PKT message, Re: Central Banks and Deflation

Re. the following:

> Hence you are just either
> uninformed or crazy to claim that the neutrality of money axiom is a natural
> outgroth of the GENERAL THEORY.

Comment:

Here is Keynes on "what now [1936] seem[ed] to [him] to be the element of SCIENTIFIC TRUTH in mercantilist doctrine.":

"When a country is growing in wealth somewhat rapidly, the further progress of this happy state of affairs is liable to be interrupted, in conditions of laisse-faire, by the insufficiency of the inducements to new investment. Given the social and political environment and the national characteristics which determine the propensity to consume, the well-being of a progressive state essentially depends, for the reasons we have already explained, on the sufficiency of such inducements. They may be found either in home investment or in foreign investment (including in the latter the accumulation of the precious metals), which, between them, make up aggregate investment. In conditions in which the quantity of aggregate investment is determined by the profit motive alone, the opportunities for home investment will be governed, in the long run, by the domestic rate of interest; whilst the volume of foreign investment is necessarily determined by the size of the favourable balance of trade. Thus, in a society where there is no question of direct investment under the aegis of public authority, the economic objects, with which it is reasonable for the government to be preoccupied, are the domestic rate on interest and the balance of foreign trade.

"Now, if the wage-unit is somewhat stable and not liable to spontaneous changes of significant magnitude (a condition which is almost always satisfied), if the state of liquidity preference is somewhat stable, taken as an average of its short-period fluctuations, and if banking conventions are also stable, the rate of interest will tend to be governed by the quantity of the precious metals, meaasured in terms of the wage unit, available to satisfy the community's desire for liquidity. At the same time, in an age in which substantial foreign loans and the outright ownership of wealth located abroad are scarcely practicable, increases and decreases in the quantity of the precious metals will largely depend on whether the trade balance is favourable or unfavourable.

"Thus, as it happens, a preoccupation on the part of the authorities with a favourable balance of trade served both purposes; and was, furthermore, the only available means of promoting them. At a time when the authorities had no direct control over the domestic rate of interest or the other inducements to home investment, measures to increase the favourable balance of trade were the only direct means at their disposal for increasing foreign investment; and, at the same time, the effect of a favourable balance of trade on the influx of the precious metals was their only indirect means of reducing the domestic rate of interest and so increasing the inducement to home investment." (Ch. 23, 'Notes on Mercantilism, etc.' - underlining added)

In other words, "the element of scientific truth" in mercantilism concerns the chain of causality which runs from (a) favorable balance of trade, (b) influx of the precious metals, (c) reduced domestic rate of interest, and (d) increased inducement to home investment.

For Keynes, therefore, the prosposition that (c) as instrument for attaining (d) is a function of the QUANTITY and NOT the COMPOSITION of money injected into the domestic economy accords with "scientific truth".

Hence my suggestion that "it would seem that the "neutrality of money axiom" is, if not implied by, a natural outgrowth of the MACRO approach to monetary and fiscal policy issues popularized by the General Theory."

Gunnar

----- Original Message -----

From: "pdavidso" <pdavidso@xxxxxxx>

To: "Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>

Cc: <pkt@xxxxxxxxxxxxxxxx>

Sent: Friday, May 23, 2003 12:30 PM

Subject: RE: Central Banks and Deflation

> >===== Original Message From Gunnar Tomasson <gunnar.tomasson@xxxxxxxxxxx> :
> >
> >From the vantage point of Creditary Economics, the "neutrality of money
> >axiom" does not merit serious debate - for it implies that the COMPOSITION
> >of credit creation and/or fiscal expenditures is a matter of indifference.
> >
> >In this respect, it would seem that the "neutrality of money axiom" is, if
> >not implied by, a natural outgrowth of the MACRO approach to monetary and
> >fiscal policy issues popularized by the General Theory.
>
>
> Gunnar if you would read Keynes's 1935 essay on a "Mnetary Theory of
> Production" [ in CWK, vol 13], you will see that Keynesw explicitly indicates
> that he is working (in 1935) on a theory that rejects the neutrality of money
> axiom in both the short-run and the long -run. Hence you are just either
> uninformed or crazy to claim that the neutrality of money axiom is a natural
> outgroth of the GENERAL THEORY. By the way, did you ever read the GT --
> especially Chapter 17 ??
>
>
> Paul
>
> Paul Davidson
> Editor, Journal of Post Keynesian Economics
> University of Tennessee
> SMC 503
> Knoxville, Tennessee 37996-0550
> office phone #;(865)974-4221; office fax# (865)974-1686 or (865)974-4601
> home phone and fax # (865)692-0802
> email pdavidson@xxxxxxx
> http://econ.bus.utk.edu/davidsonextra/Davidson.html
>
>