Re: Liquidity Preference and State Theory of Money

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

Ted:

Thanks for posting the extracts from Keynes' letters of April 4 and April
13, 1938.

Re. the following:

1.  "Substantially, my theory [of liquidity preference] is exactly what it
was when I first published the book,"

2.  "I do not consider that the conception of 'finance' makes any really
significant change in my previous theory."

Comment:

As I read it, the second extract explains the position stated by Keynes in
the first extract - he had NOT thought the matter through!

For, in the context of an analytical view of entrepreneurial production the
concept of 'finance' does - and can only - mean one thing, namely, 'finance'
as stated in my original message on the subject matter:

"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."

Since 'liquidity preference' has NO bearing on such 'finance' - or, if it
has, the case remains to be made - the statement, "Substantially, my theory
is exactly what it was when I first published the book" = "[Keynes'] theory
remains divorced from 'finance' considerations."

That is to say, "[Keynes's] theory is analytically incoherent".

Hence, the statement, "I do not consider that the conception of 'finance'
makes any really significant change in my previous theory" can only be
construed to show, at best, that Keynes did not recognize such incoherence
or, at worst, was not prepared to acknowledge it.

Gunnar



----- Original Message -----
From: "Ted Winslow" <egwinslow@xxxxxxxxxx>
To: "Forstater, Mathew" <ForstaterM@xxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Thursday, May 01, 2003 11:11 PM
Subject: Re: Liquidity Preference and State Theory of Money


>
> Mathew Forstater wrote:
>
> > With regard to the subject header but not the content, we all know
> > that Keynes asked the question why would anyone hold part of their
> > wealth in money rather than in higher interest-bearing or
> > profit-earning assets, and replied that there are the transactions,
> > precautionary and speculative motives for doing so, and later added
> > the finance motive, as Paul D. has taught us.
> >
>
> The reply was:
>
> "Why should anyone outside a lunatic asylum wish to use money as a
> store of wealth?
> "Because, partly on reasonable and partly on instinctive grounds, our
> desire to hold money as a store of wealth is a barometer of the degree
> of our distrust of our own calculations and conventions concerning the
> future.  Even though this feeling about money is itself conventional or
> instinctive, it operates, so to speak, at a deeper level of our
> motivation.  It takes charge at the moments when the higher, more
> precarious conventions have weakened.  The possession of actual money
> lulls our disquietude; and the premium which we require to make us part
> with money is the measure of the degree of our disquietude."  (XIV, p.
> 116)
>
> This points to a "conventional or instinctive" "feeling about money"
> that "operates, so to speak, at a deeper level of our motivation" and
> "takes charge at the moments when the higher, more precarious
> conventions have weakened" as the ultimate basis of the use of money as
> a store of wealth.
>
> It doesn't point to the need to use money "to pay taxes" as the
> ultimate basis.
>
> As I've also pointed out before
> <http://csf.colorado.edu/forums/pkt/aug99/msg00158.html>, Paul's
> interpretive claims about the "finance motive" are contradicted by what
> Keynes himself says about it.
>
> > Paul wrote:
> >
> > >But in Keynes's 1937 notes on the finance motive EJ, Keynes points
> > out that
> > >he overlooked this possibility in the GT and therefore the existence
> > of an
> > >overdraft system (endogeneousd money) is important.
> > >Paul.
> > >
> > >Had Keynes revised the General Theory, the finance motive and the
> > >possibility of endogeneous money would have played a much more
> > substantial
> > >role -- as I suggest in the discussion of the finance motive in my
> > MONEY
> > >AND THE REAL WORLD (1972, 1978 )book.
> > >
> >
> >
> > Aren't these interpretive claims contradicted by what Keynes wrote to
> > E.S.
> > Shaw in April 1938.
> >
> >
> > >From letter of 4 April 1938:
> >
> > "My recent article in the _Economic Journal_ ["The 'Ex Ante' Theory of
> > the
> > Rate of Interest"] did no more than emphasise a little more than
> > formerly,
> > in the hope of helping some of my critics, the fact that the finance
> > required by the planning of activity was one of the ways, by no means
> > negligible, in which changes in activity affected the demand for liquid
> > resources, a factor which had always played a prominent part in my
> > theory.
> > Substantially, my theory [of liquidity preference] is exactly what it
> > was
> > when I first published the book."  (XXIX, pp. 280-1)
> >
> > >From letter of 13 April 1938:
> >
> > "One point I do agree with.  I do not consider that the conception of
> > 'finance' makes any really significant change in my previous theory.
> > It
> > is, as you say, no more than a type of active balance which I had not
> > sufficiently emphasized in my book.  I described it as 'the coping
> > stone'
> > and attached importance to it in my article mainly because it seemed
> > to me
> > that it provided a bridge between my way of talking and the way of
> > those
> > who discuss the supply of loans and credits etc.  I thought it might
> > help
> > to show that they were simply discussing one of the sources of demand
> > for
> > liquid funds arising out of an increase in activity.  But, alas, I have
> > only driven them into more tergiversations.  I am really driving at
> > something plain and simple which cannot possibly deserve all this
> > exegesis."  (XXIX, p. 282)
>
> Ted
>
>