Both New Classical and New Keynesian macroeconomic theorists misunderstand and distort old Keynesian economics, alleging that its diagnoses and prescriptions depend on the indefensible assumption that money wages and prices are “rigid.” Here it is argued that all Keynesian macro requires is that labor and product markets are not instantaneously and continuously cleared by perfectly flexible prices. Assuming imperfect flexibility, not necessarily rigidity, suffices to open the door for involuntary unemployment. Moreover, once the economy is displaced from full employment, it is far from clear that economy-wide movements of money wages and prices will, in the absence of Keynesian demand policies, restore equilibrium. The real balance effect is too feeble, and may be overcome by debt burdens. The processes of deflation and disinflation can be inherently destabilizing. These problems, stressed by Irving Fisher as well as by Keynes and Keynesians, are ignored in “new” macroeconomics.
This survey concludes that general prosperity and economic growth have been considerably less powerful engines of progress against poverty in the U.S. than they were before 1973. Macroeconomic performance has deteriorated, and its relation to poverty has weakened too. It is shown that the incidence of poverty can be fairly well explained by regressions on unemployment rates and real wages, both in national time series and in state cross-sections. Recent downward deviations from these regressions appear to reflect structural labor market changes that make poverty less treatable by macro medicine.
This survey concludes that general prosperity and economic growth have been considerably less powerful engines of progress against poverty in the U.S. than they were before 1973. Macroeconomic performance has deteriorated, and its relation to poverty has weakened too. It is shown that the incidence of poverty can be fairly well explained by regressions on unemployment rates and real wages, both in national time series and in state cross-sections. Recent downward deviations from these regressions appear to reflect structural labor market changes that make poverty less treatable by macro medicine.
Among the conventions of almost every human society of historical record has been the use of money, i.e., particular commodities or tokens as measures of value and media of exchange in economic transactions. Somehow the members of a society agree on what will be acceptable tender in making payments and settling debts among themselves. General agreement to the convention, not the particular media agreed upon, is the source of money’s immense value to the society. In this respect money is similar to language, standard time, or the convention designating the side of the road for passing. This paper reviews the history of various forms of money, the functions of money, and the role of money in economic theory.
The structure of the international monetary system is once again a topic of great interest and controversy — among economists, business managers, financiers, and government leaders. Many members of all these groups are acutely dissatisfied with the floating exchange rate regime that succeeded the Bretton Woods system two decades ago. Within the European Community, the Exchange Rate Mechanism has re-established a regime of “adjustable pets.” After 1992 financial markets and institutions will cover the entire Community. The further step of issuing a common European currency is under serious consideration, and beyond that the more drastic step of replacing national currencies with a single European currency. These measures would still leave exchange rates among Japan, America, and the European Community free to float in currency markets.
The central macroeconomic issue is the same as ever. How reliable are automatic market adjustments in maintaining full employment equilibrium in the face of aggregate demand shocks? Many modern theorists assume that nominal prices, including wages, jump instantaneously to keep supply and demand equal in all markets. No excess supply, no involuntary unemployment, can ever arise. However, since actual price adjustments take real time, greater flexibility can be destabilizing. “Real balance” effects are overrated, and the demand effects of nominal price changes are perverse. Activist macro policies are necessary, as Keynes argued, even though nominal prices are far from rigid.
Portfolio theory has been an important component of open economy macroeconomic models. In those models, it is essential to distinguish among several categories of assets, both foreign and domestic, and to specify the demands and supplies. This framework has become increasingly relevant. Movements of capital across regional and national boundaries, and across currencies, have exploded in volume, thanks to the dismantling of currency and exchange controls and other financial regulations and to revolutionary economies in technologies of communication and transactions. The globalization of financial markets was stimulated by the floating exchange rate regime established in 1973.
The structure of the international monetary system is once again a topic of great interest and controversy — among economists, business managers, financiers, and government leaders. Many members of all these groups are acutely dissatisfied with the floating exchange rate regime that succeeded the Bretton Woods system two decades ago. Within the European Community, the Exchange Rate Mechanism has re-established a regime of “adjustable pets.” After 1992 financial markets and institutions will cover the entire Community. The further step of issuing a common European currency is under serious consideration, and beyond that the more drastic step of replacing national currencies with a single European currency. These measures would still leave exchange rates among Japan, America, and the European Community free to float in currency markets.
Keywords: International monetary system, exchange rate, currency
Eduard Marz’s book was first published in German in 1983. I have read only his English translation, which he had completed with preliminary revisions, though not alas with final polishing, before his death in 1987. The book illuminates for us who knew him in America the intellectual and personal background of this fascinating immigrant. And not just for us, of course. World events and intellectual developments over the past two decades have heightened interest in Schumpeter not only among economists, but also among our social scientists and political philosophers. Indeed many people of all ages and all walks of life have discovered Schumpeter and think that his ideas can help them understand the world they live in.
Schumpeter regarded “The Nature of Capital and Income” as one of the three of Fisher’s contributions to general theory generally recognized, at the time Schumpeter was writing, as “of first-class importance and originality.” The other two were Fisher’s “Mathematical Investigations” (1982) and his statistical method for measuring the marginal utility of income (1972). Nature is the bridge, both in sequence and in logic, between the other two great works, the timeless general equilibrium theory of the 1892 dissertation and the extension of that theory to intertemporal choices in production and consumption in the theory of interest.
The central macroeconomic issue is the same as ever. How reliable are automatic market adjustments in maintaining full employment equilibrium in the face of aggregate demand shocks? Many modern theorists assume that nominal prices, including wages, jump instantaneously to keep supply and demand equal in all markets. No excess supply, no involuntary unemployment, can ever arise. However, since actual price adjustments take real time, greater flexibility can be destabilizing. “Real balance” effects are overrated, and the demand effects of nominal price changes are perverse. Activist macro policies are necessary, as Keynes argued, even though nominal prices are far from rigid.
The Invisible Hand, one of the Great Ideas of history and one of the most influential, is Adam Smith’s most important legacy to macroeconomics, as to all economics. It is particularly important today as the ultimate inspiration for the New Classical Macroeconomics and for Real Business Cycle Theory. These are intellectual movements that engage many of the best brains in the profession, especially among younger cohorts and especially in the United States. They dominate the agenda even of theorists and econometricians who are skeptical or hostile to their methods and conclusions.
The Invisible Hand, one of the Great Ideas of history and one of the most influential, is Adam Smith’s most important legacy to macroeconomics, as to all economics. It is particularly important today as the ultimate inspiration for the New Classical Macroeconomics and for Real Business Cycle Theory. These are intellectual movements that engage many of the best brains in the profession, especially among younger cohorts and especially in the United States. They dominate the agenda even of theorists and econometricians who are skeptical or hostile to their methods and conclusions.
Keywords: Adam Smith, Invisible Hand, Keynes, macroeconomics, economic thought