PKT message, Re: Circular Flow and The Multiplier

Re. the following:

> (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?.

There are two distinct points at issue.

As indicated by my one-word comment to Randy Wray on a recent piece he did on the current U.S. economic situation and prospects - "brilliant" - I do not regard the failure of "Keynes' theoretical aspirations in the GT" as having any bearing on the practical merits of the "functional finance" approach of Godley, Wray et al.

Indeed, the following account by Hayek suggests that, late in life, Keynes himself readily distinguished between the "functional" and "theoretical" aspects of the GT:

"It is easy to see how such belief, according to which the creation of additional money will lead to the creation of a corresponding amount of goods, was bound to lead to a revival of the more naive inflationist fallacies which we thought economics had once and for all exterminated. And I have little doubt that we owe much of the post-war inflation to the great influence of such over-simplified Keynesianism. Not that Keynes himself would have approved of this. Indeed, I am fairly certain that if he had lived he would in that period have been one of the most determined fighters against inflation. About the last time I saw him, a few weeks before his death, he more or less plainly told me so. As his remark on that occasion is illuminating in other respects, it is worth reporting. I had asked him whether he was not getting alarmed about the use to which some of his disciples were putting his theories. His reply was that these theories had been greatly needed in the 1930s, but if these theories should ever become harmful, I could be assured that he would quickly bring about a change in public opinion. What I blame him for is that he had called such a tract for the times the General Theory." ('Personal Recollections of Keynes', in A Tiger by the Fail - The Keynesian Legacy of Inflation, Institute of Economic Affairs, London, Hobart Paperback No. 4, Second Edition, 1978, p. 103)

Gunnar

----- Original Message -----

From: "eperez" <eperez@xxxxxxxxx>

To: <pkt@xxxxxxxxxxxxxxxx>

Cc: "Gunnar Tomasson" <tomasson@xxxxxxxx>

Sent: Monday, May 28, 2001 2:46 PM

Subject: Re: Circular Flow and The Multiplier

> (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
> > --------------------------------------------------------------------------
> ------------------------------------------
> > 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
> > --------------------------------------------------------------------------
> -------------------------------------------------------------
> >
> >
> >
> >
> >
> >
> >
> >
> >
> >
> >
> >
> --------------------------------------------------------------------------------------------------------------------
> 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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