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.
BIBLIOGRAPHY
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.
"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".
ReplyDeleteI acknowledge this, but:
1) After a while, wouldn't the economy pick up when there is an acceptable difference between wages and overall prices? Maybe this would happen after lots of bankruptcies, I don't know.
2) "Money and financial assets have zero elasticity of substitution with producible commodities". This seems more like an effect of state intervention. Nowadays money is not a producible commodity (at least not in the standard way). Under free banking and no legal tender laws, this wouldn't happen I guess.
"Nowadays money is not a producible commodity (at least not in the standard way)."
ReplyDeleteEven under the gold standard, when it was producible commodity, that production was severely limited to certain countries and brief times. E.g., If the UK was hit by a deflationary depresion in the 1880s, with a rising purchasing power for money as demand for it increases as a hedge against future uncertainty (that is, a rise in its value due to deflation), can UK businesses just hire unemployed workers to "produce" gold in the UK? No way.
Keyenes:
"Thus the characteristic that money cannot be readily produced by labour gives at once some prima facie presumption for the view that its own-rate of interest will be relatively reluctant to fall; whereas if money could be grown like a crop or manufactured like a motor-car, depressions would be avoided or mitigated because, if the price of other assets was tending to fall in terms of money, more labour would be diverted into the production of money;—as we see to be the case in gold-mining countries, though for the world as a whole the maximum diversion in this way is almost negligible”
(Keynes, 1936. The General Theory of Employment, Interest, and Money, Macmillan, London. 230–231).
I see Keynes was fully-aware of this issue.
ReplyDelete"Can UK businesses just hire unemployed workers to "produce" gold in the UK?". Clearly not.
But the price of gold in the UK would be so high that it would prompt for gold mining in other countries, and the corresponding influx of gold into the UK would lower the gold value (and alleviate those deflation symptoms).
Now, as the government stands between "the money supply and the money demand" as a proxy, it's their job of emulating the market forces. They can do just fine and even better that the market, but it certainly needs more caution, as those policies may affect the entire country.
"But the price of gold in the UK would be so high that it would prompt for gold mining in other countries, and the corresponding influx of gold into the UK would lower the gold value (and alleviate those deflation symptoms)."
ReplyDeleteHow would this bring UK unemployment down? Foreign workers are being employed to "produce" gold.
Anyway, gold mining is often a difficult process, subject to random finds, and the limits of existing mines. It is not like other types of production, e.g., a local factory producing shoes, that can obtain its factor inputs relatively quickly and ramp up production reasonably quickly, lowering domestic unemployment.
Lord Keynes,
ReplyDeleteYou're still avoiding my question (in the other thread). Why do think there is no choice ? In reality economic agents use another medium when they want more money to hold, when they are demanding more money (accumulating cash balances). Not especially gold. There is a lot of type of commodity. Gold coins. Silver coins. Copper coins. Platinum coins. etc. etc. etc... and whatever you want. You're wrong in saying "gold is relatively scarce. Indeed money supply is sticky". Price-wage flexibility or price-wage stickiness, it doesn't matter. I repeat. Even if Bewley is right, he's wrong, and you're wrong too, because money supply is flexible. Productivity gains tend to decrease prices, depressing expectations. That is what you say. So what ? Agents produce more money. Prices and wages remain stable, and cause the demand for money to fall.
Anonymous,
"Under free banking and no legal tender laws, this wouldn't happen I guess. "
Correct. See Selgin "The Theory of Free Banking" (1988).
"You're still avoiding my question (in the other thread). Why do think there is no choice ? In reality economic agents use another medium when they want more money to hold, when they are demanding more money (accumulating cash balances). Not especially gold. There is a lot of type of commodity."
ReplyDeleteI have just given you a real world example of when a US popular movement wanted to monetise silver, and they were defeated by gold standard advocates.
In case you forget, this was opposed as inflationary by gold standard advocates, and by modern Austrians.
Are you an Austrian or not?
If you claim to an Austrian and support Austrian business cycle theory (ABCT), your position is contradictory.
So you are saying that you now support an inflationary policy of increasing the money supply by new metals or commodities which would drive interest rates down and distort the structure of production by malinvestments?
Lord Keynes, you're usually very smart but this misses the point. You said:
ReplyDelete"In case you forget, this was opposed as inflationary by gold standard advocates, and by modern Austrians."
Could you please send a link that states that? Under your interpretation of Austrian theory, gold mining should be forbidden as well. And that would be quite a funny thing to say for a libertarian!
A commodity should not become money by government decree, democratic decision or any consensus. A commodity establishes itself as money spontaneously when it becomes a common medium of store of value and exchange in the economy. Contrary to Mises, I think that there can be several commodities considered monies in an economy.
