Tuesday, October 2, 2012
Chapter 17: The Essential Properties of Interest and Money
The rate of interest on money is the key limit on I and Y. Why?
What is a commodity’s “own” rate of interest?
People can maintain wealth in many forms
Money’s rate of return falls slowly than any other rate of return
Why does the highest own-rate of interest determine all commodities’ own-rates of
Why is the money rate of interest often the highest?
How is the own-rate of interest determined by q, c, and l? (What are they?)
Q: yield, c: carrying cost, l: liquidity of asset
Liquidity is probably not great
Carrying costs of wheat can be high but price is unpredictable
What are q, c and l for machines and houses? For money?
For money: high liquidity advantage- everyone takes it on demand; carrying
costs are very low
Total return = own-rate of interest = q – c + l
Essential difference: For money, l > c; for other goods, c > l.
“...that asset’s rate of interest which declines most slowly as the stock of assets in
general increases ... eventually knocks out the profitable production of each of the
Why would money’s own-return be “more reluctant to fall as output increases” than
that of any other asset?
How could you increase the carrying cost of money? How would time-stamped
money help? In sum: Demand can go mainly to money; no more can be produced; and there isn’t a
good substitute for it.
Invest in money- ME doesn’t come down quickly
“Unemployment develops...because people want the moon...” (?) “There is no
remedy but to persuade the public that green cheese is practically the same thing
and to have a green cheese factory (i.e., a central bank) under public control...”
Do money’s special properties come from its being “the standard in which debts and
wages are usually fixed”?
May help raise l. But what counts is l – c, so low c is key.
Money’s properties are
what make wages sticky in it, not vice versa. ??
World is so poor in accumulated capital-assets because of high liquidity-preference.
(Was his world poor in accumulated capital-assets?)
Natural rate of interest: keeps I and S equal. But there is a different such r for every
level of output. Merely preserves the status quo.
Neutral or optimum rate of interest is consistent with full employment.
Chapter 18: The General Theory of Employment Re-Stated
Independent variables: Propensity to consume, MEC, and r.
Dependent variables: Employment and national income.
Three fundamental psychological factors: MPC, liquidity-preference, and
expectation of future yield.
(quaesitum: [L.] that which is sought for; an object of search; the answer to a
problem) Division arbitrary: Focus on what determines variables of most interest to
us, as well as on those that can be controlled.
II I will proceed until MEC = r. That will cause a rise in Y and N. These in turn will
cause a change in liquidity-preference (as demand for money rises because of i.
change in output, ii. rise in wage-unit and iii. rising cost because of declining MPL.
“...extreme complexity of actual course of events...”
System is not violently unstable. (Even in 1936?)
Full employment a