Abstract
Economists generally assume that economic Darwinism ensures survival of the fittest economic theories. This assumption may be valid in microeconomic value theory, where limitation of the variables by the ceteris paribus assumption reduces the relevant inferences to the inexorability of mathematical logic. In macroeconomics, which, by contrast, must deal with the ceteris that do not remain paribus, such isolation of variables and simplification of analysis is impossible, In the more realistic, complex, and less manageable world of macroeconomics, Gresham’s Law may prevail over Darwin’s. Bad monetary theories may drive out the good.
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Endnotes
No value judgment respecting the two approaches is implied. Both are necessary, but not necessarily simultaneously. Their relative relevance will be determined by the long-run or shortrun nature of the problem addressed.
Reference is made to the two page chapter, “Des Débouchés,” in the first edition of Say’s Traité (1803).
The tautological identity of the aggregate supply and demand for goods that would prevail in the absence of money is referred to in modern terms as “Say’s Identity.” On the other hand, the conditional (equilibrium) equality of the supply and demand for money as well as goods toward which a pecuniary society tends in the long-run, abstracting from the business cycle, is now called “Say’s Equality.” For the genesis of these terms and their conceptual underpinning, see Becker and Baumol (1952) and Baumol (1977). For a critique of alleged “new classical” implications, see Mason (1990).
Supra, Chap. 3, pp. 32–33.
For elaboration and clarification of these issues, see Baumol (1977, especially, pp. 157–159).
The classical school defined money as the generally accepted medium of exchange that was also the generally used standard of value (Mason 1963, pp. 42–43; 1982, pp. 552–553). The classical money supply, consequently, consisted of only that portion of a country’s gold stock that had been transformed into specie and was available to be exchanged for goods.
Thus, the “animal spirits” that Keynes recognized in human behavior was acknowledged by the classical schoolmasters as inevitably recurrent, if not persistently normal. Whether temporarily appropriate or not, human manifestation of “animal spirits” calls for appropriate public policy. The classical authorities and Keynes knew what was appropriate: maintenance of gold convertibility of the currency and countercyclical policy, respectively. Today, the classical remedy is unavailable, and the concept of “convertibility” has been redefined.
J. S. Mill’s explanation of the difficulty and its solution was financial not monetary. The situation, in the classical view, called for reduction of credit (including the non-standard money media of exchange) sufficiently to permit maintainance of currency convertibility. The generational Millian distinction of “monetary” and “financial” helps to explain the subsequent loss of the generational Millian differentiation of “Say’s Law.” Since both Mills opposed the “real business cycle,” who can explain its ironical revival by, of all people, monetarists?
Monetary neoclassicists accepted classical monetary theory and sought contemporary verification around the turn of the century by use of an ex post transactions (American) or income (British) time series equation of exchange, which excluded commercial bank deposits from the concept of money while including the notes of commercial as well as central banks (supra, Chaps. 3 and 4). The inexorable result was an inadvertent modification of the substance as well as the methodology of classical monetary theory (Mason 1963, pp. 57–58; 1974, pp. 570–571).
See Mason (1974, p. 567). Keynes (1911) noted the inadequate explanation of the money supply in his review of Fisher’s Purchasing Power of Money.
Although he had accepted the significance of historical time introduced by Fisher’s “equation of exchange,” Pigou eschewed the Fisherian transactions “velocity,” retaining the income cash-balance approach that had been a Marshallian Cambridge tradition. Marget, in contrast, reverted to the Fisherian transactions velocity approach. For elaboration and documentation see Mason (1976b, pp. 187 [n. 10], 192–194).
While Ricardians were on the winning side (de jure, but the ultimately losing side, de facto) in the bullion controversy, the classical school, ably represented by John Stuart Mill, supported the de jure losers (but the de facto winners) in the currency controversy. The apparent shift of the classical position involved more attention to the short run and to international considerations, the importance of which has since increased. Mill agreed with the banking school that domestic money should not fluctuate with temporary, unilateral (“noncommercial”) foreign payments or that, in short, the nation’s gold reserve should be used to insulate the domestic money supply against temporary foreign shocks (Mason 1956, pp. 500–502; 1977, pp. 476–483). This represented the classical school’s abandonment of the contemporary aspects of the doctrine that a century later came to be called monetarism.
