The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Patinkin, Don (1922–1955)

  • Nissan Liviatan
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2641

Abstract

Don Patinkin’s main contributions are in monetary theory, including the topics of involuntary unemployment and the interpretation of the writings of J.M. Keynes. He criticized the classical and neoclassical monetary model for its ‘invalid dichotomy’ between the real and the monetary sectors. His main underlying concern was whether capitalism possessed an automatic mechanism for attaining full employment. He claimed that the real interest rate might be insufficiently flexible and the real balance effect insufficiently powerful to allow any rapid convergence to equilibrium, rendering it politically unrealistic to rely on automatic forces to establish full-employment equilibrium in reasonable time.

Keywords

Capitalism Chicago School Clower constraint Cowles Commission Friedman, F. Involuntary unemployment IS–LM model Keynes, J.M. Kuznets, S. Monetary economics, history of Neoclassical monetary theory Patinkin, D. Quantity theory of money Real vs monetary sector dichotomy Real-balance effect Samuelson, P. Stability analysis Walras’s Law 

Don Patinkin is regarded as the ‘father of the economics profession’ in Israel. Upon his arrival in Israel with his wife Dvora in 1949, he joined the Hebrew University and raised a generation of students trained in modern economics (known as the ‘Patinkin boys’), who were to form the backbone of the economics departments in the various universities, the staff of Treasury and the Bank of Israel, the commercial banks and the other institutions that had a demand for economists. In spite of his young age, he was an economist with outstanding academic achievements, which marked him as a rising star in the economics profession. His choice to live in Israel was a source of much pride to the new state. He passed away in 1995, but the impact of his teaching and of his personality will linger on for many years.

The Chicago Days

Don Patinkin was born in 1922 in Chicago to an Orthodox Jewish family that lived in a predominantly Jewish neighbourhood. His early education was a combination of secular and rabbinical studies. In 1943 he enrolled in the economics department of the University of Chicago, obtaining his Ph.D. in 1947. This period left a deep impression on Patinkin and had a great impact on his future work. He was influenced not only by the Chicago Tradition of free-market liberalism, but also by the personalities of his prominent teachers Frank H. Knight, Jacob Viner, Henry C. Simons, Oscar Lange and Lloyd W. Mints. (See his account of his teachers in Patinkin, 1981b.)

In addition, he was awarded a fellowship with the Cowles Commission, then situated in Chicago, which hosted a remarkable number of prominent economists. Patinkin looked back to his Chicago days with pleasure and nostalgia, and considered himself lucky to have benefited from the contact with such ‘giants’. His Ph.D. dissertation, ‘On the consistency of economic models: a theory of involuntary unemployment’, under the supervision of Jacob Marshak (the chairman of the Cowles Commission), is on a topic to which he returned many times over the years without being able to find a satisfactory solution (nor has any other economist).

The Years at the Hebrew University

In 1949 he accepted the proposal of the Hebrew University of Jerusalem to serve as a senior lecturer in the economics department. On his very first day Patinkin plunged into this task, directing the transition of the department from the Continental descriptive and institutional framework to the Anglo-Saxon tradition of analytical economics (Barkai, 1993). Professor Alfred Bonne, who chaired the traditional economics department, supported this move. In the first years he taught practically all the courses in microeconomics and macroeconomics, at all levels, and performed this task outstandingly.

It is remarkable that these years of great pressure were also the most fruitful of his career: he completed his monumental book Money, Interest and Prices (MIP, 1956) and wrote a number of influential papers in leading journals, usually rebutting criticisms on various topics related to the book (such as the invalid dichotomy, discussed later). In evaluating the numerous reviews of the book, Stanley Fischer (1993) states that practically all the reviewers recognized that they were dealing with a major work.

