Re: Liquidity Preference and State Theory of Money

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

Harry:

> Are you saying from a macro (i.e.finance?) standpoint capital should be
> regarded as a form of credit? If so, I tentatively agree. It also implies
> income derived from capital is also form of interest.

Yes, that's what I am saying.

As for the implication that "income derived from capital is also form of
interest", Schumpeter spelled it out explicitly in 'The Theory of Economic
Development' - and, as I have noted on many earlier occasions, heaped
sarcasm on his contemporaries for willfully ignoring this fact and related
analytical issues of first importance:

"I have not been able to convince myself, for example, that such questions
as the source of interest [on production credit - insert]  are either
unimportant or uninteresting.  They could be made so, at all events, only by
the fault of the author."  (Preface to 'The Theory of Economic Development')

And, indeed, once the analytical issues involved have come into focus, it
would take immense effort so to 'convince oneself'.

In this respect, as indicated by my comments earlier today on Keynes'
letters of April 1938 posted by Ted Winslow, I am persuaded that he never
brought these issues into clear focus in his own mind.

> My graphic suggests that if the critical interest rate is lowered to zero,
> credit (and capital) would vanish. So if my employment theory is correct,
if
> the CB continues to lower interest rates it under and over employment
> would be reduced.

It is important to distinguish between the analytical and empirical aspects
of the issues involved.

The distinction, which was clear in Schumpeter's mind (and, partly, in
Keynes' mind as evidenced by his statement in Ch. 24: "Intererst to-day
rewards no genuine sacrifice.") was fudged over by Samuelson in 'Foundations
of Economic Analysis' as follows:

"It is quite clear that in the REAL WORLD net revenue [= entrepreneurial
profit = interest on capital - insert] is not zero for all firms, nor is it
tending towards zero.  This is true under pure competition as well as impure
competition.  It is clear that this residuum must be "due" to something, and
it may be labeled by any name we please (rent to institutional advantage,
etc.)." (p. 87)

Alas, lame-brained fudges of this kind cannot IN PRINCIPLE be caught by PK
economists using the PK Methodology detailed by Fred Lee the other day.

Gunnar


----- Original Message -----
From: "Harry Veeder" <eo200@xxxxxx>
To: "Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>; "post keynesian
thought" <pkt@xxxxxxxxxxxxxxxx>
Sent: Friday, May 02, 2003 9:05 AM
Subject: Re: Liquidity Preference and State Theory of Money


>
> Gunnar,
>
> >
> > 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.
>
> Are you saying from a macro (i.e.finance?) standpoint capital should be
> regarded as a form of credit? If so, I tentatively agree. It also implies
> income derived from capital is also form of interest.
>
> > 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.
>
> Indeed, I am working on a theory of employment were the presence of
> capital/credit is responsible for systemic under and over employment.
> With more capital/credit, comes more under and over employment.
>
> My graphic suggests that if the critical interest rate is lowered to zero,
> credit (and capital) would vanish. So if my employment theory is correct,
if
> the CB continues to lower interest rates it under and over employment
> would be reduced.
>
> HOWEVER, this prediction is apparently contradicted by the situation in
> Japan. BUT, it is also my contention that the current interest rate of
zero
> represents a conventional scale rather than an absolute scale, just as the
> temperature of zero on the Celsius scale is does not represent absolute
> zero. (Absolute zero is -273 degrees Celsius on the Kelvin scale)
>
> AN ABSOLUTE ZERO INTEREST RATE FOR JAPAN'S CB IS THAT RATE WHICH
> CORRESPONDS WITH FULL EMPLOYMENT. It could be -.1%, or -1%, or -10%.
>
> > 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.
> >
>
>
>
> Harry Veeder
>
>
>