What does mean 'to the point of exclusion'??? in below statement. I do not recall anything like that in Ricardo or Say, where is that to be found? '.....classical economists such as Ricardo and Say concentrated on replacement costs as a part of the supply schedule to the point of exclusion.'
Thank you for reading! I agree it is a simplification, esp. of Ricardo.
Recall, I previously quoted Ricardo analysis of Say’s Law: “There can be no real dearness but that which arises from the cost of production.“. Ricardo’s idea is that buying a unit off the market and producing that unit are alternatives which creates a relation between market price and cost of production. I recommend Bagehot’s “Postulates Of English Political Economy” for a more readable presentation and for how it relates to real market behavior (a level of sophistication that Ricardo assumes).
The sentence you quoted was merely an attempt by me to restate the Ricardian analysis of Say in Keynesian terms. I think Ricardo’s analysis is what Keynes incorporates in the replacement cost concept so that the supply schedule is a rational generalization. If you feel the translation isn’t successful, I have only one defense: Ricardo’s analysis is also highly compressed, so a translation must be as well!
Anyway, thanks again for reading so carefully and commenting!
Thanks for elaborating on your statement, that helps. I must admit I fully go with Ricardo on production being the cause for ‚dearness‘. And it was a good opportunity to delve into Ricardo again to looking up the quote you mentioned. There is a couple more things I am trying to figure out in your article and particularly one has been bugging me for quite a while. You stated ‚Liquidity preference ‘stabilizes’ the market system by enfeebling the force of dearness so that demand is the primary actor.‘
I am not really familiar with Keynes other than his general overall concept, but if you could give me your train of thought on the way in which ‚Liquidity preference would stabilize the market system‘ and how this would lead to demand becoming the driving force. Thank you.
Though prices boomed, nobody invested in Grape Nuts productive capacity despite reports of people paying $110 a box. Why not? In my opinion, it is because nobody wanted to give up perfectly liquid cash to buy fairly illiquid chips for completely illiquid grape nut manufacturing machines, even when the unit price of a box of Grape Nuts was that high.
This may seem silly, but in some “Austrian” theories such malinvestment is the driver of business cycle. The only reason society doesn’t collapse in those theories is complex dynamic factors that prevent investment from taking course (in Lachmann, for instance, it’s dynamic revaluation of capital which made him very sympathetic to Minsky and Shackle, but he had methodological issues with liquidity preference).
Sone business cycles really are as unsound as this, namely the ones that evade the operation of liquidity preference. The 90s comics boom, for instance, or the famous tulip bubble (if you don’t agree with the revisionist take there was no bubble). These were not prevented by liquidity preference because it takes no extra capital to, i.e. print variant covers.
Minsky also describes another, even more dangerous way around the stabilizing force of liquidity preference: Ponzi finance. A firm near insolvency can try to borrow to maintain its position, attempting to navigate between liquidity preference and survival constraint. In this case, liquidity preference is simply overcome by a more powerful force.
So we see that the operation of liquidity preference stabilizes by preventing investment spirals. Keynes also emphasized the stabilizing nature of liquidity preference. In his own summary of his conclusions, Keynes says: “But whether or not this psychological law [i.e liquidity preference] strikes the reader as plausible a priori, it is certain that experience would be extremely different from what it is if the law did not hold. For in that case an increase of investment, however small, would set moving a cumulative increase of effective demand until a position of full employment had been reached; while a decrease of investment would set moving a cumulative decrease of effective demand until no one at all was employed.”.
Liquidity preference is the flip side of the coin of uncertainty. The four channels of unemployment in so-called classical economics are on the supply side: friction, leisure preference, productivity in wage-good industries and price of wage goods. Liquidity preference stabilizes these so that changes in output (changes in intensity of usage of currently existing capital) is primarily through *expectations*, which are operate through the demand side. Firms only write new labor contracts when they expect the demand for the resulting increment of output to be strong and stable enough to justify the expense.
I hope this helped, I know it is a very long comment. Thanks again for reading!
Your line of argument makes sense and is well founded in Keynes explanation of liquidity preference being a psychological law in the realm of expectations and forming the flip side of the coin of uncertainty as you put it. Minsky’s Ponzi schemes are forms of what Marx calls fictitious capital. Yet I see liquidity preference as something which one might call idle capital in circulation which is not used productively for a variety of reasons but not to be confused with savings. This idle capital is often channelled to banks and stock markets for financial speculation and thus not used directly in the real economy for investment, which closes the loop to Minsky’s argument of keeping zombie firms afloat without any contribution to the wealth of a society. Liquidity in finance is essential since it is all about marginal flows. I do not see the stabilizing factor of liquidity preference in the real economy though which comes down to witholding productive investment - like Keynes himself states in saying that an increase of investment would set moving a cumulative increase of effective demand until a position of full employment had been reached. According to Say’s Law of productive investment being the driver of demand, the opposite - i.e. witholding productive investment manifesting in liquidity preference - is not something I would understand as a stabilizing factor on a macroeconomic level.
Anyway thanks a lot for taking the time to elaborate on the topic, it is highly appreciated
What does mean 'to the point of exclusion'??? in below statement. I do not recall anything like that in Ricardo or Say, where is that to be found? '.....classical economists such as Ricardo and Say concentrated on replacement costs as a part of the supply schedule to the point of exclusion.'