To build the foundations of the economics profession in Israel, Patinkin sent a group of graduates, whom he considered candidates for an academic career, for Ph.D. studies in the top universities in Britain and the United States. The building of foundations included also the construction of a statistical base of the Israeli economy. To perform this task he was appointed director of the Falk Institute of Economic Research Israel in 1956, where he continued the work of Daniel Creamer and Harold Lubell, the previous directors. It seems that Simon Kuznets, who was involved in formulating the programme of the Falk Institute, had a profound influence on Patinkin’s interest in empirical research. In addition to directing numerous research projects at the institute, Patinkin himself wrote on the early years of the Israeli economy (The Israeli Economy in the First Decade, 1959a), where the elimination of the monetary overhang associated with repressed inflation fitted well with his model of the real balance effect.

Although he believed in, and represented, the Chicago pro-market creed, he never pushed this approach forcefully. The very first lesson in his celebrated course ‘Introductory Economics’, modelled on the famous textbook of Samuelson with application to Israel, was about the allocation of scarce resources among competing uses, which could in principle be performed by the market or by a central planning committee.

Patinkin completed his term of office as chairman of the department of economics in 1960, moving on to serve as the Dean of Social Sciences, and from there in 1980 to serve as Rector and finally as President of the Hebrew University. In all these years he maintained his touch with monetary economics, especially from the doctrinal aspect.

Patinkin participated actively in the debates concerning Israel’s economic policy problems. In particular, he was critical of the way monetary policy was run. He served on a number of policy committees (for a thorough discussion of this aspect of Patinkin’s activity, see Barkai, 1993) and contributed to the daily press of the early 1970s when the inflationary process began. In later years he preferred that the economists that he had raised should handle these matters.

On the occasion of Patinkin’s retirement his colleagues organized a conference in his honour. The scientific works of the participants, who included many of the economists that he regarded highly, were published in Monetary Theory and Thought (Barkai et al. 1993), which covered topics related to Patinkin’s work.

Patinkin’s Contribution to Monetary Economics

Patinkin contributed to three main areas in economic theory: his criticism of neoclassical monetary theory, his treatment of involuntary unemployment and his work on the history of economic thought, in particular the writings of Keynes. Patinkin introduced some order into the vague (some may prefer the term ‘chaotic’) state of the monetary model that existed in his time. MIP stands out as a bridge between pre-Keynesian economics, Keynesian economics and the modern economic literature. Its economic rigour, building the macroeconomic model on micro foundations, was unprecedented in the literature on monetary economics.

Patinkin was very critical of the monetary model formulated by the classical and neoclassical theorists. In particular, he claimed that their theory was ‘guilty’ of the ‘invalid dichotomy’ between the determination of relative prices and the absolute price level. More specifically, the dichotomy relates to the separation between the real sector, where relative prices are determined, and the monetary sector, where the absolute price level is determined by some version of the quantity theory of money (the Cambridge equation). He claimed that this dichotomization is invalid because, by Walras’s Law, the excess demand for money is just the sum of excess supplies in all other markets and hence must share the same parameters, in particular the money supply. The fact that in the neoclassical formulation the money supply appears only in the money market is self-contradictory. (In the second edition of MIP, 1965, Appendix to ch. 8, Patinkin pointed out that, when the real balance effect is confined to the bond market, it is possible to express the excess demand functions for commodities in terms of relative prices and the interest rate without referring explicitly to the real balance effect.).

To prove that the neoclassical monetary economists adhered in fact to the invalid dichotomy, Patinkin created a ‘database’ of the relevant writings of these economists (summarized in the first and second editions of MIP), and scrutinized carefully the suspect sentences to show that they were unclear and even reckless. There is no doubt that Patinkin was a master of the literature on monetary theory, and he used it effectively to support his arguments.

Since many people wrote without a formal analytical apparatus in those days, they often said contradictary things concerning the dichotomy, and Patinkin identified and stressed the inconsistencies. The mathematically inclined economists used the formulation of excess demand functions in terms of all the n prices (p1,…,pn), which can be multiplied by a Lagrange multiplier λ, which could be any positive number. However, in order to reflect the fundamental property of zero degree homogeneity of real excess demand functions with respect to money prices and the nominal money supply, λ has to be set equal to 1/M, where M is the nominal money supply; then it would represent the real balance effect. But Patinkin insisted (and documented) that as a rule they thought of λ as 1/pn, that is, they thought of excess demand for commodities as dependent only on relative prices, without taking account of the real balance effect.

