Re: Liquidity Preference and State Theory of Money

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

Harry:

Re. the following:

> Actually, I mentioned the critical interest rate concept in March 2001 on
> pkt and Geoffrey Gardiner said "That is a very striking perception!" At
that
> time I described credit by the degree to which it is either supply or
demand
> constrained. Therefore on the graphic supply constrained means mainly
> consumptive credit, and demand constrained means mainly productive credit.

Comment:

The idea that "productive credit" is "demand constrained" is the mirror
image of Bentham's concept that, as I recall it from forty years ago, "the
extent of industry is limited by capital".

What, then, is "capital"?  From the vantage point of The Washington
Consensus, the answer detailed in my message ---

> > First.  All cooperative production activity is predicated on credit
(formal or
> > informal) - such "credit" is the finance "capital" equivalent of Factor
Inputs
> > which comprise the real "capital" which, in recent messages, I have
referred
> > to as Factor Investment in the Economy's Work in Progress.

--- has revolutionary implications.

For, given the Law of Contract and an institutional setting for its
enforcement, lack of "capital" cannot in principle be the root cause of
Factor Unemployment.

This has implications for the scenario sketched in your graph - for it
implies that "supply" of "capital" cannot in principle be constrained by
"liquidity preference" considerations.

Ditto for "consumptive credit" insofar as it is "financed" through "new"
credit creation rather than "recycled" savings out of factor incomes.

Gunnar



----- Original Message -----
From: "Harry Veeder" <eo200@xxxxxx>
To: "Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>; "post keynesian
thought" <pkt@xxxxxxxxxxxxxxxx>
Sent: Thursday, May 01, 2003 10:02 AM
Subject: Re: Liquidity Preference and State Theory of Money


> Gunnar,
>
> Let me make the following analytical suggestion. From a macro perspective
> one should not segregate credit in to the binary camps of productive and
> consumptive credit. Rather one should begin by regarding all credit as
being
> simultaneously productive and consumptive to _some_ degree.
>
> It is interest (be it formal or informal) on credit which determines the
> degree to which credit is either productive or consumptive. This means
there
> is a "critical interest rate" where credit changes from being mainly
> consumptive to mainly productive. I identify this critical rate
> with the CB's rate. Please see the attached pdf file for a graphic
> representation of this concept.
>
> Actually, I mentioned the critical interest rate concept in March 2001 on
> pkt and Geoffrey Gardiner said "That is a very striking perception!" At
that
> time I described credit by the degree to which it is either supply or
demand
> constrained. Therefore on the graphic supply constrained means mainly
> consumptive credit, and demand constrained means mainly productive credit.
>
>
> Harry Veeder
>
> > My following Gang8 message has implications for
> >
> > (a) the liquidity preference theory of interest; and
> >
> > (b) the State Theory of Money,
> >
> > namely, that they are analytically incoherent.
> >
> > Gunnar
> >
> > ********
> >
> > There are two distinct issues involved.
> >
> > First.  All cooperative production activity is predicated on credit
(formal or
> > informal) - such "credit" is the finance "capital" equivalent of Factor
Inputs
> > which comprise the real "capital" which, in recent messages, I have
referred
> > to as Factor Investment in the Economy's Work in Progress.
> >
> > All this, while self-evidently true, is branded as "monetary heresy" of
the
> > kind of which Keynes wrote in Ch. 23 of the General Theory with respect
to
> > Major Douglas that "The strength of Major Douglas's advocacy has, of
course,
> > largely depended on orthodoxy having no valid reply to much of his
destructive
> > criticism."
> >
> > "On the other hand," Keynes continued, "the detail of his diagnosis, in
> > particular the so-called A + B theorem, includes much mere
mystification...."
> >
> > As for J. A. Hobson - "a major in the brave army of [monetary]
heretics" -
> > Keynes acknowledged that he had made "the first explicit statement of
the fact
> > that capital is brought into existence not by the propensity to save but
in
> > response to the demand resulting from actual and prospective
consumption."
> >
> > All this concerns the creditary principle involved.
> >
> > Second.  In the real world, there is no case for interest to be charged
on
> > informal production credit.
> >
> > As for formal production credit - the kind which the financial system
extends
> > in exchange for IOUs of "entrepreneurs" - there is a case for interest
being
> > charged to cover the financial system's reasonable costs and profit.
> >
> > Anything beyond that has nothing to do with rewarding any "service"
provided
> > to "entrepreneurs".
> >
> > The question, then, is what constitutes "reasonable costs and profit"
for the
> > financial system?
> >
> > Since Credit Creation, in principle, is not contingent on prior
financial
> > "savings" or "deposits" - a point which is self-evident in the case of
> > informal credit but obfuscated by regulatory provisions insofar as
formal
> > credit is concerned - there is no technical case for the financial
system
> > passing on to "entrepreneurs" whatever interest they may be paying to
"savers"
> > and "depositors".
> >
> > Beyond this, we are into the realm of socio-economic policy-making,
where the
> > conflicting interests of "savers" and "depositors", on the one side, and
> > "entrepreneurs", on the other side, cannot be resolved on technical
grounds.
> >
> > Gunnar
> >
> > P.S. Interest on consumption credit is an entirely different matter - if
> > someone gives up part of his income so that another may consume more
today
> > than he could finance with his own income, it is a matter for the two
parties
> > (through financial intermediaries) to determine interest charges on such
> > credit.
>
>