Classical macroeconomics some modern variations and distortions

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Classical Macroeconomics Macroeconomics is easily the most unsettled area of modern economics Conflicting explanations abound over why interest rates or prices on average rise or fall Dispute continues over whether government tax policies should encourage consumer spending or saving Similarly, it is unsettled whether government spending should be a principal instrument of economic growth promotion or rather be limited to the minimal role of national defence, the administration of justice, including the protection of private property and enforcement of contracts, and the enactment of laws to facilitate commercial enterprise The classical economists, especially Adam Smith, David Ricardo, J.-B.Say, and J.S.Mill, provided clarifications as well as answers to the above questions, which Alfred Marshall carried into the twentieth century However, failing to interpret correctly economic concepts as employed by the classical economists, John Maynard Keynes dismissed the classical explanations and conclusions as being irrelevant to the world in which we live The trauma of the Great Depression and Keynes’s changed definition of economic concepts, aided by the work of Eugen Böhm-Bawerk, have made it difficult for modern economists to fully appreciate the classical insights This book clarifies the classical explanations to help resolve the continuing theoretical and policy disputes Key chapters include: • • • • On the definition of money Keynes’s misinterpretation of the classical theory of interest The classical theory of growth and Keynes’s paradox of thrift The mythology of the Keynesian multiplier Professor James C.W.Ahiakpor teaches economics at the California State University, Hayward, and was Department Chair, 1994–2000 His restatements of classical macroeconomics have appeared in the History of Political Economy, Southern Economic Journal, Journal of the History of Economic Thought, American Journal of Economics and Sociology and Independent Review He contributed to and edited Keynes and the Classics Reconsidered (1998) Routledge studies in the history of economics Economics as Literature Willie Henderson Socialism and Marginalism in Economics 1870–1930 Edited by Ian Steedman Hayek’s Political Economy The socio-economics of order Steve Fleetwood 11 Equilibrium and Economic Theory Edited by Giovanni Caravale 12 Austrian Economics in Debate Edited by Willem Keizer, Bert Tieben and Rudy van Zijp 13 Ancient Economic Thought Edited by B.B.Price On the Origins of Classical Economics Distribution and value from William Petty to Adam Smith Tony Aspromourgos 14 The Political Economy of Social Credit and Guild Socialism Frances Hutchinson and Brian Burkitt The Economics of Joan Robinson Edited by Maria Cristina Marcuzzo, Luigi Pasinetti and Alesandro Roncaglia 15 Economic Careers Economics and economists in Britain 1930–1970 Keith Tribe The Evolutionist Economics of Léon Walras Albert Jolink 16 Understanding ‘Classical’ Economics Studies in the long-period 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in memory of G.L.S.Shackle Edited by Stephen F.Frowen and Peter Earl 37 The Decline of Ricardian Economics Politics and economics in post-Ricardian theory Susan Pashkoff 38 Piero Sraffa His life, thought and cultural heritage Alessandro Roncaglia 39 Equilibrium and Disequilibrium in Economic Theory The Marshall—Walras divide Edited by Michel de Vroey 40 The German Historical School The historical and ethical approach to economics Edited by Yuichi Shionoya 41 Reflections on the Classical Canon in Economics Essays in honor of Samuel Hollander Edited by Sandra Peart and Evelyn Forget 42 Piero Sraffa’s Political Economy A centenary estimate Edited by Terenzio Cozzi and Roberto Marchionatti 43 The Contribution of Joseph Schumpeter to Economics Economic development and institutional change Richard Arena and Cecile Dangel 44 On the Development of Long-run Neo-Classical Theory Tom Kompas 45 F.A.Hayek as a Political Economist Economic analysis and values Edited by Jack Birner, Pierre Garrouste and Thierry Aimar 46 Pareto, Economics and Society The mechanical analogy Michael McLure 47 The Cambridge Controversies in Capital Theory A study in the logic of theory development Jack Birner 48 Economics Broadly Considered Essays in honor of Warren J.Samuels Edited by Steven G.Medema, Jeff Biddle and John B.Davis 49 Physicians and Political Economy Six studies