Thank you for reading! I agree it is a simplification, esp. of Ricardo.
Recall, I previously quoted Ricardo analysis of Say’s Law: “There can be no real dearness but that which arises from the cost of production.“. Ricardo’s idea is that buying a unit off the market and producing that unit are alternatives which creates a relation between market price and cost of production. I recommend Bagehot’s “Postulates Of English Political Economy” for a more readable presentation and for how it relates to real market behavior (a level of sophistication that Ricardo assumes).
The sentence you quoted was merely an attempt by me to restate the Ricardian analysis of Say in Keynesian terms. I think Ricardo’s analysis is what Keynes incorporates in the replacement cost concept so that the supply schedule is a rational generalization. If you feel the translation isn’t successful, I have only one defense: Ricardo’s analysis is also highly compressed, so a translation must be as well!
Anyway, thanks again for reading so carefully and commenting!
Thanks for elaborating on your statement, that helps. I must admit I fully go with Ricardo on production being the cause for ‚dearness‘. And it was a good opportunity to delve into Ricardo again to looking up the quote you mentioned. There is a couple more things I am trying to figure out in your article and particularly one has been bugging me for quite a while. You stated ‚Liquidity preference ‘stabilizes’ the market system by enfeebling the force of dearness so that demand is the primary actor.‘
I am not really familiar with Keynes other than his general overall concept, but if you could give me your train of thought on the way in which ‚Liquidity preference would stabilize the market system‘ and how this would lead to demand becoming the driving force. Thank you.
Thank you for your careful reading. So as a real example, recall that the dearness of microchips caused a crippling Grape Nuts shortage:
https://amp.cnn.com/cnn/2021/03/24/business/grape-nuts-shortage-ends-reimburse-trnd/index.html
Though prices boomed, nobody invested in Grape Nuts productive capacity despite reports of people paying $110 a box. Why not? In my opinion, it is because nobody wanted to give up perfectly liquid cash to buy fairly illiquid chips for completely illiquid grape nut manufacturing machines, even when the unit price of a box of Grape Nuts was that high.
This may seem silly, but in some “Austrian” theories such malinvestment is the driver of business cycle. The only reason society doesn’t collapse in those theories is complex dynamic factors that prevent investment from taking course (in Lachmann, for instance, it’s dynamic revaluation of capital which made him very sympathetic to Minsky and Shackle, but he had methodological issues with liquidity preference).
Sone business cycles really are as unsound as this, namely the ones that evade the operation of liquidity preference. The 90s comics boom, for instance, or the famous tulip bubble (if you don’t agree with the revisionist take there was no bubble). These were not prevented by liquidity preference because it takes no extra capital to, i.e. print variant covers.
Minsky also describes another, even more dangerous way around the stabilizing force of liquidity preference: Ponzi finance. A firm near insolvency can try to borrow to maintain its position, attempting to navigate between liquidity preference and survival constraint. In this case, liquidity preference is simply overcome by a more powerful force.
So we see that the operation of liquidity preference stabilizes by preventing investment spirals. Keynes also emphasized the stabilizing nature of liquidity preference. In his own summary of his conclusions, Keynes says: “But whether or not this psychological law [i.e liquidity preference] strikes the reader as plausible a priori, it is certain that experience would be extremely different from what it is if the law did not hold. For in that case an increase of investment, however small, would set moving a cumulative increase of effective demand until a position of full employment had been reached; while a decrease of investment would set moving a cumulative decrease of effective demand until no one at all was employed.”.
Liquidity preference is the flip side of the coin of uncertainty. The four channels of unemployment in so-called classical economics are on the supply side: friction, leisure preference, productivity in wage-good industries and price of wage goods. Liquidity preference stabilizes these so that changes in output (changes in intensity of usage of currently existing capital) is primarily through *expectations*, which are operate through the demand side. Firms only write new labor contracts when they expect the demand for the resulting increment of output to be strong and stable enough to justify the expense.
I hope this helped, I know it is a very long comment. Thanks again for reading!
Your line of argument makes sense and is well founded in Keynes explanation of liquidity preference being a psychological law in the realm of expectations and forming the flip side of the coin of uncertainty as you put it. Minsky’s Ponzi schemes are forms of what Marx calls fictitious capital. Yet I see liquidity preference as something which one might call idle capital in circulation which is not used productively for a variety of reasons but not to be confused with savings. This idle capital is often channelled to banks and stock markets for financial speculation and thus not used directly in the real economy for investment, which closes the loop to Minsky’s argument of keeping zombie firms afloat without any contribution to the wealth of a society. Liquidity in finance is essential since it is all about marginal flows. I do not see the stabilizing factor of liquidity preference in the real economy though which comes down to witholding productive investment - like Keynes himself states in saying that an increase of investment would set moving a cumulative increase of effective demand until a position of full employment had been reached. According to Say’s Law of productive investment being the driver of demand, the opposite - i.e. witholding productive investment manifesting in liquidity preference - is not something I would understand as a stabilizing factor on a macroeconomic level.
Anyway thanks a lot for taking the time to elaborate on the topic, it is highly appreciated