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Re: [gang8] Quo Vadis 2003?

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  • j.schukte.baeuminghaus
    Gunnar, Now you re on to a general evaluation of the General Theory. We need a General Theory - have done especially since the early 1970s - so that we can
    Message 1 of 8 , Dec 31, 2002
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      Re: [gang8] Quo Vadis 2003? Gunnar,

      Now you're on to a general evaluation of the General Theory.
      We need a "General Theory" - have done especially since the early 1970s - so that we can put our domestic house in order.
      Then, we can hope and pray, we'll have the skills to do a good job on the international angles.



      James
      http://VictoryOverWant.org
      http://www.crystaldreamspub.com/bios/authors/A-E/cumes_j.htm

      ----------
      From: "Gunnar Tomasson" <gunnar.tomasson@...>
      To: <gang8@yahoogroups.com>
      Subject: Re: [gang8] Quo Vadis 2003?
      Date: Wed, Jan 1, 2003, 2:48 am


      James:
       
      Re. the following:
       
      Keynes' answer to the fundamental pre-war economic problems was the General Theory - essentially how to run your domestic economy.

      Comment:
       
      According to Hayek, Keynes did not share this view of the General Theory - instead, he advised Hayek "that these theories had been greatly needed in the 1930s, but if these theories should ever become harmful, [Hayek] could be assured that he [Keynes] would  quickly bring about a change in public opinion.  What I blame him for," Hayek added, "is that he called such a tract for the times the General Theory."
       
      Now, some 56 years after his death, Keynes' legacy - as shaped by others - has brought to a sorry pass.
       
      Here is my recent take on what Keynes was up to with the General Theory posted to PKT some time ago - while I hold him in the highest esteem for the many good things he did, I see no point in elevating his 'tract for the times' into Holy Writ insofar as modern economic management is concerned:
       
      In a recent exchange, a fellow Gang8 member made the following statement:
       
      Missing from [Keynes's] intellectual legacy is any coherent theory of interest rates. It is widely agreed in the Gang that interest rates have the opposite effect on inflation from that fondly believed by most central bankers around the world.
       
      I responded as follows:
       
      Not so!
       
      Here is Keynes in Ch. 24 of the General Theory - Concluding Notes Of The Social Philosophy Towards Which The General Theory Might Lead - on the subject matter:
       
      "The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes....
       
      "I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure.  [Sorry about that - this whole line of reasoning is analytical nonsense, but Keynes makes amends at the end of his discussion.  So read on - insert Gunnar].  This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment.  In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour-costs of production plus an allowance for risk and the costs of skill and supervision. [Hear, hear! - now Keynes is back on the track which leads inexorably to the following - again, read on.]
       
      "Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. [Which, of course, is zero, considering that there is no inherent reason why would-be entrepreneurs could not issue IOUs in whatever amount they needed to undertake worthwhile investment projects.  With this, Keynes puts all analytical nonsense behind and tells it like it is.]  Interest to-day rewards no genuine sacrifice, and more than does the rent of land."
       
      My fellow Gang8 member responded as follows:
       
      Those bits from Keynes which you quote mix nonsense with sense often within the same sentence. He was not a clear-thinking genius.  Again, his vocubulary is so ornate one loses the thread. In short, he may have HAD a coherent theory of interest rates in his head, but that's where it stayed. It did NOT become part of his earthly legacy.
       
      My response - termed "The Tomasson Summation Of Keynes" by a third Gang8 member - follows:

      "The writer of a book such as this," Keynes wrote in Preface to the General Theory, "treading along unfamiliar paths, is extremely dependent on criticism and conversation if he is to avoid an undue proportion of mistakes.  It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one's ideas to a conclusive test either formal or experimental.  In this book, even more perhaps than in writing my Treatise on Money, I have depended on the constant advice and constructive criticism of Mr. R. F. Kahn.  There is a great deal in this book which would not have taken the shape it has except at his suggestion.  I have also had much help from Mrs. Joan Robinson, Mr. R. G. Hawtrey and Mr. R. F. Harrod, who have read the whole of the proof-sheets...
       
      "The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author's assault upon them is to be successful, - a struggle of escape from habitual modes of thought and expression.  The ideas which are here expressed so laboriously are extremely simple and should be obvious.  The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds."
       
      Here is my "translation":
       
      I had an "extremely simple" idea - that maldistribution of income generated in the production process can cause demand to fall short of supply of final output, setting in motion a downward spiral of increased unemployment, incomes and demand - which made no sense to my neo-classical (automatic-full-employment) Cambridge peers.
       
      With so much at stake (how to end the world depression and save the market-alternative to the soviet system), I decided to sell my idea to my Cambridge peers (and, through them, to policy makers) by inviting them to become, as it were, co-authors of this book.  In the process, I co-opted their "analytical" approach and, as chief author, tailored it Cinderella Step-mother fashion, to serve a pre-determined end, namely, promotion of my "extremely simple" idea.
       
