Re: Samuelson vs. Keynes on "theory"

["Dr. Bruce R. McFarling" <ecbm@xxxxxxxxxxxxxxxxxxx>]

On Sat, 05 Oct 2002 12:55:20 -0400, Gunnar Tomasson
<gunnar.tomasson@xxxxxxxxxxx> wrote:

>Re. the following:

>> Being casual about the dimensions of the terms that you are talking
>> about ($ versus $/period, in this case) often leads into fallacies
>> when the same term can be used to refer values of different
>> dimension.

>Comment:
>The point at issue does not concern ($ versus $/period) but analytical vs.
>empirical economics.

First, note that on the fallacy of interest paid exhausting the
money created when credit is granted, going off on what is labelled
as analytical versus empirical economics is completely a red herring.
Noting that interest is an income term [* see note] lets us see that
the money that is created when the credit is extended may be used
multiple times in the process of making income payments, whether
interest, wages, salaries, dividends, or whatever, without exhausting
that money, and that the money is only exhausted when the principle
is repaid (but of course if there is a demand for the money, the
banking system will be free to recreate that money with a new loan).

[* not: That is, in a general theory system of definitions of terms.
However, clearly a Post Keyensian Thought list is one place where
someone is entitled to use this system of definitions of terms
without attaching a qualification to the discussion or to each use
of each term.  Further, if an argument makes sense and is valid when
read in those term, someone who deliberately misreads the argument
in an effort to find a reading in which it is invalid is engaged in
nothing more than a cheap rhetorical ploy.]

So, the fallacy is one that comes from a basic misconception
about the relationship between money-in-existence and
monetary-payments-made in a monetary production economy.

What about the supposed distinction between analytical and
empirical economics?  Good empiricism requires clear
analysis of what terms are observables in a given set of
social institutions and which are not; while clear analysis
requires a good empirical understanding about what terms of
analysis have an actual empirical analogue and which terms
are misrepresentations of the empirical economy in question.

The specific red herring raised in response to the point
about the basic fallacy does not concern analytical versus
empirical economics.  It concerns empirical versus BS
economics.

>A case in point.
>> To be a bit more precise, the question is nonsensensical given
>> that interest is an income while oustanding credit obligations
>> is a stock.

>Here is Schumpeter's account of Böhm-Bawerk's - implicit - debunking of the
>proposition that "interest is an income":
>"Böhm-Bawerk was indeed the first who expressly said that the whole value of
>the product must in principle be divided between labor and land, if the
>process of production is to proceed with ideal perfection." (Theory of
>Economic Development, Oxford University Press, 1961, p. 32).

Read the following carefully (are opposed to carelessly):
>A few weeks back, I cited Adam Smith's comment that "It would be too
>ridiculous to go about seriously to prove that wealth does not consist in
>money, or in gold and silver, but in what money purchases and is valuable
>only for purchasing."

What "real" wealth consists of ... not why money is valuable ...

>As I recall it, Bruce expressed his agreement with Smith's comment.

As I recall it, I expressed my agreement with what Smith was saying
and disputed the implications that Gunnar drew from what Smith said.

>If money is NOT wealth - or, more generally, if money is not an economic as
>distinct from free good - WHY should interest on production credit be
>regarded as Income?

Now, two implicit premises thrown in:

(a) Money is not "real wealth" translates into money is not
"financial wealth".

(b) Income is a category that consists of "economic goods".

Neither of these two premises hold up, empirically.

(a)  Money is valuable ... it is a financial asset ... not
because it is real wealth, but because it is intrinsically
liquid, and is the only thing that is intrinsically liquid.
In any economy in which there is uncertainty ... which means,
empirically, in any economy whatsoever ... and in which command
over the means of production is obtained with the means of
exchange ... which empiricall means in all industrial economies
at least ... and in which the default remedy for breach of
contract is in terms of the means of exchange ... which
empirically is also all industrial economies at least ...

... then it is valuable to hold a balance of money against
windfall losses in money terms, when the monetary value
of any item of real wealth that must be liquidated at
short notice is uncertain.

In any monetary production economy, money is valuable as an
asset because of its liquidity.  Of course, if you get rid
of true uncertainty because of the difficulty in modelling
it with mid 1800 physics, then there is no room in such a
model for money to have value as an asset, so that neoclassical
economics is at least internally consistent in permitting
model that exhibit long run neutrality of money ... but if
your first priority is to have a model ABOUT monetary
production economies, then analytical systems that purport
to model monetary production economies as a whole in which
liquidity is not valuable cannot be used unless it is
possible to correct this flaw.

For one aspect of Schumpeter's TED that I would see to be of
value from a institutional perspective, see my JEI article
on "Schumpeter's Entrepreneurs Under Common's Sovereign
Authority".  There are other aspects of Schumpeter's work
that I would see as valuable.  But first the implications
that rely heavily on the picture of a Walrasian GE as
"normal economic conditions" have to be winnowed out ...
there is no need to keep the chaff together with the
wheat.

(b) Playing semantic games with a term like "Income" does
not merit any extended critique.  This IS a post keynesian
list, so when the term "income" is used in a way that makes
perfect sense in actual, observable terms as a monetary
value, then what more needs to be said?

Income entitlements are in terms of the means of exchange,
income disbursements are disbursments of the means of
exchange, the means of exchange under someone's control
can then be used to obtain a share of the economy's product.
Interest entitlements and interest payments are obviously
part of that.  Being deliberately obstruse does not strike
me as the foundation of a persuasive argument, so there is
nothing more to add in response to Gunnar's point (b).