. Presidente Masaryk 29 12o Piso
> Col. Chapultepec Morales 11570 Mexico D.F.
> Phone   : 263-9681
> Fax     : 531-1151
> E-mail address: eperez@xxxxxxxxx
> Mexico ECLAC WEBPAGE:
> http://www.un.org.mx/cepal
> This message does not constitute official ECLAC
> correspondence; the organization is not responsible
> for the contents or the consequences of its use,
> not for inaccurate transmission or misdirection
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--------------------------------------------------------------------------------------------------------------------
Esteban Pérez
Economic Affairs Officer
Economic Commission for Latin America and the Caribbean
United Nations
Av. Presidente Masaryk 29 12o Piso
Col. Chapultepec Morales 11570 Mexico D.F.
Phone   : 263-9681
Fax     : 531-1151
E-mail address: eperez@xxxxxxxxx
Mexico ECLAC WEBPAGE:
http://www.un.org.mx/cepal
This message does not constitute official ECLAC
correspondence; the organization is not responsible
for the contents or the consequences of its use,
not for inaccurate transmission or misdirection
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