Abstract
Contrary to Marget’s benign duality (Mason 1976b, pp. 185–186), the neoclassical dichotomy was construed by Don Patinkin as a doctrinal inconsistency. Patinkin persistently clung to this conclusion despite a softening of his terminology and modifications of his argument to meet the objections of his critics. The original characterization of the “inconsistency” as a substantive “contradiction” became successively an inconsistency, a possible inconsistency or suspected lack of consistency, and, finally, the “roots” (rather than actuality) of an “invalid dichotomy.” Consistent with his persistent conclusion, however, Patinkin’s terms underwent a rehardening in the later stages of his argument, where he found that the “implications” of the “invalid dichotomy” were “straightforward” (1965, p. 187).
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Endnotes
See also Patinkin (1965, p. 477) and Valavanis (1955, pp. 353,366–367).
The term “commodities” was used in the “Patinkin controversy” to mean what is ordinarily meant by goods (commodities and services) because “goods” in this literature often included money as well as commodities and services. This unfortunate usage will be generally followed in these pages in order not to augment the terminological difficulties that already complicate communication.
“Since the physical volume of transactions is independent of the absolute price level in this model, the money value of transactions varies in proportion to the price level” (Archibald and Lipsey 1958, p. 10).
See also Mason (1963, pp. 55–58,108).
Nevertheless, the latitude of discretionary “determination” of the money supply in neoclassical thought was considerably less than Patinkin suggests. His characterization of the “act of specifying the nominal amount of money” as “adventitious,” “arbitrary,” and “mechanical” is modern, not neoclassical (Patinkin 1965, p. 173). Neoclassical “elbow room” in this area was believed to be very narrowly restricted by the monetary standard, given that the concept of the standard varied among neoclassical writers (Mason 1963, pp. 13–40).
Supra, Chap. 3, pp. 32–33.
If Patinkin based his assumed fixed stock of money on Marshallian analysis (Marshall 1923, pp. 282–283), he errs in failing to notice the classical and neoclassical distinction between gold and “money” (specie). Marshall’s fixed stock of gold was related to separate monetary and nonmonetary demands for gold; hence his analysis implied that changes in the value of gold altered the (variable) quantity of money, a relationship elaborated by Pigou (supra, Chap. 4). Patinkin assumed the contrary: “…A movement of the price level along the vertical axis of Figure 4 is assumed to be unaccompanied by any change in the initial endowment of money” (Patinkin 1956, p. 42). The meaning was not changed by the rewording of the second edition (1965, pp. 46–47).
Cf. supra, Chap. 3, n. 23.
Patinkin (1954, p. 125): “Explicit recognition of the effect of real balances in monetary theory cannot be accepted as prima facie evidence of such recognition in demand theory.” Also, in the first edition of his magnum opus (1956, p. 108), Patinkin said, “But it is precisely on this realbalance effect that the [neoclassical] quantity theory depends for the inflationary impact of a monetary increase!”
Patinkin, himself, acknowledged the change in the nature of his argument (1954, p. 125 [n. 5]; 1965, pp. 57 [n. 28], 176–177 [especially n. 38], 528).
An alternative interpretation of Walras’ comment will be offered later in this chapter.
Continued imputation of Lange’s “homogeneity postulate” (Lange 1942, pp. 64, 66) to neoclassics after departure from Lange’s monistic version of “Say’s Law” (as an identity) meant that proof of neglect of the real-balance effect required evidence that neoclassical literature included general equilibrium analysis encompassing money and construing the quantities of commodities supplied and demanded as unaffected by an equiproportionate alteration of all prices that occurs without a prior corresponding modification of the money supply (Patinkin 1965, pp. 20–21 et passim). The reason for this requirement is simple: equiproportionate changes in prices corresponding to changes in the quantity of money do not modify real balances (pp. 175–176,602 [repetition of 1st edn., pp. 108,437]). This seems to be the reason for Patinkin’s insistence that “an equiproportionate change in all prices … is the type of price change that is our primary concern in monetary theory” (1965, p. 20). Classical economists would have regarded the statement as ridiculous. Neoclassical authorities would have viewed it as misleading because the equiproportionate change of prices in neoclassical monetary analysis was merely an assumption implicit in the abstraction from relative value theory. Quotation of both editions of Patinkin’s magnum opus demonstrates that the relevant error of the first edition was not corrected in the second.
This repeated pp. 39 and 444 of the 1st edn. See also Patinkin (1965, pp. 38–43, 173–174, 195).
It had, however, the advantage of being less vulnerable to formal disproof.
This is a verbatim repetition of p. 101 of the first edition.
Patinkin rests his case for the significance of the difference represented by the “nuance” on the conventional failure to apply to monetary theory the standard supply and demand exercise for testing the stability of equilibrium (1965, pp. 168–169, 186). The organic unity of classical economic theory permitted the same stability analysis in monetary and value theory but furnished an additional reason for omitting it: why repeat details already covered? Cf. J. S. Mill (1871, pp. 446–448, 489–498) with Patinkin (1965, p. 530). Walras’ failure to “advert to the real-balance effect in the commodity market in his analysis of the determination of the absolute price level” (p. 571) may be explained by a belief that in equilibrium the real-balance effect is nil and in disequilibrium it is too obvious to need delineation. What appeared to Patinkin to be an inconsistency in neoclassical stability analysis (p. 604) is even more simply explained: identical stability analyses in neoclassical monetary and value theory are precluded by the different methodologies employed in the two areas of analysis.
