Re: What is Creditary Economics?

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

Paul:

Re. the following:

> There is one logically consistent Post Keynesian view--
> others who call themselves "post Keynesians" {including Paul Samuelson by
> the way} require the same basic restrictive classical assumptions as the
> mainstream -- e.g., the neutrality of money -- at least in the long run;
> the ergodic axiom; etc

Comment:

Let me respond in the context of the extract below from your 1998 paper on
'Post Keynesian Employment Analysis and OECD Unemployment".

The "one logically consistent Post Keynesian view" is predicated, inter
alia, on a CONCEPT of 'money' of which you write as follows:

6. Money is a chartalist institution. In any money-using system, liquidity
is defined as being able to meet your monetary contractual obligations as
they come due. The civil law of contracts makes the State the enforcer of
all contractual commitments. In modern entrepreneurial systems, where
slavery is illegal, all contractual obligations can ultimately be enforced
only in terms of nominal payments and penalties. Thus money and the demand
for liquidity affects real behaviorial decisions in both the short and long
run.
7. Money possesses two "essential properties" [Keynes, 1936, ch. 17], namely
its elasticity of production is (approximately) zero, i.e., money does not
grow on trees, and its elasticity of substitution with the products of
industry is (approximately) zero so that if the price of money

(or other liquid assets increases) agents do not attempt to substitute
producible goods to provide the same services as liquid assets do.
Consequently, as Hahn points out, "in any economy which is not a barter
economy, the existence of "any nonreproducible asset [i.e., a durable that
has a zero elasticity of production] allows for a choice between employment
inducing and non-employment inducing demand. But, of course in a monetary
economy money is an important nonreproducible asset" [Hahn, 1977, p. 39]. In
other words, as Hahn [p. 31] unemployment is possible as long as there
"resting places for saving [in] other than reproducible assets"(3).

MONEY so defined EXCLUDES the "non-chartalist institution" of non-MONETARY
forms of CREDIT, which are vitally important in real-world economies in
general and in the less developed economies in particular.

A case in point.

In the "stabilization" phase of Indonesia's economic and financial
rehabilitation after the inflationary ravages of the late Sukarno era (ca.
1966-1970), the growth of key monetary variables at rates far in excess of
concurrent real output growth was consistent with rapidly decreasing rates
of domestic price inflation because of (a) the RE-monetization of some parts
of the economy, and (b) the monetization EX NOVO of other parts.

Moreover, this growth of monetary variables reflected CREDIT CREATION within
the organized banking system.

Thus, the "restrictive axiom" that money's "elasticity of production is
(approximately) zero" was/is inapplicable in real-world economies.

Accordingly, I submit that ANY "logically consistent Post Keynesian view"
which incorporates the "essential properties" of money as defined by Keynes
must be held to attain such consistency at the cost of real-world
applicability.

Gunnar

*****
The relevant characteristics of Keynes's General Theory that are fundamental
to the Post Keynesian analysis of employment are:

1. Involuntary Unemployment is a possible and normal short- and long-run
equilibrium outcome of any money-using market-oriented laissez-faire
economy. The equilibrium unemployment level is determined by the
intersection of the aggregate demand and supply functions, i.e., the point
of effective demand, whether these functions are expressed either in nominal
terms or deflated by the money wage rate. In any entrepreneurial economy
Say's Law "is not the true law relating the aggregate demand and supply
functions [Keynes, 1936, p. 26], and three classical axioms are not
applicable. These classical axioms are: (1) the neutral money axiom, (2) the
ergodic axiom (that assumes that an uncertain future can be reduced to a
probabilistic risky future which can be reliably predicted, and (#0 the
gross substitution axiom.

2. The marginal productivity of labor function is not the demand curve for
labor in any money-using market-oriented entrepreneurial economy. At best, a
conception of an aggregate labor marginal productivity curve [muliplied by a
scalar representing Lerner's [1935] degree of monopoly] can be interpreted
as, in Patinkin's [1965, pp.391-2] terminology, "a market equilibrium curve"
that specifies the real wage outcome associated with any given equilibrium
level of employment where the latter is determined by the point of effective
demand.

3. A downward sloping marginal product of labor curve would be "the obverse
of the familiar [classical] proposition that industry is normally subject to
decreasing returns [i.e., increasing costs] in the short period during which
equipment is assumed to be constant so that the marginal product in the wage
good industries (which governs the real wage) necessarily diminishes as
employment increases" [Keynes, 1936, p. 17]. Only if in the aggregate
industries are operating under diminishing returns will an increase in
employment induced by an increase in effective demand result in a lower real
wage outcome [Keynes, 1936, p. 18].

In his response to Dunlop and Tarshis, Keynes [1937] admitted his General
Theory does not require that higher levels of employment equilibrium are
necessarily associated with lower real wage rates. As long as effective
demand rises then employment will increase. Whether the resulting real wage
declines or not depends on the supply conditions including returns to labor,
the degree of monopoly, etc that underlay the Z curve (as LNJ [1990,
pp.341-2] recognize but fail to incorporate into their analysis..