of the work of doctoreconomists Edited by Peter Groenewegen 50 The Spread of Political Economy and the Professionalisation of Economists Economic societies in Europe, America and Japan in the nineteenth century Massimo Augello and Marco Guidi 51 Historians of Economics & Economic Thought The construction of disciplinary memory Steven G.Medema and Warren J.Samuels 52 Competing Economic Theories Essays in memory of Giovanni Caravale Sergio Nisticò and Domenico Tosato 53 Economic Thought and Policy in Less Developed Europe The 19th century Edited by Michalis Psalidopoulos and Maria-Eugenia Almedia Mata 54 Family Fictions and Family Facts Harriet Martineau, Adolphe Quetelet and the population question in England 1798–1859 Brian Cooper 55 Eighteenth-Century Economics Peter Groenewegen 56 The Rise of Political Economy in the Scottish Enlightenment Edited by Tatsuya Sakamoto and Hideo Tanaka 57 Classics and Moderns in Economics Volume I Essays on nineteenth and twentieth century economic thought Peter Groenewegen 58 Classics and Moderns in Economics Volume II Essays on nineteenth and twentieth century economic thought Peter Groenewegen 59 Marshall’s Evolutionary Economics Tiziano Raffaelli 60 Money, Time and Rationality in Max Weber Austrian connections Stephen D.Parsons 61 Classical Macroeconomics Some modern variations and distortions James C.W.Ahiakpor Classical Macroeconomics Some modern variations and distortions James C.W.Ahiakpor LONDON AND NEW YORK First published 2003 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2005 “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2003 James C.W.Ahiakpor All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Ahiakpor, James C.W., 1945– Classical macroeconomics: some modern variations and distortions/James C.W.Ahiakpor p cm Includes bibliographical references and index Classical school of economics Keynesian economics Macroeconomics I Title HB94.A35 2003 339–dc21 ISBN 0-203-41352-0 Master e-book ISBN ISBN 0-203-41375-X (Adobe eReader Format) ISBN 0-415-15332-8 (alk paper) 2002037164 To Michael, Andrew, and Daniel Contents List of figures Preface Acknowledgments xi xii xvii Introduction The classical theory of value: a foundation of macroeconomic analysis On the definition of money: classical vs modern 29 The classical theories of interest, the price level, and inflation 57 Keynes’s misinterpretation of the classical theory of interest 79 The Austrians, “capital,” and the classical theory of interest 96 Wicksell on the classical theories of money, credit, interest, and the price level 114 Fisher, the classics, and modern macroeconomics 133 The classical theory of growth and Keynes’s paradox of thrift 144 10 Full employment: Keynes’s mistaken attribution to the classics 158 11 Hicks, the IS-LM model, and the success of Keynes’s distortions of classical macroeconomics 177 240 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159, 162; management of 192, 214–15, 219 aggregate employment, classical theory of 163–4 aggregate supply (AS) 78, 120, 160, 162–3, 174, 180, 195, 227; of “capital” 83–4; of labor 159, 162 Ahiakpor, J 45, 112, 200, 202, 207, 220–1, 223–31, 233 American mines 73 Argentina 77, 188 Ashley, W 231 Aslanbegui, N 220, 229 Australia 77 Austria 127 Austrian economists 8, 21, 26, 28, 96, 104, 109, 113, 131, 141, 218; capital controversy 108; criticism of classical theory of interest 97, 113; return to gold money 112; subjective value concept 48 Austrian theories of capital, interest, and production 96, 106, 108, 110, 112, 218 Austrian time-preference theory 133–4, 141, 214, 218 Backhouse, R 115 Bagehot, W 193, 232 Baily, M.N 177, 231 banana economy model 154 Bank of England 34, 35–6, 39, 47, 52, 85, 116, 124–5, 128–9, 165 banking: institution of 45, 49, 74, 77, 118, 121–2, 126, 140, 183, 214, 218; system 48, 51, 53–4, 77, 196, 202 Banking Policy and the Price Level 94 banks: credit 36, 54–6, 62, 77, 139–40, 202, 206, 226–7, 229; deposits 142, 188; financial intermediation function 5; money 50, 53 Barnett, W 56 Barro, R.J 4, 144, 177 barter 14, 30–1, 33–4, 68, 146, 198, 228 Baumol, W.J 56, 150, 187 Bentham, J 161–2, 169–70, 223, 230 Bernanke, B.S 3, 160, 164, 220 Besomi, D 95, 225 Beveridge, W 230 Bibow, J 67, 233 bills of exchange 35–7, 38–9, 44, 46–7 Blanchard, O 220 Blaug, M 1–2, 12, 27–8, 34, 97, 111–12, 115, 132, 151, 165, 220–1, 223, 228, 233 Blinder, A 220 Böhm-Bawerk, E 1–2, 6–7, 26, 28, 50, 67, 96–7, 99–108, 110, 113, 115, 117, 127–8, 131, 133–5, 141–2, 214–15, 218, 223, 225; definition