Thursday, December 10, 2009

more about money

I had pulled out my gold teeth...

is this another contrived dialogue about money?

I had pulled out my gold teeth, and placed them, along with my wedding ring, in the bag provided by Cash4Gold, the internet gold purchasers, because the frightening analyses on this page had convinced me that the economy was in real peril. But on checking your analysis of Keynes, I've noticed some discrepencies, and this leads me to doubt the whole thing. According to what you wrote earlier, Keynes sees "savings" and "investments" as disarticulated processes, leading to inflationary or deflationary pressure when they fail to balance. In fact, in Keynes' chapter seven, Keynes insists that they are equal, or at least that the theory that they are always equal is "sounder" then the theory that they aren't. Doesn't this invalidate what you wrote before?

If you look at the summary of Keynes' book (chapter eighteen), the model described is pretty much the same as I put forward. It's such an intuitively appealing model, with the disarticulated monetary flows, and their tendency to self correct, I still feel like it's central to Keynes' approach. It's a perfectly reasonable model of an economy without reserve banking, or at least in this case it would only commit the errors of any economic model. Maybe Keynes set up his model this way and then wrote chapter four after being criticised for not developing a theory that's able to deal with reserve banking. In other places Keynes seems to think his theory is transhistorical. In that case, his insistance that "savings" equals "investments" would be absurd, because it would not apply to a money economy without reserve banking. The very terms "savings" and "investments" are suggestive of such an economy. If he wanted to talk about modern fractional reserve banking, surely "savings and investments", necessarily equal, should be shown as "debt contracted" a double entry added to a bank's assets and liabilities, the schedule that may or may not meet it could then be "debt serviced", a double entry in the opposite direction.

Are you saying now that Keynes' theory is a theory of commerce in the ancient world, with a few contemporary bourgeois trappings pasted on? Because before, I seem to remember you said the supposedly historical part of Keynes' book described bourgeois England but dressed it up in period costume.

I think the methods I've used were entirely suitable to the things I was looking at before, the ideological apparatus of capitalist society, basically, and these issues around authority etc. Money evidently requires a different approach. I haven't read the secondary literature on Keynes, but anyone who wants an authoritative view could look at Skidelsky's or Harrod's biographies, or the reinterpretations of Keynes by Minsky, Harcourt, Tarshis and Leijonhufvud.

The reinterpretation I read on this site seemed more along the lines of Milton Friedman.

maybe, but this follows logically from the assumption of indestructible money, gold or whatever, which follows logically from the pure model with "savings" and "investments" and the downard sloping schedule of the marginal efficiency of capital. I don't think this theory is right anyway, but the orthodox theory of money doesn't seem to have got much further than where Keynes was in the thirties.

1 comment:

catmint said...


savings=investments is axiomatic only in an economy where the options as to what to do with income are limited to purchases and debenture finance. But even this model has to rule out e.g. the "saving" of gold caused by the sinking of Spanish galleons

The persistance of this dogma undoubtedly has a lot to do with neoclassical economists' ignorance of finance, and instinctive toadying to finance capital, which can be fallaciously presented as a disinterested public service; a flattering picture no-one asked for or required.

The later use of these categories to try to deal with the expansion and contraction of credit money was both inept and a source of confusion.