Indeed, Wicksell did not deem it necessary to include this (in Patinkin’s words) “crucial” explanation (Patinkin 1965, p. 168, n. 19) in his two volume Lectures on Political Economy (1934,1935).
For Patinkin’s quotation of Wicksell, see Patinkin (1965, pp. 581–582).
The equilibrating process initiated (ceteris paribus) by a decrease in the money supply is identical to that to be expected from a rise of prices without any increase in the quantity of money; and exactly the opposite adjustment flows from an increase in the money supply (Wicksell 1936, pp. 39–40).
Hansen (1927, pp. 138–149). See, for example, Fisher (1933, pp. 337 ff).
Meltzer (1967, pp. 32–38) has furnished a brief description of Fisher’s monetary stability analysis. Unfortunately, Meltzer’s concentration (ibid., p. 33, n. 6) on Fisher’s chapter (TV) dealing with the cyclical deviations from the quantity theory, in conjunction with his relative neglect of Fisher’s chapter 8 on the quantity theory, appears to confuse, rather than relate, Fisher’s monetary stability analysis and quantity theory. Unlike Fisher, Wicksell did not pursue the matter of disequilibrating price expectations although he recognized the possibility (1935, II, p. 207); hence, the “cumulative process” that became associated with his name was not really cumulative (Blaug 1968, pp. 625–262). Samuelson (1947, p. 328, n. 27) pointed out that Wicksell’s system was “without historical change.” Consequently, Wicksell’s analysis of monetary stability was neither as realistic nor as complete as that of either his American and English contemporaries or his Swedish followers, who pursued the logic of neoclassical, nonequilibrium, time series analysis to efforts toward the cyclical construction of monetary “stability.” Therefore, although Wicksell’s misnamed “cumulative process” represented a peculiar form of it, monetary stability analysis was not peculiar to Wicksell.
Patinkin (1965, pp. 596–597) attributed Wicksell’s allegedly unique monetary stability analysis to his “peculiar” definition of the money supply. The fact is that Wicksell’s concept of the money supply was typical of the neoclassics. See, for example, Wicksell (1935, II, pp. 67, 168–169).
Also, see supra, n. 9 of this chap.
This was a repetition of pp. 434–435 of the first edition.
Likewise, a virtually verbatim repetition of p. 435 of the first edition.
Patinkin (1965, p. 609): “To the best of my knowledge, the only discussion by Cambridge economists of the relationship between monetary and value theory that is relevant to our present inquiry occurs at the beginning of Pigou’s essay on the ‘Value of Money.’”
The violation of Patinkin’s own classificatory criterion represented by this judgment should be noted. See Patinkin (1965, pp. 162–163; 1956, pp. 96–97).
Walras (1954, pp. 315–316). See also Marget (1935, pp. 170 [n. 49], 172–179,183–186); and Schumpeter (1954, p. 1020 [n. 57]). It should be kept in mind that the assumption of a fixed quantity of fiat money rendered Walras’ analysis irrelevant to both classical and neoclassical theory. The assumption merely makes the general equilibrium (as distinct from the classical and neoclassical partial equilibrium) analysis mathematically manageable (Modigliani 1963, pp. 84–87).
Myrdal (1962, pp. 11,16) denied that either Walras, Cassel, Pareto, or Fisher included money in his general equilibrium model of relative values. Traditionally, the post-Walrasian general equilibrium model has abstracted from money.
In Walras’ notation U is the symbol for money (inconvertible paper) and p the symbol for the value of money. Hence, p u signifies the value of money in terms of the numéraire; p u, the value of the services of money (interest rate); and p 1 u. the value of the services of money cried at random. H∝ reduces to H∝ i which, in effect, symbolizes the demand for money. Consequently, the Walrasian equation for monetary equilibrium is Qu = H∝ /p u (Walras 1954, pp. 327, 547 [n. 6]). Normally, Walras expected the initial tâtonnement (of relative values) to produce monetary disequilibrium, rather than equilibrium, because of the absence of any reason to expect that p 1 inu, would happen to be an equilibrium value since it was cried at random before exchanges began and assumed constant during the first of the two tâtonnements.
Patinkin’s second edition exposition of this issue was a virtually verbatim repetition of his first edition (1956, p. 403).
Contrary to Patinkin’s interpretation, “The [Walrasian] textual evidence strongly suggests that Walras’ Law is imagined [by Walras] to be operating in the ‘real’ markets alone” (Collard 1966, p. 669).
Despite the fact that Patinkin quoted it (1965, p. 560).