of capital 50, 102, 133; influence on Fisher 113; misrepresentations of classical concepts 218; period of production analysis 127; theories of capital and interest 99, 115, 214 Bolivia 231 borrowing-and-lending equation 183, 190 Boulding, K 226 Bowen, E 41 Boyes, W 144 Brazil 77 Brothwell, J 235 Cagan, P 224 Caldwell, B 112 Cambridge: capital controversies 111; equation 70, 75, 139, 141, 167, 182, 246 Index 202; quantity theory of money 77, 167; school Canada 77, 141 Cannan, E 54 Cantillon, R 40, 228 capital 96; accumulation 58, 129, 147, 211; in classical terminology 77, 80, 92, 97– 8, 136, 173; definition of 83; markets 60, 167; mobility of 16; as savings 136, 141; supply function 59; see also credit and loanable-funds capital-goods: purchase by firms 182; supply and demand, classical theory of interest 90 Capital and Interest 100 capital-labor ratio 172 “capital” supply and demand, classical theory of interest 60, 67, 89, 96, 118, 128, 133, 165, 214–15, 218 Carver, T.N 79, 81 Case, K.E 144 cash: reserves 202; theory of interest 167 cash-or liquidity-preference theory 79 Cassel, G 79, 81 Cate, T 220 central bank: credit 96, 111–13, 123, 128, 148, 202; lending to government 196; money creation 168 Chalmers, T 213, 215 Chick, V 174 Chile 77 circulating medium or currency 32–3, 35–40, 46, 51, 65, 72–4, 117, 121, 139, 199 Clark, J.B 98–9, 104, 106, 111, 224–6; distinction between “capital” and capital goods 104 classical economists 4–5, 158, 219 Classical School 50 Clower, R 231 Coinage Act of 1909 49 Colander, D.C 157, 216 commercial banks 202; lending 140 commercial crises, times of 170 commodity money 168 competition 16; between labor and machinery in production 172; perfect 218 confidence, business or public 148, 182, 212–13; Keynes on 57, 161; Marshall on 44, 67, 171; Mill on 170; Ricardo on 74, 121–2; shaken 171, 189, 213; Smith on 32; Thornton on 34 consumption 91, 165, 204; autonomous 186; goods 117, 194, 204; role in income determination 207; as ultimate goal of production consumption spending 89, 151, 192–3, 195, 197, 201, 203, 205, 208; and income growth, relationship between 205 costs: of fiat, paper money 168; of production 8, 12, 19 credit: and “capital”, distinction between 38–9, 44, 49–50, 122; card 29; irculating 46; classical theories of 131; inflation 126; instruments 30, 41 credit-cycle theory of inflation 140 “cumulative-process” argument 114, 118, 124–5 currency 41; creation 165; growth of 188 currency-deposit ratios of public and banks 164 Dalziel, P 91 Darky, W 174, 177, 230–1 DeLong, B 3–4, 220 demand: curve for money 69; deficiency 206 demand and supply: of “capital” 123; of labor 19 DeQuincey, T 21, 221 Deutscher, P 207, 232 development economics 144, 201 diamond—water “paradox” see Smith, Adam Dimand, R 193, 231–2 Divisia indexes 56 Dornbusch, R 160, 230 Douglas, P 27–8 Dow, S.C 239 economic growth: of country 145; theory of 144, 181 Economic Journal 176, 232 Economic Principles 80 economics education Economics of Industry 162, 199 economic thought, history of economy: of consumption 150; growth, principal determinants 211; output into consumption and nonconsumption goods 209 Edwards, J.R 144 Eiselen, R 100 Ekelund, R 34, 97, 115, 221, 227 employment: changes 217; in consumption goods industries 205; creation, effect of saving on 195; of Index labor in production 99; multipliers 205; theory of 194 Employment and Equilibrium 205 England 37, 43, 65, 74, 127 equation of exchange 47, 74, 139–41, 214 equilibrium: income determination 157; interest rates 57 exchange: equation 133; value 8, 12, 21 expectation(s): and demand for “capital” 59, 60–1; and demand for cash (money) 69; and interest rates 66; and investment 152, 179; and production 199; rational Fair, R.C 144 Federal Reserve policy 55 fiat money 5, 123, 168, 213; cost of 168; emergence of 40; modern 69 financial assets (FA) 61, 68, 122, 138, 147–8, 200, 202, 214; accumulation 144; demand for 188; issuers of 154; nonbank 202; purchase of 165, 181–2, 185, 216 financial intermediaries 209, 227 Fischer, S 160, 230 Fisher, D 56 Fisher, I 2, 6–7, 45–7, 50–5, 74–5, 97–8, 103, 106, 110, 113–14, 128, 133–6, 140–3, 166, 168, 214–15, 222–4, 227, 229; on classical theory of interest 133; currency 46, 214; definition of “capital” 106; differences with classical theories 142; equation of exchange 74, 139; macroeconomic analysis 133; and modern macroeconomics 141; monetary analysis 139; quantity theory of money 51, 77, 167; on reserve requirement 141; theory of interest 133 fixed