In a government supported gold standard, if a new commodity is now considered as money as well by government decision, it will impact the interest rates and the economy in the way the ABCT says.
Could you please send a link that states that?
ReplyDeleteThat the free silver movement's idea of silver monetization is condemned by modern Austrians?
Nothing easier:
Murray Newton Rothbard, A history of money and banking in the United States, p. 167
"Under your interpretation of Austrian theory, gold mining should be forbidden as well"
Wrong. Gold mining is supported by Austrians because they support the gold standard.
Nowhere have I said that in my "interpretation of Austrian theory, gold mining should be forbidden as well".
"A commodity establishes itself as money spontaneously when it becomes a common medium of store of value and exchange in the economy."
ReplyDeleteHistory shows in fact that governments have had a major role introducing the common unit of account and medium of exchange, by demanding that unit back in payment of taxes.
The origin of coined money in Western civilization goes back to Lydia, where such coinage was clearly issued by the state.
"A commodity should not become money by government decree, democratic decision or any consensus."
And yet there are very few commodities, compared to the vast number of acually exsiting commodities, that have become money in Western civilization.
Given that a money commodity generally has certain properties, such as being durable, scarce, and prized for other aesthetic reasons, the number of such possible commodities is limited.
On the actual origin of coins as a medium of exchange and unit of account in the West:
ReplyDelete"Numismatists believe that the earliest coins were produced at Lydia (now Western Turkey) in the mid-seventh century BC. The coins were made of electrum, a naturally occurring alloy of gold and silver. They had a design on one side and were of uniform weight but had a highly variable proportion of gold. In an influential article Cook (1958) argued that these coins were introduced to pay mercenaries, a thesis modified by Kraay (1964) who suggested that governments minted coins to pay mercenaries only in order to create a medium for the payment of taxes"
Charles A. E. Goodhart, “Two Concepts of Money: Implications for the Analysis of Optimal Currency Areas,” in S. A. Bell and E. J. Nell (eds), The State, the Market, and the Euro: Chartalism versus Metallism in the Theory of Money, Edward Elgar, Cheltenham. p. 7.
Agreed with everything, except with that Rothbard's passage. I don't see nothing inherently wrong with monetizing silver, as long as the transition is smooth. It is, in fact, an inflationary act. The government has always the final word, as it establishes the reserve requirements and the legal tender for tax payments.
ReplyDeleteLord Keynes,
ReplyDeleteYou missed my point. If productivity gains tend to decrease prices and nominal revenues, the value of money tends to increase, people demanding (i.e. producing) more money. In the end, price level would be stabilized. And your example proves nothing, and doesn't contradict my point; what I mean is... : in the face of a scarcity of money, it is possible to produce more money. And if prices tend to go up, so they will immediately stop mining gold (or other metals).
"Wrong. Gold mining is supported by Austrians because they support the gold standard."
But they never said : "gold must be taken as legal tender or the only medium of exchange".
Re-read my answer above :
ReplyDelete'Not especially gold. There is a lot of type of commodity. Gold coins. Silver coins. Copper coins. Platinum coins. etc. etc. etc... '
'Productivity gains tend to decrease prices, depressing expectations. [...] Agents produce more money. Prices and wages remain stable, and cause the demand for money to fall.'
Because they want more money, they have more money to spend. Not especially gold, not especially metal. Suppose there is a scarcity of the different types of metals. Even in this situation, they could buy and sell whatever they want because law cannot prevent them from using another commodity.
"Even in this situation, they could buy and sell whatever they want because law cannot prevent them from using another commodity."
ReplyDelete"they could buy and sell whatever they want"??
As I said, things that function as a money commodity generally have certain properties, such as being durable, scarce, and prized for other aesthetic reasons, and the number of such possible commodities is limited.
So it won't be "whatever they want". There will only be a limited range of such commodities.
"and the number of such possible commodities is limited"
ReplyDeleteLimited ? Like shoes and shorts ? I never said "gold backed money" or "metal backed money", I said "commodity backed money".
Limited ? Like shoes and shorts ?
ReplyDeleteIf shoes and shorts become a widely accepted unit of account and medium of exchange, everyone would produce them, and you would very quickly have a worthless currency.
Commodity must have certain properties, you're right; but this doesn't mean "scarce" (it's "your" claim). And these properties mean that commodity must be widely accepted. No more and no less. There is no place for scarcity. In ancient times, chinese people use tea brick as a medium of exchange. And why ? Because tea brick is largely accepted.
ReplyDeleteWrong. Commodity have a non-monetary use and a monetary use. If the commodity is overused to produce "money", so this commodity will no longer be accepted for payment.
ReplyDelete