I'm glad that Tom's message has been posted to the list.  I did not 
reply to his private response to me because I didn't think our 
"settling" the dispute privately was as helpful as in "public."  The 
question I have for Tom's position is why he does not recognize the 
inconsistency in his failure not to back off "one whit from the gist of 
[his] message."  Perhaps he needs more clarification of the misleading 
nature of Keynes's changed language of macroeconomics that I explained 
as having led to inappropriate economic analysis and policy 
recommendations.  Thus, Tom says:
>>>> While backing off not one whit from the gist of my message, I must say
>>>> that I agree with many of the points James Ahiakpor makes. Namely, I agree
>>>> that:  (1) There are weaknesses in the original Keynesian framework,
>>>> weaknesses that James identifies splendidly. But many of these weaknesses
>>>> have been addressed and corrected by later economists writing in the
>>>> Keynesian tradition.
Which New Keynesians have changed the meaning of saving from 
non-spending to the purchase of financial assets (including bank 
deposits) that supplies funds to borrowers such that increased savings 
do not reduce "aggregate demand"?  Which New Keynesians have recognized 
the misleading nature of focusing on "broad money" rather than currency 
or the monetary base as the relevant concern of a central bank?  The 
broad definition of money comes from Keynes.  Which New Keynesians 
recognize the misleading nature of the expenditure multiplier, founded 
as it is on the mistaken notion that savings are a leakage from the 
expenditure stream?  Which New Keynesians have given up the mistaken 
notion that savings are bad for an economy in the short run but good for 
an economy's growth in the long run (following Robert Solow), as if the 
long run is not a succession of short runs?
>>>> And even Friedman, when spelling out his analytical
>>>> framework in a JPE article of the early 1970s employed a version of the
>>>> IS-LM model that James condemns.
Sure enough, Friedman employed IS-LM framework, just as his 1968 
statement that we all have become "Keynesians now" for employing 
Keynes's language and apparatus would predict.  Friedman also called the 
/General Theory/ "a great book," the very book whose message his 
life-long's work mostly sought to undermine.  Any surprise that Friedman 
could not be more successful?  Had Friedman paid attention to Jacob 
Viner's (1936) and Frank Knight's (1937) reviews of Keynes's /General 
Theory/ pointing out the unhelpfulness of Keynes's changed language of 
economics, he might have avoided adopting the IS-LM framework.  As Viner 
(1936) notes, in Keynes's book, "no old term for an old concept is used 
when a new one can be coined, and if old terms are used new meanings are 
generally assigned to them" while Knight observes that "familiar terms 
and modes of expression seem to be shunned on principle in this book "  
And yet it is Keynes's definitions of saving, capital, investment, and 
money that modern macroeconomics continues to adopt, thanks to J.R 
Hick's failure to take seriously the problems associated with Keynes's 
new definitions.

Tom also argues:
>>>>
>>>> I also as an unreconstructed quantity theorist agree that the price level
>>>> is determined by the supply of and demand for real money balances, and that
>>>> when the Fed fails to accommodate panic-driven increases in the demand for
>>>> real balances, the result in the US economy with sticky nominal wages will
>>>> be a decline in the level of real economic activity.
I don't think it is as helpful to attempt to explain the price level by 
the supply and demand for real balances as it is to do so by the supply 
and demand for nominal balances.  It is true that the quantity of money 
demanded is a function of money's purchasing power (the price level).  
But the Fed does not control the real quantity of money (currency).  It 
can control only the nominal quantity.  Thus, given the demand for 
nominal balances (a rectangular hyperbola demand function), itself a 
function of such variables as income, interest rates, the price level, 
and expectations of changes in the price level, an increase in the 
quantity of money by the Fed creates an increase in the real quantity at 
the existing price level (determined by the previous supply and demand 
for currency).  It is the attempts to reduce the quantity of money 
desired to be held or currency-to-income to their previous level that 
causes prices or the price level to rise.  On the other, should the 
public desire to increase its currency-to-income ratio from its current 
level, spending on goods and services would contract and with it the 
price level.

I find that the data contradict Tom's claim below:
>>>> The recession of 2008-9 was due to the Fed's failure to increase the supply of broad money
>>>> sufficiently to accommodate the public's increased demand for it.
In July 2007 the U.S. monetary base stood at $821,830 million and rose 
to $2,647,237 million by June 2011, an increase of 222% while M2 that 
stood at $7305.6 billion in July 2007 rose to $9111.4 billion, an 
increase of 24.7%.  I consider the Fed's credit (money) creation to have 
been rather reckless.  Moreover, there was not a rush on banks by the 
public to demand cash.  Someone in tune with the classical explanation 
that savings are the proper source of an economy's investible or 
loanable funds would not have expected the Fed to do what it did, let 
alone blame it for not having responded sufficiently to the public's 
demand for "broad money."  If there was a freeze in lending on the 
overnight Federal Funds market, as some have claimed, wouldn't the 
cash-rich banks have continued to do their lending while the 
cash-starved banks have curbed theirs?  Wouldn't the economy as a whole 
have been trading with the available savings?  I think it's Tom's 
adoption of Keynes's language that leads him to take his incorrect 
position regarding the Fed's recent behavior.

Finally, Tom declares:
>>>> None of this invalidates my point that research employing the Keynesian
>>>> framework was, on net, a substantial advance in economic analysis, an
>>>> advance that we shouldn't throw away.
I think the Keynesian framework has been an unfortunate source of 
considerable confusion in macroeconomic analysis and policy 
formulation.  Besides, Tom's cited hero, Paul Krugman, is hardly a 
"reformed" or New Keynesian, or is he?  I think N. Gregory Mankiw is on 
his way out of the Keynesian confusion when he discusses the six 
"dubious" Keynesian propositions in his /European Economic Journal/ 
article, praising David Hume's monetary analysis.

James Ahiakpor

-- 
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

(510) 885-3137 Work
(510) 885-4796 Fax (Not Private)