The preoccupation with the question of ‘what people really thought’ left a gray area of possible interpretations, which depended on subjective evaluations. Paul Samuelson (1968), who thought that in principle Patinkin’s criticism was well taken, nevertheless believed that Patinkin’s reading of the earlier theorists was not sympathetic. However, the examples of the articles of Hickman (1950) and Archibald and Lipsey (1958), who tried to defend the invalid dichotomy, made it clear that Patinkin’s tough criticism was justified from the point of view of improving professional rigour in economic science (see also Fischer, 1993).

Patinkin’s critical evaluation reflects the stringent criteria he applied to the work of his predecessors. He required of monetarist theorists who put money in the utility function to state explicitly the rationale for holding money; he insisted on an explicit reference to the real-balance effect, and he required an understanding of the difference between the individual and market experiments. In addition, he insisted on the incorporation of stability analysis of the money market in the same way as his predecessors analysed the stability of markets for ordinary commodities. He considered the fulfillment of all these criteria necessary for a full integration of money and value theory.

The ‘victims’ of this harsh criticism included such famous names as Walras, Fisher, Pigou and Cassel, in whose writings the presence of the invalid dichotomy was ‘highly probable’, as well as others who were more explicit about it, such as Lange, Modigliani, and Hickman (Patinkin, 1965, p. 175, n. 33).

Patinkin enjoyed the role of critical interpreter of texts, which he attributed to his training at the Yeshiva College in Chicago (1994). This perhaps explains his infatuation with Keynes’s writings in later years, and his preoccupation with the writings in the Chicago tradition. The former involved mainly the evolution of Keynes’s thoughts on effective demand and involuntary unemployment, and the latter focused on the interpretation of the quantity theory of money and the economic philosophy of his famous teachers at the University of Chicago.

The non-technical writings of Keynes (1936) were a fertile ground for interpretations and formulations of formal models attributed to his ideas, and it provided Patinkin with ample room for clarification of Keynes’s arguments. For example, he presented a diagrammatic exposition of the Keynesian theory in Patinkin (1982), especially Figures 5 and 6, clarifying the concepts of effective demand and aggregate supply in the Keynesian model. (In Figure 6 it is shown that effective demand is determined at the intersection of aggregate demand and supply – in terms of wage units – as functions of employment. In this diagram the real wage is endogenous to the level of employment on the assumption that firms are on the demand curve for labour. Thus the real wage is indirectly determined by aggregate demand. In this sense it is not a fixed-price model.) In his analysis of Milton Friedman’s statement of the quantity theory of money (Patinkin, 1981) he contrasts it critically with what Patinkin considered the true Chicago tradition.

Involuntary Unemployment

While the task of putting the house of neoclassical monetary theory in order involved an in-depth analysis of the early literature, his other major preoccupation was in an area which required his own creativity – involuntary unemployment. This problem, which reflected the realities of the Great Depression of the 1930s, occupied Patinkin’s academic interests from his Ph.D. dissertation and throughout his later work. Yet the problem of why the workers could not avoid unemployment by real wage cuts remains basically unresolved to this very day.

Patinkin first approached this problem in his famous early article in the American Economic Review (1948), where he claimed that the real interest rate and the real-balance effect might not be sufficiently flexible to allow an equilibrium solution, and even if they did it may take a long time (due to bankruptcies and pessimistic expectations). This may render it politically unrealistic to rely on automatic forces to establish full-employment equilibrium. Patinkin therefore considered unemployment essentially in the context of economic dynamics.

In Chapter 13 of MIP, Patinkin took an additional step in dealing with this issue, arguing that if firms cannot sell their optimal (competitive) output they will not employ their optimal labour input. This gave rise to a new area of research in macroeconomics, namely, disequilibrium models. Barro and Grossman (1971) combined this analysis with the Clower constraint, which postulates (as explained by Barro and Grossman) that, if workers cannot supply their optimal labour services they will not purchase their optimal (competitive) quantity of goods. Barro and Grossman go on to show how equilibrium can be established in the fixed-price model of this type. Over the years, the criticism of these models increased because they required arbitrary rationing rules (Drazen, 1980), and because they were too complicated technically. The disappearance of widespread involuntary unemployment in the post-Second World War era probably had something to do with the growing unpopularity of these models.

