Re: Savings fallacy redux (was Re: Method)

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Esteban:

I owe you an immense debt of gratitude for posting Keynes' comments before
the MacMillan Committee - this is the first time I see them and can only
regret that Keynes did not live to be 120 years old to lend the weight of
his formidable intellect to the cause of Creditary Economics as developed
during the past 14 years within Gang8.

For the proposition that ¨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¨, is right
out of the play-book of Creditary Economics.

The WORLD economy being "a closed economy", the MONETARY LOGIC of "the
banana world" is one with that of the World Economy as a whole, provided
ONLY that IMF members marshal the imagination and political will required to
think through and put in place world monetary arrangements that support Full
Employment monetary policies at the national level.

Gunnar



----- Original Message -----
From: "Esteban Perez" <eperez@xxxxxxxxxxxx>
To: <ecbm@xxxxxxxxxxxxxxxxxxx>; <gunnar.tomasson@xxxxxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>; <gang8@xxxxxxxxxxxxxxx>
Sent: Sunday, September 01, 2002 4:21 PM
Subject: Re: Savings fallacy redux (was Re: Method)


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¨.

---------------------------------------------------




<<< "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