Re: Liquidity Preference and State Theory of Money

[Harry Veeder <eo200@xxxxxx>]

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.

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