income earners 169 floating capital 48, 76, 90, 226 flow demand and supply of money, classical theory 72–4 flow-of-funds, classical concept 135 Flux, A 79, 80 forced-saving: classical doctrine of 5, 58, 63, 112, 114, 121, 126, 131, 158, 160–1, 168–9, 183–4, 186, 189, 202, 217, 228, 230; classical mechanism 40, 71, 77, 218; definition of 170 foreign trade 212 France 127 Frank, R.H 3, 220 free capital 90 247 freedom of commerce or market exchange 211 free market system 211 Friedman, M 4, 30, 54–6, 76–7, 133, 142, 144, 177, 181, 187, 215–17, 224, 231, 233 Friedman, P 177, 231 frugality, forced 169 full employment 131, 154, 161, 164–5, 168–9, 171–2, 174, 176, 180, 184–5, 188–9, 196, 223, 229–30; alternative versions of IS-LM model 174; assumption of 161, 168–70, 175–6, 189, 217; theories 158 funds for investment 192, 203 Gamber, E.N 157, 216 Garrison, R 112, 218, 220, 225–6 General Theory 79, 93–5, 114, 154, 159, 175, 178–80, 186, 193, 197, 216, 218, 225, 229; see also Keynes Germany 127, 224 Gesell, S 155 Giblin, L.F 193 Glazer, A 110, 137 gold 212; discoveries 66; mines 123 Gold and Silver Commission 43, 45, 84, 116, 121, 126 goods and services (IS) 178; purchase for producers 198 Goodwin, C 228 Gootzeit, M 227 Gordon, R.J 187 government: borrowing 196, 203; budget deficits 61; policies 156 Great Depression 55–6, 141, 151, 164, 179 Greenfield, R 221 growth: aggregate demand 193; of capital 152; effects of financial intermediation by banks 140; of money supply 55 growth theory: classical 144–5, 156; in modern macroeconomics 156 Haberler, G 192, 207, 232 Hansen, A.H 4, 181, 228 Harcourt, G 111 Harrod-Domar growth model 144 Harrod, R 79, 82, 90, 94–5, 224–5 Hawtrey, R.G 6, 54, 79, 81, 90–2, 110, 142, 159, 185, 192–3, 201, 206–7, 215, 226, 229, 232 Hayek, F.A 34, 96–7, 106–7, 108–9, 111– 12, 128, 169–70, 218, 221, 225–6, 230, 248 Index 233; Austrian theory of capital and interest 106, 112; debate with Knight 97 Hazlitt, H 144, 192, 207–8, 224, 232 Hébert, R 34, 97, 115, 221, 227 Hegeland, H 193, 232 Henderson, H 205 Herbener, J 232 Hicks, J.R 4, 6, 90, 97, 110, 115, 177–8, 180–4, 186, 190–1, 215–16, 224–5, 227–8, 230–1; 1937 article 177–8; original IS-LL model 180, 184, 191 high-income countries 77 high money-growth and high inflation countries 77 Hillier, B 177 Hirshleifer, J 110, 137 hoarding 5, 8, 60–1, 79, 86, 89, 91–3, 95, 122, 131, 151, 157, 161, 164–6, 168, 170–2, 186, 190, 209, 213, 216, 222 Hobson, J.A 155–6, 215 Hollander, S 1–2, 8, 28 Horwitz, S 220 Howitt, P 231 Hubbard, R.G 222, 227 Hueckel, G 8, 28, 221 Hume, D 3, 30–1, 34–5, 37, 40, 64, 71–2, 99, 105, 109, 122, 136, 138, 140, 156, 166, 202, 221, 226, 229–30; monetary analysis 30; price-specieflow mechanism 76; aecommendation on monetary policy 217; use of “stock” to mean funds 105 Humphrey, T 114–15, 227 Hutchison, T 233 Hutt, W.H 192, 208 import of gold or silver 69, 73 income: changes 94; creation 153, 197; determination, classical theory of 181, 218; generation process in economy 193; payment, system of 200; principal forms of expenditure 165; velocity of money 167, 216 income-expenditure stream 193 incremental output-capital ratio analysis 201 inflation 54, 168, 179, 215; alternative theories of 78; classical theory of 57, 77, 114, 121; rate 75–6, 116, 124, 188 interest 92; and capital, relation between 85, 110; as reward for loaned money 85, 100 interest, classical theory of 57–8, 67, 94–6, 103–4, 108, 115, 121, 127, 130–1, 138, 141, 153, 155, 165, 179, 181, 184, 189, 218; assumption of full employment 160; “capital” in 57–8, 214; modern variations on 76 interest rate 60, 84, 116, 119, 122, 127, 134, 138, 148, 153, 155, 178, 187; coordinating role between savers and borrowers 215; natural 117–18, 124–5, 184; reversal, process of 66; short- and long-run 126 investment 91, 192, 206, 208; amount of 152; “capital” 173, 185; funds 206; multiplier 194; nonconsumption goods 194; portfolio 203; rate of interest 184; spending 153, 200–2, 209 IS curve 178; see also goods and services IS-LM model 4, 6, 174, 177–81, 183–91, 216–17; long-run flexible-price version of 184; persistent problems with 185; short-run version of 184; as a teaching tool 177 Israel 229 Japan 77 Jevons, W.S 25, 41–3, 127–8 Johannsen, N.A.L.J 193 Johnson, L.E 220 Jonsson, E 200, 228, 230 Jonung, L 129 Joplin, T 114 Kahane, L.H 193, 231 Kahn-Keynes multiplier 205, 207; see also Keynesian multiplier Kahn, R 6, 175, 192–7, 202–4, 206, 230, 232 Kaldor, N 6, 230 Kates, S 200, 227–8, 230 Kauder, E 27–8 Keen, S 15 Keynes, J.M 