Aside from this superficial exception, equilibrium did not remain undisturbed during the Walrasian tâtonnements after money was introduced. Walrasian analysis typically began with a disequilibrium created by some assumed change, and proceeded, after the introduction of money, to a really general equilibrium by way of two separate tâtonnements, one of relative real values and the other of the value of money. The groping modifications of p u in the second tâtonnement were adjustments to the real equilibrium established by the first tâtonnement. The Walrasian text (1954, p. 327) for Patinkin’s interpretation of Walras clearly implies that a real sector equilibrium may be disturbed more or less by the introduction of money, thus requiring, to some extent at least, a secondary (as well as primary) real tâtonnement as an adjustment to the completed monetary tâtonnement. When, in his supposed analysis of Walras, Patinkin assumes “that the economy as a whole is in equilibrium at a certain level of money prices” and arbitrarily changes p u, (1965, p. 561), he reverses the sequence of Walras’ reasoning and creates disequilibrium (instead of preserving equilibrium) in the Walrasian system. Patinkin’s arbitrary change of p u, alters the demand for money; therefore, the equation for the supply of and demand for money (Qu = H∝ /p u) can no longer be in equilibrium. Yet, Patinkin alleged to “prove” the preservation of monetary equilibrium in the Walrasian system by “Walras’ Law”! I am indebted to David F. Seiders for calling my attention to this particular misuse by Patinkin of Walrasian analysis. Patinkin’s critique of Walras was irrelevant and the Walrasian “evidence” for Patinkin’s indictment of the neoclassical school was inadmissible.
These are perhaps some of the considerations which Schumpeter had in mind when he observed, “… for the purposes of applied monetary theory, Walras decided to abandon his method of general [equilibrium] analysis and to adopt that of a partial [equilibrium] analysis. This means that he decided to adopt an approximation to which the standards of rigorous analysis do not apply” (Schumpeter 1954, p. 1025).
Patinkin (1965, pp. 184,600–602).
Patinkin’s own quotation of Fisher includes the statement, “‘The equation of exchange is needed in each case to supplement the equations of supply and demand’” (Patinkin 1956, p. 436; 1965, p. 600). It should be recalled that Fisher’s two models were published in separate volumes which were separated by many years and related only by the reference that Patinkin has seemingly misconstrued.
Again Patinkin’s 2nd edition merely repeated the text of the first edition relative to the point of this section (e.g., 1956, pp. 39,110).
Had Patinkin not misconstrued Walras as a neoclassical monetary theorist (in violation of his own stated criterion [supra, n. 27 of this chap.]) and had he attended more to the neoclassical literature and less to irrelevant mathematical notes, he would have seen this. In all probability he then would have reduced his fanciful superstructure of “valid” and “invalid dichotomies” to the actual analytical dichotomy.
Fisher and Cassel were probably the only leading neoclassical monetary theorists who even attempted a general equilibrium model of value theory. Neither of their models included money except as a unit of account.
Supra, Chap. 3, pp. 32–33.
The conceptual distinction between “individual” and “market experiments” may be useful for certain purposes, but in the context of the dichotomized neoclassical analysis of monetary and real values, the distinction is a redundancy rather than a divider between the “valid dichotomy” of “effects” and the “invalid dichotomy” of “markets.”
Patinkin (1965, p. 21): “Thus, whatever the justification for neglecting the real-balance effect in value theory, there can be no justification for neglecting it in monetary theory.” Indeed not, since it is a monetary phenomenon! And it was not neglected in neoclassical monetary theory, as Patinkin himself points out (supra, n. 9 of this chapter). It appears that Patinkin has perplexed himself as well as his readers by his unceremonious shift from the charge of formal inconsistency of neoclassical propositions in general equilibrium analysis to the allegation of inconsistency in the handling of the real-balance effect in disequilibrium. For recognition of this shift and of Patinkin’s continued irrelevance to the neoclassics as well as the classics, see Becker and Baumol (1960, p. 766).
It simply has not been realized that neoclassical methodology compelled both abstraction from price level determination in (relative) value theory and abstraction from relative value determination in monetary theory (Mason 1974, pp. 568–569). For proof of this imperception see Patinkin (1965, p. 183, n. 47).
Patinkin (1965, pp. 608–609) documents the neoclassical methodological inconsistency from Taussig to Samuelson.
Cf. the simultaneous interdependence of the supply of and demand for money in classical analysis supra, Chap. 2, section on “Interdependence of Supply and Demand for Money.” If a reminder of the methodological problem is needed, refer again to n. 23 of Chap. 3.
Patinkin (1965, pp. 46 ff., 170). Since Wicksell’s “cumulative process” was a description of the chronological process of equilibration, his rectangular hyperbola is interpreted by Patinkin as a “market equilibrium curve” rather than as a Marshallian demand curve for money (pp. 583, 588–593). Cf. Blaug (1968, pp. 570–572).
Moreover, although Patinkin recognized that a conventional demand function for money is incompatible with neoclassical monetary analysis, he nevertheless presumed to convert the neoclassical MV into a conventional supply function for money (see Valanvanis 1955, p. 357).
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Mason, W.E. (1996). The Dichotomy: A Methodological Interlude. In: Butos, W.N. (eds) Classical versus Neoclassical Monetary Theories. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-6261-0_5
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