      And, while the result may be a pig's breakfast of an economic model, it may give academics and policy-makers around the world an excuse to do the right thing and use the monetary mechanism to inflate aggregated demand from the world-economy-depressing levels of recent years.
       
      Later, when this immediate objective has been accomplished, I plan to resume my long-standing effort at re-educating my Cambridge peers in analytical economics viewed as "an apparatus of the mind, a technique of thinking" as I put it in 1922 - at shepherding them away "from [their] habitual modes of thought and expression".
       
      Gunnar
       
      ----- Original Message -----
      From: j.schukte.baeuminghaus <mailto:cresscourt@...>  
      To: gang8@yahoogroups.com <mailto:gang8@yahoogroups.com>  
      Sent: Tuesday, December 31, 2002 3:37 PM
      Subject: Re: [gang8] Quo Vadis 2003?

      Gunnar,

      Keynes' answer to the fundamental pre-war economic problems was the General Theory - essentially how to run your domestic economy.
      The Bank and Fund were the international structure when you got your domestic economy right - yes, it was then of course "an integral part of 'the clearing-up' process."
      A new Bretton Woods will be "part of the solution" - as soon as we get our domestic policies right.
      The Washington Consensus thinks everything is fine - domestic as well as IMF, WTO, the lot.
      We know it's not.
      We have to fix the lot.
      My point is simply that the international structure can't be effectively raised until we have a "General Theory" adapted to modern conditions that gives us stable domestic foundations, just as we did after the war.




      James
      http://VictoryOverWant.org
      http://www.crystaldreamspub.com/bios/authors/A-E/cumes_j.htm

      ----------
      From: "Gunnar Tomasson" <gunnar.tomasson@...>
      To: <gang8@yahoogroups.com>
      Subject: Re: [gang8] Quo Vadis 2003?
      Date: Tue, Dec 31, 2002, 9:39 pm


      James:
       
      Re. the following:
       
      "Should Keynes have put Bretton Woods on hold during the 1930s pending the clearing-up of the mess in the pre-war economic situation?"
      The answer to that would be, "Yes, of course."
       
      Bretton Woods was Keynes' response to "the mess in the pre-war economic situation" - it was an integral part of "the clearing-up" process.
       
      And, insofar as post-Bretton Woods monetary rules of the game are part of the problem, a new Bretton Woods must be part of the solution.
       
      The Washington Consensus view that nothing is wrong with the rules of the game - that nothing needs to be fixed - is not credible.
       
      Gunnar


      ----- Original Message -----
      From: j.schukte.baeuminghaus <mailto:cresscourt@...>  
      To: gang8@yahoogroups.com <mailto:gang8@yahoogroups.com>  
      Sent: Tuesday, December 31, 2002 2:28 PM
      Subject: Re: [gang8] Quo Vadis 2003?

      Gunnar,

      Of course not - but the Articles of Agreement themselves provided that there should be certain qualifications pending the establishment of a postwar system that would sustain the full application of the Articles.
      More to the point would have been "Should Keynes have put Bretton Woods on hold during the 1930s pending the clearing-up of the mess in the pre-war economic situation?"
      The answer to that would be, "Yes, of course."


      James




      http://VictoryOverWant.org
      http://www.crystaldreamspub.com/bios/authors/A-E/cumes_j.htm

      ----------
      From: "Gunnar Tomasson" <gunnar.tomasson@...>
      To: <gang8@yahoogroups.com>
      Subject: Re: [gang8] Quo Vadis 2003?
      Date: Tue, Dec 31, 2002, 5:39 pm


      James:
       
      You have made this point before, but I still don't understand it.
       
      Should Keynes have put Bretton Woods on hold pending post-war economic recovery?
       
      Gunnar
       
       
      ----- Original Message -----
      From: j.schukte.baeuminghaus <mailto:cresscourt@...>  
      To: gang8@yahoogroups.com <mailto:gang8@yahoogroups.com>  
      Sent: Tuesday, December 31, 2002 3:44 AM
      Subject: Re: [gang8] Quo Vadis 2003?

      "7. There is work to be done."


      Gunnar,

      The principal work that has to be done is to get our domestic policies of stable growth and employment in place.
      Until we get that, no agreed system of international payments is going to work with any semblance of reliability.
      When we do get our required domestic policies in place, then -


      "More generally, we need a means of reassurance to a troubled world
      [Including erstwhile newly traumatized U.S. Baby Boomers - insert], by which
      any country whose own affairs are conducted with due prudence is relieved of
      anxiety for causes which are not of its own making, concerning its ability
      to meet its international liabilities; and which will, therefore, make
      unnecessary those methods of restriction and discrimination [A.k.a. IMF
      "stabilization programs" - insert], which countries have adopted hitherto,
      not on their merits, but as measures of self-protection from disruptive
                 outside forces."