1–4, 6, 7–8, 29, 45, 47, 50–4, 57, 67, 76, 79, 80–2, 84–97, 108–9, 112–14, 120, 128, 132, 137, 141–2, 151–70, 172–209, 215–18, 220, 222–33; (1936) aggregate demand management, and income and employment creation theory 192; aggregate supply and demand for goods and services framework 78; alternative theories of interest, price level, income, and employment determination 191; attribution of full-employment Index assumption to classical theory 2, 4, 6, 57, 86, 152, 158–9, 160–6, 168, 170, 172–5, 189, 209, 217, 220, 222, 224, 230, 233; on Austrian structure of production theory 109; on business or public confidence 57, 161; “capital”, misinterpretation of 79, 90; definition of involuntary unemployment 159, 164; distortions of classical macroeconomics 2; expectations and investment 152, 179; influence on modern macroeconomics 190; “liquidity-preference” theory of interest 77, 86, 93, 95, 110, 141, 183, 187, 215; “marginal efficiency of capital” 87; money theory, ineffective criticisms of 90; paradox of thrift 56, 144, 151, 156–7, 174; on savings 79, 156, 185, 216; tradition 30; views of monetary economy 177; see also IS-LM model Keynesian multiplier 179, 183, 185–6, 192–3, 197, 209–10, 222, 232–3; for a closed economy 204 King, R 230 Kirzner, I 96–7, 108, 225 Klein, L 227 Knight, F.H 6, 79–80, 82, 90, 92–3, 96, 98–9, 106–8, 111, 215, 218, 224, 226 Kohn, M 227 labor 18, 23; costs of production 16; demand for 195; exploitation of 24; as measure of value 17, 19, 21, 23, 26–7, 233; productivity 156, 201; skills, demand for 189; supply and demand for 189; theory of value 11, 13, 20, 23, 26–8, 214, 218, 220 labor market 4, 162, 190; aggregation of 163; classical view of 159 labour-time 25 Lachmann, L.M 97, 226 Laidler, D 3, 54, 56, 72, 115, 129, 142, 220, 223, 226, 229 Lavington, F 224 Law, J 64 Law of Markets 64, 158, 171–3, 189, 199, 214, 219 Leaf, W 52 Leeson, R 205 legal-tender money 40, 47, 50 Leijonhufvud, A 67, 97, 110, 115, 174, 177, 226, 228, 231 249 lending: by banks 169, 196; capital goods, reward for 99 Lerner, A 240 less developed countries (LDCs) 144 Lewin, P 110 Lindahl, F 115, 126–7 liquidity, definitions of 86 liquidity preference 141, 164–5, 167–8, 216; theory of interest 179, 181, 187, 215 LM see money loan 33, 98, 123; capital demand for 129; markets 60; transaction 58 loanable funds 51, 59, 63, 99, 117, 127–8, 141, 182, 187; neoclassical supply and demand theory of interest 67, 76–7, 79, 90, 181 Locke, J 64 Logic of Political Economy 21 long-run interest rates 126 long run or natural value 20, 22, 25–6, 211 Lotz, J.E 100 low interest rates 77 low money-growth and low inflation countries 77 Lucas, R 4, 144, 229 Machlup, F 232 McCulloch, J.R 42 McKinnon, R.I 141, 144, 227 Malthus, Thomas R 8, 14, 19–24, 28, 98, 101, 127, 150, 155, 158, 165, 198, 213, 215, 221; on saving not being hoarding 150–1 Mandeville, B 228 Mankiw, N.G 177, 231 Marget, A.W 115, 172, 194 marginal efficiency of capital 88, 181, 183–4 marginal propensity to consume 192–3, 195, 201, 207, 232 marginal utility of consumption 92 markets: aggregation of 188; for credit 167; exchange, voluntary 211; gluts in 198–9; price 10–11, 15, 17, 124; rate of interest 59, 118, 125, 152; wage rate 162 Marshall, A 4, 8, 24–6, 28, 43–5, 47, 50, 52, 63, 67, 69, 71, 75–6, 80, 82, 83–5, 91, 98–9, 105, 111, 114, 116, 121–3, 126, 128, 131–3, 136–8, 151, 154, 155, 158, 160, 162–5, 166, 168, 170–2, 176, 180–3, 185–6, 189–90, 199, 201, 214, 218, 250 Index 222–6, 228–9, 231; on business or public confidence 44, 67, 171; definition of “currency” 44; distinction of money as commodity 52; “marginal efficiency of capital” 89; “marginal net efficiency” 88; on perfect competition 218; on remedy for unemployment 111; on unemployment 171; use of “stock” to mean funds 82, 98, 128, 137 Marshall, Mary 162, 172, 199 Marxists 8, 15 Marx, Karl 24–6, 155; exploitation theory 27; labor theory of value 214 Mason, W 8, 28, 227 Mattick, P.Jr 25 measure of value 13–14, 17, 21, 23, 27, 29–30, 32, 34, 37, 39–41, 43, 47–8, 213; of commodity by labor command 19–20, 24 medium of exchange 29, 116; character of money 31, 48 Meier, G.M 231 Meiselman, D 56 Melvin, M 144 Menger, C 26, 28, 48, 127 Mill, James 150, 193, 215, 227 Mill, John Stuart 3, 8, 14, 21–5, 27–30, 38–9, 40–2, 58–60, 62, 65–6, 68–9, 74–6, 91, 98–9, 118, 122–3, 125–6, 127, 134, 138–9, 151, 156, 158, 165–8, 170, 173, 189, 193, 199–200, 213–14, 221, 223–4, 226–7, 229, 231, 233; on business or public confidence 170; expectations and interest rates 66 Mints, L 72 