Error or Lack of Clarity?
Steven Kates deserves our thanks for his work on Says Law and his recent
clarification in this thread.
Says Law of Markets concerns market clearing. Sadly, the debate remains
essentially unresolved owing to severe lack of clarity. What exactly is it
that we are trying to grasp? The term error is too provocative and
aggravating. I would prefer the term vagueness to error.
The search for conditions of market clearing may add some clarity and hence
help us remove some confusion. One of the first things to do in this
connection is to choose a set of rigorously defined variables. I could cite
endless passages from Smith, Malthus, Say, Ricardo, Marx, Mill, Marshall,
Wicksell, Keynes and others to show that they frequently used terms vaguely
such that when they should have said income, they said demand or and so on.
This is an argument in favor of rigorous use of symbols for precise
analysis.
The precision is helpful because it opens up the various distinct scenarios,
each with its own set of equilibrium conditions. For example, market
clearing is not a problem at all if there is no market: when the seller is
the buyer himself. There is a problem of double coincidence in kind if
barter is possible, and that problem does not exist under autarky. This
significantly affects the analysis. Most importantly, indirect trade
requires additional conditions of what I called multiple coincidence in
order to permit the creation of artificial double coincidence with money as
an artificial good. The whole point is that if we define the terms precisely
and sort out the various possible scenarios, we can learn more about market
clearing than if we remain vague.
The Keynesian articulation of market clearing in terms of broad aggregates
of C+I+G+X-M has its own virtues as it permits explorations of important
relations among these variables, but it also carries severely crippling
confusion between money and credit respectively as tools to transfer value
within a given current period and to store value between periods. I have
found that indirect trade requires a transfer of value that can be
accomplished with fiat money which is most certainly not a store of value,
because it is acquired to be spent instantly in principle (within the
current period). It has nothing to do with savings or storage of value.
Credit however is a separate matter that involves storing value. Credit
cannot explain business cycle or the multiplier, because there is no
transmission mechanism. All these critically depend on precise use of terms
for money, credit, savings, and spending, lending and borrowing, and
paying. I have found [Gani 2003] that it is easy to separate the function
of the means of payment with a Wicksell Matrix of indirect exchange, and
then add money to create a Keynes Matrix. Comparing the matrices shows
clearly what Keynes wanted to explain but could not. Showing that the
[savings-investment equilibrium] is independent of the [real balance
equilibrium] removes the confusion that kept Keynes open to the kinds of
criticism Steven Kates refers to in his reply, and in is edited book.
By the real balance equilibrium under indirect trade means that an
individual sells real output of exactly equal value that he buys back in
real goods, and yet he must buy money and sell all of it too. Thus John may
sell one dollar of real good x to Tim, and buy one dollar of real good y
from Paul; but he cannot do this without also buying one dollar in fiat or
commodity money from Tim and then selling one dollar in fiat or commodity
money to Paul to balance the payments in each transaction, one with Tim and
one with Paul. The use of money can occur only within a payment circuit in
which money starts its journey from a given point and must return to the
point of origin. If the payment circuit is used, Keynes is suddenly
vindicated. That is, Keynes knew the correct conclusion, but did not know
how to reach it.
I hope that study of history will be rewarding with some careful rewording
of past masters. I fully agree with Steve that profound insights were gained
by past masters, but I would add that those insights cannot be grasped by
our generation unless we do some work on using words and symbols with
precision.
Mohammad Gani
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