Patinkin originally presumed he was criticizing classical theory, but by the second edition of his magnum opus (1965) Becker and Baumol (1952) had convinced him that his critique related to neoclassical, rather than classical analysis. As will be demonstrated, Patinkin’s confusion was never completely removed.
Although the reciprocal abstraction was recognized in the early days of neoclassicism, the dichotomy was not explicitly acknowledged. The lapse may be explained by failure to recognize the neoclassical abstraction as mandatory instead of optional (Mason 1974, pp. 568–569). While “Walras’ Law” is relevant to Patinkin’s particular model of the general equilibration of absolute and relative prices, it is not relevant to the relationship between the actual, methodologically dichotomized models of neoclassical monetary and value theories.
For some of the details and documentation see Mason (1976b, pp. 191–194).
The issue of the relevance or irrelevance of the real-balance effect to the comparative static propositions of the neoclassical quantity theory foundered on the venerable confusion of the neoclassical quantity theory and equation of exchange. It was unresolvable because Patinkin related those comparative static propositions to Fisher’s “transition periods” of disequilibrium represented by successive ex post equations of exchange when the real-balance effect is relevant (Fisher 1818, pp. 70–73; Patinkin 1965, p. 57 [n. 26]). In contrast, Patinkin’s critics, e.g., Archibald and Lipsey (1958), related comparative statics to the long-run equilibrium of the neoclassical quantity theory (without the equation of exchange) when the real-balance effect is irrelevant. Patinkin and his critics could not resolve their differences because they argued from different premises.
Irving Fisher, the father of monetary neoclassicism, clearly indicated that the independence of relative and absolute prices is a procedural assumption, not a description of the actual behavior of prices (1918, pp. 175–176, 193–194). Fisher’s position was reinforced by his contemporary, Edwin Kemmerer, whose similar (and prior) equation of exchange (first published in 1907) was abandoned in favor of Fisher’s simpler notation. Marget, the theoretical heir apparent of both, agreed (1942, pp. 330–333,337).
The irrelevance of the homgeneity assumption to the substance of neoclassical thought was acknowledged by Karl Brunner in spite of his sympathetic treatment of Patinkin (Brunner 1951, pp. 153,173).
Patinkin (1949, p. 23): “In fact, the inconsistencies and inadequacies of the classical [i.e., neoclassical] system that have been repeatedly demonstrated in this paper are due entirely to this [homogeneity] assumption.” Cf. Mason (1974, pp. 568–569).
“Walras’ Law” applies to a set of general equilibrium equations (Walras 1954, p. 185). It does not apply to an empirical description of a process for a specified period of actual calendar time, even though the portrayal may be called an “equation of exchange” (Johnson 1962, p. 362). In connection with his utilization of “Walras’ Law” to equate the “liquidity-preference” and “loanable-funds” theories of interest, Hicks explicitly denied that it could be used to relate relative price determination and the neoclassical equation of exchange (1939, pp. 158–159). Patinkin (1965, pp. 35–36, n. 2) alleges to document Lange’s version of “Walras’ Law” (which purported to identify monetary with real relationships) by citing pages in the work of its namesake preceding the introduction of money.
This is not a unique citation of a secondary source that is presumed to be supporting but turns out to be contradictory; it is merely an outstanding example of the genre. A review of supra, Chap. 4 might be helpful for the reader.
Lange (1942, p. 51, n. 2) said “Walras’ proof is somewhat different.” For the distinction between definitional identities and conditional (equilibrium) equalities, see G. L. S. Shackle (1965, pp. 50–52).