Mises, L.v see von Mises, L Mizen, P 233 Modigliani, F 181, 227, 231 Moggridge, D 95 Monetarists 3, 177, 186 monetary analysis, modern 132 monetary expansion 138 monetary policy 187; classical 5; interpretation of 55 monetary theory of rate of interest 85 money: borrowed 87; classical theories of 131; as commodity 30–1, 68, 199; credit and “capital”, classical distinction between 44, 49–50; definition of 29, 40, 54, 57, 142, 166, 186–7, 222; demand 71, 213; evolution of 54; market 167, 178; measure of value 14, 30–2, 34, 47; price of labor 18; rate 184; and savings, classical distinction between 56; security services of 165; supply 5, 169, 188; supply and demand theory of interest 57, 87, 179; variously defined (LM) 178; velocity 75, 139 money (specie) 29, 32; classical definition 29–30, 40, 43; paper substitute 33–4; and prices, theory of 8; substitutes 29; supply, classical 8, 69 money-of-account 50 Money, Credit, and Commerce 67, 84 money-function 41 money multiplier 55 monopoly 22, 124 Montesquieu, M 57, 64 multiplier see Keynesian multiplier Mummery, A.F 155–6, 215 national defense 156, 211 national income 178, 185, 192, 203, 233; theory of 181–2 national security 147 natural price 10–11, 14, 17, 19–20, 22–3, 124, 189, 212, 220 “natural” rate of interest 114, 117–18, 124–5 natural value 20, 22, 25–6, 211 New Classicals 3, 108, 177, 217 New Keynesians 3, 218 New Zealand 77 Nicaragua 188 non-central bank credit 77 nonconsumed income 5, 152 nonconsumption goods industries 195, 205 non-wage goods industry 204 Nordhaus, W.D 156–7 Oakes, G 220 O’Brien, D.P 1–2 O’Donnell, R 225 Ohlin, B 79, 90, 92, 110, 115, 119, 129 opportunity costs 10; of public sector spending 209 output-labor ratio 172 paper: credit, benefits of 35; currency 5, 37, 41, 65, 165, 213 paradox of thrift see Keynes, J.M paradox of value 9, 28 parsimony 58, 98, 146–7, 149–50, 155 Pasinetti, L 8, 28 Patinkin, D 67, 95, 114–15, 173–4, 177, 181, 186, 215, 226, 228 Index pattern predictions: from classical theory of interest 60; of equilibrium interest rate determination 61 “periods of production” analysis of 106 Peru 73, 229, 231 Phelps, N Philips curve Pigou, A.C 6, 8, 47–8, 50–1, 53, 69, 75, 79, 81, 90, 92, 98, 123, 144, 158–60, 162–4, 167–8, 173, 175, 181, 189, 192–3, 204–5, 215–16, 223–5, 228–9, 231–3; analysis of unemployment 163 policy formulation to assist economic growth policy-induced business cycles 96 Portugal 73 Positive Theory of Capital 102, 104 Post-Keynesian economists 3, 185, 217 Post-Ricardian socialists 27 precious metals 13; determinants of prices 11 Presley, J 205, 233 price: concept, parts of 12; determination, modern analysis of 24; dynamics 131; natural 10, 17, 20, 124, 189, 212; theory, modern 8, 19, 22 price level 56, 72–3, 119, 139, 202, 214–15, 217; adjustment, process of 71, 209; aggregate supply (AS) and aggregate demand (AD) approach 180; of bullion 129; classical theory of 57–8, 68, 72, 75, 77, 115, 121, 127, 130–1, 160, 166–7, 180–1, 190, 218; determination process 119; equation 70; and inflation 68 private sector spending 186 prodigality 146, 148 production: concurrent nature of 198, 200; costs 8, 12, 19; process of 106, 108, 198; theory of 182 productive laborers 146, 148 productivity 145: enhancing effect of investment 201; theorists 101–2 profits as reward to “real capital” 100 promissory notes 39 property, private 47 protective tariffs 148 public: deposit of money with banks 140; financial assets 202 public works 196–7, 203, 205, 209 purchasing power 5, 33, 43, 45, 50, 62, 67–9, 83, 122, 126, 134, 138, 154, 165, 170, 192, 199, 201–2, 209 251 Pure Theory of Domestic Values 151, 155, 173, 228 quantity of money 116, 160, 217 quantity theory of money, classical 45, 47, 50, 54, 93, 114–15, 120, 128, 130, 158, 160–1, 182, 188, 214–15, 229; Wicksell’s criticism of 116 quasi-rent 99 Rau, K.H 100 Reagan, R 156 real cost of production 25 real output and employment changes 217 recession, cause of 213 Reisman, D 221 relative cost theory 15 relative exchange values, determination of 15 relative labor cost theory of value 20 relative scarcity theory of value 28 rental price of “capital” 102 rent on land and interest on “capital”, distinction between 135 residual income earners 169 Ricardian Vice Ricardo, D 3, 8, 14–29, 34, 37–40, 42, 60, 64–5, 67–8, 74–6, 85–6, 98–101, 114, 121–5, 127, 129, 135, 138–9, 141, 149–50, 155–6, 158, 160, 165–6, 169–72, 189, 193, 198–9, 202, 213–14, 220–1, 223, 226–8, 233; analysis of relative value determination 16; on buisness or public