Re: Savings fallacy redux (was Re: Method)

["Esteban Perez" <eperez@xxxxxxxxxxxx>]

Gunnar,

1. The banana parable is found both in the Treatise and in Keynes´s explanations to the McMillan Committee. In the Treatise (Vol. I, pp.176-178 in the Macmillan edition) it is presented as an illustration of the fact that : ¨..the act of saving is in itself no guarantee that the stock of capital goods will be correspondingly increased¨. In The MacMillan Committee it is presented in relation to close-open economy considerations and to the role of the banking system and more precisely to that of the Bank rate. After his banana parable story Keynes´s (CW, vol XX, pp.76-77) goes on (p.78): ¨The banking system is a balancing factor because the banking system  decides what the agrégate amount of investment is. Therefore you can always cure this trouble by allowing the banking system to operate if you belong to a closed economy, as in the banana world¨....But if the Bank of England were to put the Bank Rate at a figure at which current savings could be absorbed by home investment we should try to lend so much abroad, that we should lose gold¨. Thus the key to full employment is the rate of interest in a closed economy if all prices were flexible. In the GT, by endowing money with two properties: zero elasticity of production and of substitution, Keynes´s denied that the banking system and the rate of interest could play the role he assigned to it in his Treatise framework even if prices were flexible.

2. In his Anticipations he mentions the parable twice with respect to the ¨paradox of savings¨and even compares Keynes´ parable with a passage from Myrdal´s Monetary Equilibrium (1939). Given his wide knowledge of the evolution of Keynes´s thought (even if one does not agree with his interpretations) he probably did not want to engage in a discusion or debate. I am obviously speculating with very little information.

3. Patinkin criticizes Keynes´s aggregate supply curve on several grounds: ambiguity of Keynes´s definition of the supply price, no counterpart of  Keynes´s aggregate supply in Marshall among others... It seems that his argument for the derivation of the aggregate supply curve rests on the assumption that the marginal product of labor is the demand for labor function (Patinkin, p.131, 132, 1982). Davidson has made the point (several times) that ¨In a money-using market economy, there is no aggregate demand for labor fucntion with the real wage as an independent variable¨ (Davidson, JPKE, 1999, Vol. 21 no.4, p.581). This is perhaps Patinkin´s confusión  This is compounded by the fact that he seems to equate his derivation of the aggregate supply curve which is also found in his Money, Interest and Prices is similar to that of Weintraub (1958) and Davidson and Smolenski (1964).

4. Davidson and Smolenski (1964 pp119-122) derive the aggregate supply curve by determining output from the marginal cost curve at the firm level and deriving employment bt reference to the total product curve..The industry supply curve is ¨the lateral summation of the marginal cost curve of each firm in the industry.¨ The summation of the expected revenue-employment function for the industry leads to the agrégate supply ufnction.

5. Patinkin claim the supply curve is not important in Keynes. Tarshis (1977 in Leith and Patinikn, p. 54) writes: ¨ The failure of economists after 1936 to give to the aggregate supply fuction the importance that Keynes judge it to deserve, is, I believe, unfortunate, thoug part of the blame belongs to Keynes himself¨.

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<<< "Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>  8/31  8:50a >>>
Thanks, Esteban.

At the time, I took Patinkin's feigned ignorance of the "banana plantation"
parable to imply that he was not prepared to engage in debate on the subject
matter.

And why might that be so?

A possible explanation occurred to me when I read Patinkin's book on the
evolu