Re: Liquidity Preference and State Theory of Money

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

Re. the following:

> Yet one year later, 1939, Keynes states that finance was introduced to
remedy an omission in the GT: ¨In my General Theory of Employment, Interest
and Money, I was seriously at fault in omitting any discusion...of the
process of capital formation. Under spur of criticism I have since
endeavoured to remedy this omission in an article published in this Journal
(1937). I there introduced a conception serving the same purpose as, but not
identical with, that of funds available for investment under the name of
finance..´ CW, XIV, p.283.

In the EJ article in question ('Alternative Theories of the Rate of
Interest'), Keynes comments on his 'remedy', inter alia, as follows:

"Planned investment - i.e. investment _ex ante_ - may have to secure its
'financial provision' _before_ the investment takes place; that is to say,
before the corresponding saving has taken place.  It is, so to speak, as
though a particularl piece of saving had to be earmarked against a
particular piece of investment before either had occurred, before it is
known who is going to do the particular piece of saving, and by someone who
is not going to do the saving himself.  There has, therefore, to be a
technique to bridge this gap between the time the _decision_ to invest is
taken and the time when the correlative investment and saving actually
occur.

"...let us call this advance provision of cash the 'finance' required by the
current decisions to invest.  Investment finance in this sense is, of
course, only a special case of the finance required by any productive
process; but since it is subject to special fluctuations of its own, I
should (I now think) have done well to have emphasised it when I analysed
the various sources of the demand for money. [...]  if decisions to invest
are (e.g.) increasing, the extra finance involved will constitute an
additional demand for money.

"...'finance' has nothing to do with saving.  At the 'financial' stage of
the proceedings no net saving has taken place on anyone's part, just as
there has been no net investment.  'Finance' and 'commitments to finance'
are mere credit and debit book entries, which allow entrepreneurs to go
ahead with assurance."

Comment:

The interesting thing here is WHY Keynes would find himself "seriously at
fault" for "omitting any discussion" in the GT of a concept of 'finance'
which has nothing to do with 'saving' and/or 'investment' when, as he
underscored later in the article,

"...the initial novelty [of the GT] lies in my maintaining that it is not
the rate of interest, but the level of incomes which ensures equality
between saving and investment.  The arguments which lead up to this initial
conclusion," Keynes continued, "are independent of my subsequant theory of
the rate of interest, and in fact I reached it before I had reached the
latter theory.  But the result was to leave the rate of interest in the
air."

If Keynes had only been content to leave it there!

For, by joining Ohlin et al. in debate on a NON-issue insofar as "the
process of capital formation" is concerned, Keynes overlooked the BIG
issue - namely, that the "equality between saving and investment:" is NOT a
function of "the level of income".

That "saving" - 'finance' provided by suppliers of factor services - and
"investment" - net factor content of the economy's work in progress - are
one and the same thing at ALL levels of income.

I conclude that Keynes may have sensed that he was "seriously at fault" for
SOMETHING - but could not figure out what it was.

Gunnar


----- Original Message -----
From: "Esteban Perez" <eperez@xxxxxxxxxxxx>
To: <egwinslow@xxxxxxxxxx>; <ForstaterM@xxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Saturday, May 03, 2003 12:27 PM
Subject: Re: Liquidity Preference and State Theory of Money


> In his 1938 letter to Shaw, Keynes wrote: ¨I described it (finance) as the
coping stone and attached importance to it in my article mainly because it
seemed to me that it provided a bridge betweeen my way of talking and the
way of those who discuss the supply of loans and credits etc.¨ CW.XXIX,
p282.
> Yet one year later, 1939, Keynes states that finance was introduced to
remedy an omission in the GT: ¨In my General Theory of Employment, Interest
and Money, I was seriously at fault in omitting any discusion...of the
process of capital formation. Under spur of criticism I have since
endeavoured to remedy this omission in an article published in this Journal
(1937). I there introduced a conception serving the same purpose as, but not
identical with, that of funds available for investment under the name of
finance..´ CW, XIV, p.283.
>
>
> <<< Ted Winslow <egwinslow@xxxxxxxxxx>  5/ 2 10:16a >>>
>
> ---------------------------------------------
> 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
>
>
>
>