It is noteworthy that Patinkin refrained (in the second edition of MIP) from seeking a solution to the problem of involuntary unemployment in the domain of imperfect competition, in spite of Arrow’s (1959) remark that in disequilibrium situations the competitive model is problematic. It seems that this is an indication of Patinkin’s conservative approach to economic analysis.

Although most of MIP is devoted to the working of Patinkin’s model in full employment, the more interesting implications of monetary policy were in connection with unemployment. The latter case gave rise to the fundamental question of whether the capitalist system possesses an automatic mechanism for attaining full employment, which is the basic problem that underlies much of Patinkin’s work. Perhaps this explains why he was willing to take the risk of dealing with disequilibrium models, although he realized their limitations (1965, ch. 13, n. 9).

Some of the issues which were presented in MIP gave rise to criticism by prominent economists. But in all these confrontations Patinkin had the upper hand. One can cite as an example Hicks’s (1957) criticism of Patinkin’s interpretation of Keynesian unemployment theory; Patinkin’s reply (1959b) in terms of the Hicksian IS–LM model suggested that Hicks did not fully understand Pigou’s (1943) mechanism of the real-balance effect.

Patinkin’s early work dealt solely with the static economy, while the profession was concerned in the 1960s with models of economic growth, including monetary growth. This led Patinkin to write a paper, with David Levhari (1968), on monetary growth in the fashion of Tobin’s original contribution to these models.

Patinkin’s own view of his early work and his critical reflections about the recent developments in economics are interesting. We have a glimpse of these in the introduction to his final, abridged edition of MIP in 1989, 23 years after the publication of the first edition. In this introduction he welcomes the progress that has been made in disequilibrium theory, although he realizes its limitations, since it contradicts some of the tenets of rational expectations. He also welcomes the renewed theoretical work by the neo-Keynesian economists on the rational basis of price and wage rigidities, and discusses the effect of the new developments related to rational expectations. His discussion is certainly very scholarly but short of the original insights that characterized his earlier writings. It seems that rational expectations represent a whole new philosophy that was absent in the writing of the 1950s and 1960s, which one might call the age of innocence.

See Also

  •  Keynes, John Maynard (1883–1946)

  •  Monetary economics, history of.

    I am grateful to Akiva Offenbacher and Stanley Fischer for their comments. I also benefited greatly from the comments and suggestions of my veteran colleagues of the economics department of the Hebrew University: Haim Barkai, Nachum Gross, Michael Michaely, Ephraim Kleiman and Gur Ofer.

Selected Works

  • 1948. Price flexibility and full employment. American Economic Review 37: 543–564.

  • 1956. Money, interest and prices. Evanston, IL: Row Peterson.

  • 1959a. The Israeli economythe first decade. Jerusalem, The Maurice Falk Institute For Economic Research in Israel.

  • 1959b. Keynesian economics rehabilitated: A rejoinder to Professor Hicks. Economic Journal 69: 582–587.

  • 1965. Money, interest and prices, 2nd edn. New York: Harper and Row.

  • 1968. (With D. Levhari.)The role of money in a simple growth model. American Economic Review 58: 713–753.

  • 1981a. The Chicago tradition, the quantity theory, and Friedman. In Essays in and on the Chicago tradition. Durham, NC: Duke University Press.

  • 1981b. Introduction: Reminiscences of Chicago 1941–47. In Essays In and On the Chicago Tradition. Durham, NC. Duke University Press.

  • 1982. A critique of Keynes’ theory of effective demand. In Anticipations of the general theory, and other essays on keynes. Chicago: University of Chicago Press.

  • 1989. Money, interest and prices, 2nd edn. Abridged, with a new introduction. Cambridge, MA: MIT Press.

  • 1994. From Chicago to Jerusalem. Economic Quarterly, Hebrew, New Series 1994(2): 165–190.

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Nissan Liviatan
    • 1
  1. 1.