Abstract
Unlike physical scientists who, with the aid of modern technology, claim to observe phenomena beyond the recognition of the average layman and therefore are free to invent language (e.g. the quark) to describe the hypothetical causes of observable events, economists are destined to discuss phenomena which all but the youngest among us have observed and experienced. Thus, as soon as we are out of our infancy, we all (including the most feeble-minded among us) are ‘economists’ able to discourse on what are the causes of inflation, unemployment, etc. with ease and expertise. After all, everyone knows what money is; all have experience with inflation; from childhood on, we are taxed on our purchases and are recipients of government services, etc.
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Notes and References
How many economists have carefully read and comprehended Keynes’ definitional Chapter 6 and its Appendix in his General Theory? How many have similarly worked through Chapters 1 and 2 of Friedman’s Theory of Permanent Income and realize that in Friedman, saving is defined (p. 11) to include the purchase of new durable goods including clothing, etc. while in Keynes, saving involves the decision not to purchase durables or nondurables by households? [Cf. J. M. Keynes, The General Theory of Employment Interest and Money reprinted as Volume vn of The Collected Writings of John Maynard Keynes [hereafter cited as CWK] (London: Macmillan, 1973)
M. Friedman, Theory of Permanent Income (Princeton University Press, 1957).]
Durables with high carrying costs are ‘expensive’ modes of time transportation, just as ‘gas-guzzlers’ are for space transport. All other things being equal, savers will attempt to find time machines with the lowest carrying cost among those available, just as car buyers might, ceteris paribus, choose the lowest ‘gas guzzler’ even if only guzzlers are available. Milton Friedman, however, would permit (by definition) the household saver to store his liquidity in retail consumer durables such as clothing and household appliances (see M. Friedman et al., Milton Friedman’s Monetary Framework: A Debate With His Critics (University of Chicago Press, 1974) p. 28). Thus is Friedman’s models, households’ purchasing power is stored in durables which, in the real world, have very large carrying costs and are not readily resaleable, since, most consumer markets are not efficiently organized and orderly and hence, most consumer durables are, as far as households and entrepreneurs not in the normal distributive chain are concerned, illiquid. In a Post Keynesian analysis, in order to be a liquidity time machine, not only must a durable be resaleable but also its carrying costs must be significantly less than the expected profit from future resale in order to make its holding as a store of value worthwhile. Since the marginal carrying costs of tangibles tend to rise rapidly with the size of stock held, those tangibles that are readily reproducible (at roughly constant costs in terms of the wage unit) will rapidly lose any time machine capabilities they might be thought to possess if the public attempts to buy (and hold as a store of value) any surplus over current consumption at the cost of reproduction of the tangible.
A. Marshall, Principles of Economics, 1st ed. (London: Macmillan, 1890) p. viii.
G. Debreu, Theory of Value (New Haven: Yale University Press, 1959) p. 32.
Cf. J. R. Hicks, Critical Essays in Monetary Theory (Oxford University Press, 1967) p. 36.
P. Davidson, ‘Rolph on the Aggregate Effects of a General Excise Tax’, Southern Economic Journal, 27, 1960.
A. Smith, The Wealth of Nations, Modern Library ed. (Random House, 1937) p. 325.
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© 1982 Paul Davidson
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Davidson, P. (1982). Definitions for a Closed Economy: Illustrated via the Shortage of Saving Hypothesis. In: International Money and the Real World. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-16679-4_3
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