confidence 74, 121–2, 171; cost of production theory of value 23, 26; expectations and production 199; explanations of inflation 76; on unemployment 171 Riedel, E 101 Rima, I 97, 112, 190 Robertson, D.H 6, 52–3, 76–7, 79, 81, 89–95, 110, 137, 141, 144, 159, 174–5, 181, 185, 188, 192, 202, 205–7, 215, 222–4, 226, 229–30, 233; description of banks 53; loanable-funds theory 141 Robins, L 114 Robinson, J 6, 26–7, 95, 230, 232 Rodbertus, J.K 26 Rogers, J.E.T 41 Roscher, W 101 Rothbard, M.N 28, 112, 141, 192, 221, 232 252 Index Royal Commission on Depression of Trade and Industry 116 Salerno, J.T 112 Samuelson, P.A 111, 156–7, 227 Sargent, T savers’ investments in financial assets 215 saving-is-spending principle, classical 151 savings 5, 77, 85, 89, 92, 131, 151–3, 165, 192, 195, 206, 208; amount of 152; classical definition of 91, 153, 173, 193, 209; classical emphasis on 192; depository institutions 213; as deposits 138; as determinant of aggregate income 182; equality with deficiency of demand 206; generation of 205; in growth 144, 150, 156, 216; as hoarding 95, 154, 201, 216; impact on output growth 140; insufficient 154; as investment in financial assets 182, 185; as loanable funds 51, 133; need for 155; as non-spending 95; portfolio 203; as prerequisite for capital accumulation 147; rate of 144–5, 213; role in theory of income determination 182; as source of “capital” 45; supply of 117, 155; theory of economic growth, classical 56, 154, 157, 216; in theory of interest 89; as transfer of purchasing power 154; voluntary 206; “withdrawal” or “leakage” effect on expenditure stream 195 Say, J.-B 3, 101, 149–50, 158, 161, 171–2, 189, 193, 198, 227; on unemployment 171 Say’s Law of Markets 2, 5, 120, 150, 158, 161–2, 170, 178, 189, 198, 200, 208–9, 213, 215, 217, 228, 230–1, 233 Schumpeter, J.A 1–2, 23, 107, 111, 115, 222–3 Schwartz, A.J 30, 56, 142 Schwoner, A 193 Screpanti, E 112 secondary-employment effect 194 “secondary” income 195, 205 self-denial 59 self-interest 12, 198, 212 Senior, N.W 28, 38, 58–9, 101–2, 135, 221; abstinence theory of interest 101 Serletis, A 56 Shepherd, G 242 short-run interest rate 126 short-run market prices 22, 25, 211–12 silver 212 Sinai, A 193 Sismondi, J.C.L 213, 215 Siven, C.H 115 Skidelsky, R 230 Smith Adam 2–3, 8–40, 42, 57–60, 62, 64, 67, 69, 72–3, 76, 87, 97–101, 105, 112, 122–5, 130, 134–40, 145–8, 156–8, 166–9, 173, 193, 197–8, 211–14, 220–3, 228, 233; analysis of market and “natural” price 189; on business or public confidence 32; definition of money 37; demand and supply theory of value 13, 16, 21; description of bank lending 36; diamond-water paradox of value 9, 15, 21; distinction between money and credit 33; explanation of process of economic growth 149; functions of money 32; on “knowledge problem” 211; use of “stock” to mean funds 11–12, 16, 36, 98, 130, 132, 136–7, 140, 142; theory of value 15, 17, 19; unproductive labor 145–6; value of labor 17, 19–20, 23, 32 Smith-Ricardo explanation of theory of value 20 Smith-Ricardo-Mill-Marshall tradition 108 social usefulness Solow, R.M 144 South Korea 224 Sowell, T 220 Spain 73 specie (gold) 19; and convertible paper money, classical regime of 76; money system 5; and pure credit definitions of money, classical 45 spending 148, 186; of income, categories 91; on public projects by government 203 Sraffa, P stagflation 168 Stark, W 169, 230 state: duty of 147; interference in industries 149 State-Money 50 Stewart, D 227 stock demand and supply explanation of price level, classical 70–1 “stock”, as savings or funds 11–12, 16, 36, 82, 98, 105, 128, 130, 136–7, 140, 142 Stockman, A.C 192 Streeten, P xii structure of production, theory of 96, 109 Index subjective utility 8, 21 substitution: of “capital” for “investible resources” 80; of future consumptiondemand for present consumptiondemand 195; of paper money for specie 31, 37 supply: of goods and services 122, 166; of money 62–4, 120, 123; price of capitalgoods 84; of savings 129 supply and demand: for “capital” 58, 67, 79, 87, 122, 130, 148; for financial assets 60; for money (currency) 68; principles of supply of savings and investment demand theory of interest, classical 184 surplus value: creation of 99, 100–1; productivity of physical capital 102; theory of 25 Surrogate Production Function 111 Switzerland 77 Taussig, F.W 79–80 tax: collection 203; inflationary 169; revenues 197 taxation 4, 147–8, 196, 210, 212; rate of 60–1, 147 tax-benefit, effect of publicly funded projects 204 Taylor rule 217 Theory of Unemployment 