PKT message, Re: The Widow's Cruse

On October 2, I posted the below message to PKT.

Paul Davidson responded off-list as follows:

Gunnar did you ever note that Keynes specifically changed his definition in
the GT from that used in the TM?

To which I replied:

Yes.

There, the Widow's Cruse is embedded in Y = C + I.

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Paul has yet to respond.

At issue is the distinction between analytical and empirical economics as practiced Keynes and PKT economists, respectively.

In one case, the precursor of the Y = C + I proposition entails a logical absurdity, which is disregarded in the other case.

Isn't that so, Paul?

Gunnar

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Paul:

Further to my message of yesterday's date -

I will check out Ch. 2 of your book at the IMF library tomorrow.

- I have now read the chapter.

Briefly, its contents are reflected in the chapter heading, 'Keynes's principle of effective demand' -

there is NOTHING there on "the Keynes theory of value".

I also used the occasion to leaf through Vol. I of 'A Treatise on Money' and, in doing so, took special note of the following two passages:

1. "(1) Income. - We propose to mean identically the same thing by the three expressions: (1) the community's money-income; (2) the earnings of the factors of production; and (3) the cost of production; and we reserve the term profits for the difference between the cost of production of the current output and its actual sale-proceeds, so that profits are not part of the community's income as thus defined." (MacMillan and Co., London, 1950, p. 123)

In turn, Keynes identified NET Investment as the source of Profits.

2. "Human effort and human consumption are the ultimate matters from which alone economic transactions are capable of deriving any significance; and all other forms of expenditure only acquire importance from their having some relationship, sooner or later, to the effort of producers or to the expenditure of consumers." (p. 134)

Whence it follows that Investment is a pen-ultimate aspect of a production process whose ultimate object is Consumption - that is to say, Investment in any given period translates into Consumption in some future period.

And, by including Profits/NET Investment as part of the community's disposable purchasing power in any given period, Keynes ended up with an analytical mess of the first order - the fabled Widow's Cruse:

"There is one peculiarity of profits (or losses) which we may note in passing, because it is one of the reasons why it is necessary to segregate them from income proper, as a category apart. If entrepreneurs choose to spend a portion of their profits on consumption (and there is, of course, nothing to prevent them from doing this), the effect is to increase the profit on the sale of liquid consumption-goods by an amount exactly equal to the amount of profits which have been thus expended. This follows from our definitions, because such expenditure constitutes a diminution of saving, and therefore an increse in the difference between I' and S. Thus, however much of their profits entrepreneurs spend on consumption, the increment of wealth belonging to entrepreneurs remains the same as before. Thus profits, as a source of capital increment for entrepreneur's, are a widow's cruse which remains undepleted however much of them may be devoted to riotous living. When, on the other hand, entrepreneurs are making losses, and seek to recoup these losses by curtailing their normal expenditure on consumption, i.e. by saving more, the cruse becomes a Danaid jar which can never be filled up; for the effect of this reduced expenditure is to inflict on the producers of consumption-goods a loss of an equal amount. Thus the diminution of their wealth, as a class, is as great, in spite of their savings, as it was before." (p. 139)

Keynes' confusion in this respect carried over into the General Theory.

For replacement of Entrepreneurial Profits in the amount of NET Investment by the concept of Expected Profits in the amount of "SOMETHING" (Samuelson's phrase in Foundations of Economic Analysis, p. 87) cannot drive the Widow's Cruse out of business - for the Widow's Cruse was born of the misguided attempt by Keynes to integrate Entrepreneurial Profits and Income in a unitary scheme of monetary analysis.

You insisted the other day that Keynes had been "consistent" in his reasoning throughout the General Theory.

Insofar as the Widow's Cruse is concerned, the "consistency" consisted in perpetuating gross analytical error.

Gunnar