Lange’s misuse of “Walras’ Law” was based on a confusion of “Say’s Identity” and “Say’s Equality” (see supra, n. 3 of this chap.). “Walras’ Law” affirms that n-1 equilibrium equations can solve n equilibrium equations for commodities and services because any one of them may be derived from all the others. Lange misstated “Walras’ Law” as a definitional identity of the supplies and demands for everything, including money. He did so, however, without having distinguished money from other assets. The fundamental error in general equilibrists’ failure to distinguish money from other assets was exposed by Clower (1967).
The equilibrium equation of the supply and demand for “gold” could be deduced by “Walras’ Law” (not by “Lange’s Identity”) from the other general equilibrium equations for goods (see supra, n. 3 of this chap.), but this would not identify either classical or neoclassical money because gold had nonmonetary as well as monetary uses. Only gold crafted in the form of specie (in contrast to that performing industrial, commercial, and consumptive services) constituted “money” in the classical lexicon. Lange did not identify classical money; consequently he failed to incorporate money into his model of the classical system.
The “difficulty of defining the terms demand and supply, when used with reference to money,” was conceded by F. A. Walker, one of those originally responsible for injecting historical time into the neoclassical quantity theory (Walker 1895, p. 372).
Supra, n. 6 of this chap.
Supra, Chap. 2., Fig. 2 A and B.
The flow component was absent from the classical money supply function in a country without gold mines.
Walras’ procedure circumvented, instead of solved, the problem of getting money into a general equilibrium model because it necessitated postulating an “arbitrary fixed quantity of money” (Schumpeter 1954, p. 1020, n. 57).
Secondary source “authorities” on general equilibrium generally misconstrued Walras’ suggested possible lack of necessity for a second-round tâtonnement (of the value of money) as implying the “homogeneity postulate” (which actually removed money from the process of general equilibration). Reconsideration of the context suggests the likelihood that the purpose of Walras’ remark was merely to simplify the mathematics (Schumpeter 1954, p. 327).
Patinkin’s celebrated “proof of “inconsistency” in neoclassical theory depends upon invocation of the Walrasian conception of “Walras’ Law” to prove monetary (as well as real) equilibrium under conditions that at once render the “Law” irrelevant and violate Lange’s conception of it as an identity (Archibald and Lipsey 1958, pp. 11,16). Both the “homogeneity postulate” and “Walras’ Law” (pre-or post-Lange) cannot be relevant (Becker and Baumol 1952, p. 360 [n. 1]; Baumol 1960, p. 31).
The contradiction Patinkin discerned between neoclassical real and monetary equilibrium could be removed, in his judgment, only by construing money as a mere counting unit. Accordingly, equilibrium could be preserved in the neoclassical real and monetary “sectors” only if variations in the money stock are accounted for by changing the unit of account (e.g., renaming the dime a dollar) (1949, pp. 20–21; 1956, pp. 107–109; 1965, pp. 175–176). Patinkin limited the relevance of neoclassical monetary theory to changes in the unit of account (1956, pp. 113–114; 1965, pp. 183–184), which subjected the money supply to the whims of the “monetary authority.” The “accounting prices” so “explained” are indeterminate (Patinkin 1956, pp. 9,108–109; 1965, pp. 175–176). Patinkin rescued his “proof” of “inconsistency” in neoclassical theory from absurdity by restricting neoclassical monetary theory to a prepecuniary barter economy (1965, pp. 193–195). His point was that neoclassical monetary theorists (and/or others he called “neoclassical”) are absurd in presuming to separate the inseparable real and monetary “sectors of the economy” (a phrase that Patinkin substituted for “areas” or “levels” of analysis) (1949, pp. 1–2). He mistook the neoclassical dichotomy of analysis for a supposed neoclassical notion that the economy is actually split into separate real and monetary “sectors” (1949, pp. 2, 23). The distinction between “real sector” and “monetary sector” cannot be empirical. These singularly infelicitous expressions signify, if anything, abstraction.
Patinkin himself appreciated the conceptual irregularity but not the incongruity of his imputation (1956, p. 435; 1965, pp. 599–660).