159 Thornton, H 34–7, 39, 73–4, 114, 122, 221, 226; on business or public confidence 34; treatment of bank credit and “capital” 36; treatment of bills of exchange 36 time-preference or impatience theory of interest 133–4, 141, 214, 218 Tobin, J 30, 56, 187, 227 Todaro, M xii Tooke, T 116, 131 trading of future against present consumption goods 96 Treatise on Money 50 Tsiang, S 230 Tullock, G 226 Turgot, A.R.P 100, 135 Turgot-Smith-J.S.Mill theory of saving and investment mechanism 1–2 under-consumption theorists 155, 213, 215 unemployment 56, 111, 140, 152, 161–4, 168, 171, 173, 175, 179, 188–9, 190, 197–8, 200, 208–9, 213, 216–17, 220, 253 229, 233; causes of 140, 163, 171; “frictional” and “voluntary” 159, 162, 229; involuntary 158–9, 162–5, 168; remedy for 111; types of 159 unit: of account 30; of labor’s exertion 14; of Purchasing Power 50 United Kingdom 77, 141 United States 46, 55–6, 77, 156, 217; Federal Reserve System 55; tax cuts 156 Uruguay 229 utility: based on biological need 15; role in determination of exchange value 8, 12, 15, 21, 25–8, 221 value: of commodities 7–8, 13–14, 16–17, 19, 21, 23–4, 29, 32, 37, 68, 74, 121, 149, 166; in exchange 9, 14, 21, 25, 48; of labor 13, 18, 23, 32, 221, 224; of money 4–5, 32–3, 35–6, 38, 54, 65, 68–75, 85, 119, 121–2, 124–5, 129, 137, 139, 160, 166–7, 183, 190; natural 20, 22, 25–6, 211; of paper currency 19; in use 9, 14, 21 value, classical theory of 4, 7–29, 57, 60, 95, 133, 137, 159, 162, 165, 176, 211–12, 218, 214, 233; application to currency 4–5, 7, 68, 72, 78, 165–6, 168, 173, 212, 229; distortion of 27 value productivity: of capital 134–5; of capital goods 105 velocity of money 8, 51, 74–5, 121, 139, 141, 166–7, 175, 202, 207, 216 Vickers, D 72, 222–3 Viner, J 6, 34, 79, 81, 90, 92, 215, 223, 229 von Mises, L 48–50, 97, 106, 221, 225–6 von Wieser, F 26, 28, 104 wage-cost theory of inflation 120 wage-fund 163, 173 wage/rental ratio 172, 190 wages: determination of 162, 176, 212, 218; nominal 5, 9–12, 20, 23–5, 58, 62, 64, 71, 85, 106, 112–13, 117, 120–4, 138, 145, 151, 160, s165, 167–9, 172, 183, 189, 194, 229, 232; rate 11, 18–19, 63, 127, 223; real 71, 112, 121, 202 Walker, F.A 40–2, 44, 47, 127–8, 222 Walras, L 79, 81, 127; equation counting exercise 183 Wealth of Nations 8, 17–18, 27–8, 30, 34, 37, 254 Index 64, 72, 105, 124, 145, 197, 211, 220, 223, 233 Weintraub, E.R 227 Wicksell, K 2, 6, 45, 51, 53–4, 67, 98, 114–32, 184, 214–15, 223, 226–7; on the classical theories 114–15, 121; conception of process of banking 118; “cumulative-process” argument 114, 124–5; deviations from classics 127; theories of interest and price level 115, 128; use of comparative statics method of analysis 130; version of classical natural vs market rate of interest 184 Winfrey, J World Bank 229 Wright, A.L 205 Wullf, J 193 Yeager, L 221 yield of output 200 Young, W 174, 177, 230–1 Zamagni, S 112 ... D.Parsons 61 Classical Macroeconomics Some modern variations and distortions James C.W.Ahiakpor Classical Macroeconomics Some modern variations and distortions James C.W.Ahiakpor LONDON AND NEW YORK... 1945– Classical macroeconomics: some modern variations and distortions/ James C.W.Ahiakpor p cm Includes bibliographical references and index Classical school of economics Keynesian economics Macroeconomics. .. and the classical theory of interest 96 Wicksell on the classical theories of money, credit, interest, and the price level 114 Fisher, the classics, and modern macroeconomics 133 The classical

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  • Book Cover

  • Title

  • Contents

  • List of figures

  • Preface

  • Acknowledgments

  • Introduction

  • The classical theory of value: a foundation of macroeconomic analysis

  • On the definition of money: classical vs modern

  • The classical theories of interest, the price level, and inflation

  • Keynes's misinterpretation of the classical theory of interest

  • The Austrians, "capital," and the classical theory of interest

  • Wicksell on the classical theories of money, credit, interest, and the price level

  • Fisher, the classics, and modern macroeconomics

  • The classical theory of growth and Keynes's paradox of thrift

  • Full employment: Keynes's mistaken attribution to the classics

  • Hicks, the IS-LM model, and the success of Keynes's distortions of classical macroeconomics

  • The mythology of the Keynesian multiplier

  • Conclusion

  • Notes

  • Bibliography

  • Index

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