John Maynard Keynes stressed that money has special properties. Money has a zero or very small elasticity of production, and money and financial assets have zero elasticity of substitution with producible commodities. Keynes and modern Post Keynesians thus reject the “gross substitution axiom,” an idea held by neoclassicals and probably by many Austrians as well.
As Paul Davidson has noted (Davidson 2010), Frank H. Hahn in 1977 came to a similar conclusion about money and financial assets:
“there are ... resting places for saving other than reproducible assets. In our model this is money. But land, as Keynes to his credit understood, would have just the same consequences and so would Old Masters. It is therefore not money which is required to do away with a Say’s Law-like proposition that the supply of labour is the demand for goods produced by labour. Any non-reproducible asset will do. When Say’s law is correctly formulated for an economy with non-reproducible goods it does not yield the conclusions to be found in textbooks. As I have already noted Keynes was fully aware of this and that is why he devoted so much space to the theory of choice amongst alternative stores of value” (Hahn 1977: 31).Furthermore, Hahn also questioned the role that flexible money wages are supposed to play in clearing markets and reducing unemployment:
“One can certainly now see that the view that with ‘flexible’ money wages there would be no unemployment has no convincing argument to recommend it … Even in a pure tatonnement in traditional models convergence to an equilibrium cannot be generally proved. In a more satisfactory model matters are more doubtful still. Suppose money wages fall in a situation of short-run non-Walrasian unemployment equilibrium. The argument already discussed suggests that initially this will lead to a redistribution in favour of profit. The demand for labour, however, will only increase on the expectation of greater sales since substitution effects in the short run can be neglected. If recipients of profit regard the increase as transient (as they sensibly might) their demand for goods will not greatly increase. On the other hand, if wage-earners have few assets their demand will decrease. But that means that producers get a signal to reduce output. Wages continue to fall and prices begin to fall also. Real cash balances increase but expectations about future prices may give a positive rate of return to money. There may be many periods for which falling money wages go with falling employment. Where the system would end up in the ‘long run’ I do not know” (Hahn 1977: 37).Hahn (1977: 39) also noted that in any economy “which is not a barter economy … any non-reproducible asset allows for a choice between employment inducing and nonemployment inducing demand.” Hahn was right, but Keynes knew this long before Hahn.
Davidson, P. 2002. Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham.
Davidson, P. 2010. “Keynes’ Revolutionary and ‘Serious’ Monetary Theory,” in R. W. Dimand, R. A. Mundell, and A. Vercelli (eds), Keynes’s General Theory after Seventy Years, Palgrave Macmillan, Basingstoke, England and New York. 241–267
Hahn, F. H. 1977. “Keynesian Economics and General Equilibrium Theory: Reflections on Some Current Debates,” in G. C. Harcourt (ed.), The Microeconomic Foundations of Macroeconomics, Macmillan, London. 25–40.