This thread has continued much too long. This is my last submission to  
the discussion.

1. James Ahiakpor posed examples of what he thinks is Keynes's  
misleading language that distorts his macroeconomics. I don't agree  
with James. It's quite natural to define saving in the Keynesian  
fashion as the non-consumed portion of income. And broad money, M1,  
M2, or M3 is, more than the monetary base M0, the relevant money stock  
from the viewpoint of the determination of nominal spending.  
Furthermore, the Kahn-Keynes multiplier is hardly a misleading  
concept, although its quantitative magnitude is a matter of  
contention. Moreover, assuming the natural rate of interest always  
works to equilibrate saving with investment, then saving is a good  
thing both in the short run and the long. But if the natural rate  
fails in the short run to coordinate S and I such that the first  
outruns the second, then the resulting excess S is indeed a leakage  
that lowers spending and real activity.

2. James calls our attention to Viner's and Knight's book review  
comments on The General Theory regarding Keynes's unnecessarily  
creative coinage of new terms for old concepts. Fair enough. But that  
does not mean that Keynes's classical reviewers, Viner especially,  
judged The General Theory to be misleading and useless. On the  
contrary, as David Laidler notes on page 283 of his Fabricating the  
Keynesian Revolution, Viner, together with Hawtrey, Robertson, and  
Pigou "all endorsed Keynes's claims to have clarified certain  
theoretical questions in a useful way." For the most part, Keynes's  
classical critics judged The General Theory to be a novel, useful, but  
hardly revolutionary, contribution to the ongoing literature on what  
we now call macroeconomics.

3. I agree with James that the Fed controls the nominal, not the real,  
money stock. The public determines the real money stock via its  
expenditure of the nominal stock until the price level adjusts to make  
the real value of that stock equal to what the public wishes to hold.

4. I stand by my argument that the Fed caused the recession by failing  
to expand broad money sufficiently to match the public's increased  
demand for that stock. The "proof" is that the level of total nominal  
spending, or MV (where V is the circulation velocity of money M) is  
well below its pre-slump trend level. Owing to the public's desire to  
hold the safest liquid asset, the demand for money has outrun the  
supply. The resulting excess demand for money has resulted in a  
slowing of expenditures and economic activity as the public attempts  
to build its cash balance and so eliminate the excess demand for  
money. In other words, V (the obverse of the demand for money) has  
slowed to such an extent that even with an increased M, the product MV  
hasn't kept pace with its level on the pre-slump path.  The Fed could  
restore spending and economic activity to its pre-slump path by  
increasing M sufficiently to counter the slowing of V.

5. Paul Krugman is not my hero. He writes a perceptive and stimulating  
blog and column. And I agree with James and Greg Mankiw that David  
Hume was one of the greatest monetary theorists who ever lived, and  
certainly Keynes's equal as a monetary theorist.

Tom Humphrey

On Nov 13, 2011, at 5:41 PM, James C.W. Ahiakpor wrote:

> 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)