The virtual identification of the “homogeneity postulate” and “Say’s Identity” is evident in the following series of Patinkin’s statements from 1951 to 1965 (all italics mine): (1) “Say’s Law” [i.e., identity] and dependence of the commodity demand functions on relative prices alone are necessary and sufficient conditions for each other” (1951, p. 151, n. 33). (2) “Say’s Identity” and the “homogeneity postulate” are “in a certain sense formally equivalent” (1954, p. 115, n. 4). (3) “Say’s Identity” and the “homogeneity postulate” are logically equivalent properties.… Thus the existence of the one implies the coexistence of the other” (1956, p. 121; 1965, p. 195).
Hence, characterization of the analysis as the “Lange-Patinkin argument” (Becker and Baumol 1952, pp. 355 ff.) continues to be correct in spite of Patinkin’s protestations (1954, pp. 115 ff.).
The brackets within Lange’s quotation of Ricardo are Lange’s. The remaining bracketed phrases and all italics are mine.
Lange (1942, pp. 61 ff.). Pseudo-classicists were prone to escape from the dilemmas arising from their oversimplification of classical propositions by “logic chopping” (e.g., attribution of the increasing value of wine, with the mere passage of time, to the “labor of God”), but the headmaster of the classical school, J. S. Mill, was not guilty.
Ricardian international equilibration assumed internal and external competition and abstraction from temporary unemployment by assuming wage-price flexibility and domestic factor mobility. Modern writers have tended to ignore the open economy premise of Ricardian analysis, just as Malthus did. Gardner Ackley, for example, presumed to describe the “classical model” on the assumption of a closed economy, with the unclassical consequences that became textbook dogma for a generation (1961, pp. 105–167). On the contrary, the classical school was conceived in the free trade versus mercantilist protection argument of the eighteenth century and reared in the bullionist controversy about the high prices of bullion and foreign exchange during and after the Napoleonic Wars. The latter issue was the one that inspired Ricardo’s initial interest in (and early publications on) political economy. See Ricardo (1951–1973, III, pp. 13–256).
Patinkin’s reversion to the identity interpretation of “Say’s Law” (1965, p. 193, n. 1) signifies that his earlier concession to Becker and Baumol on the meaning of the “law” was restricted to the classics (Patinkin 1954, p. 113, n. 1). Neoclassical analysis did embrace the “homogeneity postulate,” but only as a procedural assumption (required by the neoclassical methodological dichotomy). On the other hand, the “homogeneity postulate” was merely an optional assumption of classical partial equilibrium analysis. Its optionality resulted from the organic unity of classical theory, which permitted a general theory of relative and monetary values, even though such a theory was never formally developed (Mason 1963, pp. 55–56; 1974, pp. 568–569). See also supra, n. 13 of this chap.
“Monetary aggregates” are really “financial aggregates.” A “monetary aggregate” cannot be designated until the concept of money has been specified and its empirical counterparts have been identified (Mason 1980, pp. 214–218).
Eliminating the money supply from monetary theory has more substantive theoretical consequences than did the failure to recognize the methodological abstraction from money in neoclassical value theory.
This will be elaborated subsequently.
I follow the lead of my history of economic thought mentor, Jacob Viner, in regarding Ricardo as the founding father of the classical school. Viner reasoned that while Adam Smith chronicled the roots of the classical school, including Hume’s specification of the role of the quantity theory in balance of trade equilibration, Ricardo was the architect of the classical system of analysis.
Kuenne, for example, integrated only the demand for money into his “general equilibrium.” He included only currency (outside money), ignoring the issue of the money supply (1963, pp. 291,301,321,325,345,361).
Evidence alleged to support Friedman’s particular version of the quantity theory dealt almost exclusively with the hyperinflations of war-induced explosions of fiat moneys that inexorably reduced money to worthless paper in the relatively short period of three to four years (Friedman 1956). The process represents the trivialization of money while the implication that such experience verifies the long-run neoclassical quantity theory trivializes theory.
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Mason, W.E. (1996). Economic Darwinism Versus Gresham’s Law in the “Development” of Monetary Theory. In: Butos, W.N. (eds) Classical versus Neoclassical Monetary Theories. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-6261-0_6
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