Re: Liquidity Preference and State Theory of Money

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

Re. the following:

> The realized investment may, of course, not have been intended.  If
> it's greater than what was intended there will be unintended inventory
> accumulation and the aggregate level of output and income will fall
> until the amount of saving is again made equal to the intended level of
> investment.

Comment:

The concept of "realized investment...not [having] been intended" is an
oxymoron.

Investment in Work in Progress attests to the "intentions" of both Suppliers
of Factor Inputs and Entrepreneurs.

And, by speaking of "realized investment...not [having] been intended",
economists attest to the inevitable conceptual/methodological confusion
which comes from mixing apples and oranges - analytical and empirical
economics.

Gunnar


----- Original Message -----
From: "Ted Winslow" <egwinslow@xxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Saturday, May 03, 2003 6:09 PM
Subject: Re: Liquidity Preference and State Theory of Money


>
> Esteban Perez wrote:
>
> > 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.
>
> The "finance motive" is a component of the transactions demand for
> cash.  It's one of the reasons increased activity tends to increase
> interest rates by reducing the amount of money available for "inactive
> balances".
>
> The motive has nothing to do with "financing" investment in the sense
> of it being possible for funds for investment additional to saving out
> of current income to be made available through money supply creation or
> "dishoarding" and hence for investment to differ from saving out of
> current income.  It is a matter of national income accounting that
> saving (Y - C) must necessarily be identically equal to "investment"
> i.e. that part of output which isn't purchased by consumers.  This
> point is repeated in the context from which you've taken the second
> passage.
>
> "They [the League of Nations Committee of Statistical Experts] are
> concerned with the amount of saving set aside out of current income at
> a date appreciably prior to that of the current investment which they
> have in view; and they point out, quite correctly, that there is no
> reason to expect equality between such saving and such investment
> (after correcting the latter for the fact that it is gross and not
> net).  But they do not point out that it follows no less clearly from
> the definitions which they have adopted that the amount of saving which
> is taking place *at the same time* as the investment must be exactly
> equal to it (both reckoned net).
> "This corollary is not merely a neat truism.  For unless it is kept in
> mind, the reader is very likely to be led to false conclusions.  For
> example, he might naturally suppose - for anything the Committee say to
> the contrary - that the right way to prepare for an increase of
> investment is to save more at the appropriately prior date.  But the
> corollary shows that this is impossible.  Saving at the prior date
> cannot be greater than the investment at that date.  Increased
> investment will always be accompanied by increased saving, but it can
> never be preceded by it.  Dishoarding and credit expansion provides not
> an *alternative* to increased saving, but a necessary preparation for
> it.  It is the parent, not the twin, of increased saving." (XIV, p. 281)
>
> The realized investment may, of course, not have been intended.  If
> it's greater than what was intended there will be unintended inventory
> accumulation and the aggregate level of output and income will fall
> until the amount of saving is again made equal to the intended level of
> investment.
>
> The "finance motive" had primarily a rhetorical function.
>
> > 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)
>
> As Keynes himself points out here, it didn't work.  The psychological
> reason it was unlikely to work was pointed to in "Alternative Theories
> of the Rate of Interest" in another passage I've repeatedly quoted.
>
> "I emphasise these obvious matters to clear our minds of the idea that
> the  quantity of hoards depends in any way on what people are doing
> with their savings, or that there is any connection between idle
> balances and the conception (meaningless on my definitions) of idle
> savings.  But I have only a limited hope of success.  There is a
> deep-seated obsession associating idle balances, not with the action of
> the banks in fixing the supply of cash or with the attitude of the
> public towards the comparative attractions of cash and other assets,
> but with some aspect of current savings."  (XIV, p. 214)
>
> The members of the Committee of Statistical Experts had been guilty of
> this confusion.
>
> "We have been all of us brought up, like the members of this Committee,
> in deep confusion of mind between the demand and supply of money and
> the demand and supply of savings; and until we rid ourselves of it, we
> cannot think correctly." (XIV, p. 285)
>
> This validity of this particular claim about the psychology of money
> and of the general psychological theory of money on which it is based
> is repeatedly confirmed on this list.
>
> Ted
>
>
>
>
>
>
>