4. In an entrepreneurial economy, money is never neutral in either the short
run or long run [cf. Keynes 1935, p. 409]. Consequently, the economy will
not be automatically self-adjusting to any full employment rate (or natural
employment rate or natural interest rate) and "without purposive direction
it is incapable of translating actual poverty into potential plenty"
[Keynes, 1935, p. ].

In a market-oriented monetary economy, money always matters. Moreover, in
the post-1973 open global economy of flexible exchange rate markets,
speculation, imbalances in international monetary payments and foreign
exchange market activities are the money matters that plays a prime role in
determining global employment as well as the distriubtion of employment
among the trading partner nations. As we will argue below the high
unemployment rates associated with OECD nations (compared to the first
quarter century after World War II) can be largely explained in these terms.

5. Contracts denominated in money terms are a ubiquitous human institution
used to organize production and exchange activities in all market-oriented
entrepreneurial economies. The civil law of contracts evolved to help humans
organize time-consuming production and exchange processes in a world of
nonergodic (uncertain) circumstances(2)

where economic agents recognize that future outcomes can not be reliably
predicted on the basis of past and current data. Since the money-wage
contract is the most ubiquitous of these efficiency-oriented contracts,
modern economic systems can be characterized as money-wage based systems.
The ubiquitous use of the money-wage contracts underlies (1) why Keynes (and
PK) deflate the nominal values of the Z and D functions by the (money) wage
unit to obtain output measures in terms of labor time rather than deflating
by a goods and services price index in a delusive attempt to measure
aggregate real output, and (2) why in a money-using economy, the market
demand for labor is not derivable from any marginal productivity
relationships any more than the micro-demand for any product is deriveable
from the marginal cost schedule of a firm or the supply schedule of the
industry.

6. Money is a chartalist institution. In any money-using system, liquidity
is defined as being able to meet your monetary contractual obligations as
they come due. The civil law of contracts makes the State the enforcer of
all contractual commitments. In modern entrepreneurial systems, where
slavery is illegal, all contractual obligations can ultimately be enforced
only in terms of nominal payments and penalties. Thus money and the demand
for liquidity affects real behaviorial decisions in both the short and long
run.

7. Money possesses two "essential properties" [Keynes, 1936, ch. 17], namely
its elasticity of production is (approximately) zero, i.e., money does not
grow on trees, and its elasticity of substitution with the products of
industry is (approximately) zero so that if the price of money

(or other liquid assets increases) agents do not attempt to substitute
producible goods to provide the same services as liquid assets do.
Consequently, as Hahn points out, "in any economy which is not a barter
economy, the existence of "any nonreproducible asset [i.e., a durable that
has a zero elasticity of production] allows for a choice between employment
inducing and non-employment inducing demand. But, of course in a monetary
economy money is an important nonreproducible asset" [Hahn, 1977, p. 39]. In
other words, as Hahn [p. 31] unemployment is possible as long as there
"resting places for saving [in] other than reproducible assets"(3).

Unfortunately Keynes's method of analysis has been ignored by the majority
of the profession who in a retrogression movement encouraged by Samuelson's
Foundation of Economic Analysis and the neoclassical synthesis adopted the
classical axiomatic microanalysis as the foundations for expressing the
aggregate demand function on the assumption of neutral money and the
aggregate supply function on the assumption of Say's Law based either on the
classical labor supply function where homogeneous workers are willing to do
a day's work for a day's pay or the New Keynesian labor supply where workers
are a homogeneous group of shirkers and wastrels who must be bribed to do a
day's work for more than a day's pay. Because Keynes's functional analysis
is practically unknown to most readers of this journal, I will be required
to



----- Original Message -----
From: "paul davidson" <pdavidson@xxxxxxx>
To: "Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxxx>
Sent: Monday, April 14, 2003 1:09 PM
Subject: Re: What is Creditary Economics?


> At 12:40 PM 4/14/03 , you wrote:
> >  Paul:
> >
> >Two brief comments re. the following:
> >
> > > WHY IN THE WORLD WOULD YOU THINK THAT JOE STIGLITZ REPRESENTS THE POST
> > > KEYNESIAN VIEW?????
> >
> >First.  Judging by the variety of viewpoints expressed by "Post
Keynesians"
> >on PKT, there is NO monolithic Post Keynesian View.
>
>
> There is one logically consistent Post Keynesian view--
> others who call themselves "post Keynesians" {including Paul Samuelson by
> the way} require the same basic restrictive classical assumptions as the
> mainstream -- e.g., the neutrality of money -- at least in the long run;
> the ergodic axiom; etc
>
>
> >Second.  Judging by Gernot Kohler's following post, Joe Stiglitz is as
"Post
> >Keynesian" as they come.
> But Kohler calls Joew a "Global Keynesian" -- not a Post Keynesian
>
>
>
> >Gunnar
> >       13 July 2002 15:04 UTC  < < <
> >       Thread Index
> >       > > >
> >
> >       The Global Keynesianism of Stiglitz
> >
> >       Stiglitz can, perhaps, be described as a global-Keynesian. He is
> >critical of global neoliberalism and his analysis and proposals have
> >Keynesian elements and are of a global, rather than national, scope. Here
> >are some examples.
>
> Having an open vs. a closed economy model is not sufficient to make one a
> Post Keynesian
>
> Paul
>
>