      Quo vadis 2003?
      I see a lot of tough times ahead, before we - or our masters - bring our/themselves to confront the political, economic and social issues whose effective treatment is essential if we are to extract ourselves from our present discontents.




      James Cumes
      http://VictoryOverWant.org
      http://www.crystaldreamspub.com/bios/authors/A-E/cumes_j.htm

      ----------
      From: "Gunnar Tomasson" <gunnar.tomasson@...>
      To: "Gang8" <gang8@yahoogroups.com>
      Subject: [gang8] Quo Vadis 2003?
      Date: Tue, Dec 31, 2002, 2:45 am


      Dear Gang:
       
      I just posted the following to PKT - Hummel was commenting on my Gang8 message of today's date which I re-posted to PKT under the heading 'Quo Vadis 2003?'
       
      Gunnar
       
       
      Re. the following:

      It's clear that the Bretton Woods monetary system was house of
      cards.  The present system is a mix of BW institutions and free
      floating exchange rates.  So referring to the post-BW system
      leaves a lot to the imagination.  Just what is it?  And more
      importantly, if you can describe a (politically) viable system
      that will do better, what is it?

      Comment:

      1.  As noted, inter alia, by former IMF Deputy Managing Director in an
      article on the occasion of the IMF's fiftieth anniversary, the IMF has been
      without ANY jurisdictional role with respect to world monetary arrangements
      since the mid-1970s.

      2.  Post-Bretton Woods world monetary arrangements is shorthand for (a) use
      of the U.S. dollar as World Currency, and (b) absence of ANY effective
      official regulatory structure for the operations of non-government financial
      institutions.

      3.  The original (Friedman) case for "free floating exchange rates"
      envisaged neither large-scale external deficit financing by the BW
      institutions nor exercise of external political leverage over the exchange
      rate policies of individual countries as under the present "dirty float"
      system.

      4.  I have long believed that the "(politically) viable system" of the past
      three decades is NOT economically viable - but, to paraphrase Keynes, I do
      not agree that political leaders lack the smarts to (a) understand the
      difference between the two forms of viability, (b) recognize, and (c) act on
      their duty to put in place monetary arrangements that provide sustainable
      support for world employment and output.

      5.  A good point of departure for work thereon - albeit in need of update in
      light of changed circumstances - was outlined by Keynes in a memorandum in
      the early 1940s as follows:

      "We need an instrument of international currency having general
      acceptability between nations...

      "We need an orderly and agreed method of determining the relative exchange
      values of national currency units, so that unilateral action and competitive
      exchange depreciations are prevented.

      "We need a quantum of international currency, which is neither determined in
      an unpredictable and irrelevant manner as, for example, by the technical
      progress of the gold industry, nor subject to large variations depending on
      gold reserve policies of individual countries;  but is governed by the
      actual current requirements of world commerce, and is also capable of
      deliberate expansion and contraction to offset deflationary and inflationary
      tendencies in effective world demand.

      "We need a system possessed of an internal stabilizing mechanism, by which
      pressure is exercised on any country whose balance of payments with the rest
      of the world is departing from equilibrium in either direction [Are you
      there, Greenspan? - insert], so as to prevent movements which must create
      for its neighbours an equal but opposite want of balance.

      "We need an agreed plan for starting off every country after the war [The
      coming - functional - collapse of post-Bretton Woods world monetary
      arrangements - insert] with a stock of reserves appropriate to its
      importance in world commerce, so that without undue anxiety it can set its
      house in order during the transitional period to full peacetime
      [Post-post-Bretton Woods - insert] conditions.

      "We need a central institution, of a purely technical and non-political
      character [The IMF as World Central Bank - insert] to aid and support other
      international institutions concerned with the planning and regulation of the
      world's economic life.

      "More generally, we need a means of reassurance to a troubled world
      [Including erstwhile newly traumatized U.S. Baby Boomers - insert], by which
      any country whose own affairs are conducted with due prudence is relieved of
      anxiety for causes which are not of its own making, concerning its ability
      to meet its international liabilities; and which will, therefore, make
      unnecessary those methods of restriction and discrimination [A.k.a. IMF
      "stabilization programs" - insert], which countries have adopted hitherto,
      not on their merits, but as measures of self-protection from disruptive
      outside forces."

      6.  "The document was at once subjected to close scrutiny in the Treasury,"
      Roy Harrod wrote, "and it went through many drafts.  The obvious criticism
      was that it was too grandiose; it was thought to be almost Utopian.  Keynes
      bided his time in regard to this view.  He must first get the scheme into
      good order."

      7.  There is work to be done.

      Gunnar







      ----- Original Message -----
      From: "William F Hummel" <wfhummel@...>
      To: "Gunnar Tomasson" <gunnar.tomasson@...>; <pkt@...>
      Sent: Monday, December 30, 2002 6:16 PM
      Subject: Re: Quo Vadis 2003?


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