[OPE-L:5390] Re: use-value of money etc.

Duncan K. Foley (dkf2@columbia.edu)
Sun, 31 Aug 1997 06:47:36 -0700 (PDT)

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In reply to Hans' OPE-L:5378:

Hans writes:

>Hi Duncan. It seems to me that you are saying, for instance in
>[OPE-L:5357] and [OPE-L:5376] and elsewhere, that a rise in prices in
>the Marxian theory can have the following causes:
>(1) speculation, i.e., prices rise because everybody expects prices to
>rise. This is a self-fulfilling hypothesis, and it is indeterminate
>how fast prices rise, and there could also be falling prices for the
>same reason.

The basis of the speculation in the view I am putting forward is the real
value of the whole government debt. Your formulation seems to imply an
additional assumption that the markets believe real tax revenues and
spending are neutral with respect to the absolute price level, so that
there is no anchor for this speculation in real terms. This may be so.

>(2) a Phillips curve: workers can bargain for higher wages
>due to lower unemployment, and this is passed on to prices.

This is the Keynesian consensus of the moment. Notice that in political
economy terms it is a version of the "Treasury view" against which Keynes
polemicized, which argued that the solution to unemployment always has to
lie with a lowering of wage demands.

>(3) disequilibrium effects which have to do with prices deviating from
>prices of production, but these are contingencies which cannot explain
>persistent inflation.

In principle there is a symmetry operating here, so that it is hard to see
how you get inflation except through some ad hoc assumption.

Hans then lays out at some length a story in which credit expansion in
high-profit sectors leads to "excess demand" and rising prices (with
consumers rationed) in those sectors without offsetting price declines in
other sectors. He sums this up as follows:

>I don't think I am telling you something new here. But it is
>important to note that this rise in the price level is not
>speculative. It is also not a quantity-theory of money mechanism.
>The real money balances of the consumers do not play a role here.
>Basically this rise in the price level comes from the impossibility
>for both suppliers and demanders to distinguish a situation in which
>prices are high because of an imbalance of supply and demand from a
>situation in which prices are high because of general inflation.

How do you see this differing from Lucas' original rational-expectations
paper (JET 1973), where the moral is the inability of individual agents to
distinguish macroeconomic changes from sectoral demand shifts?

(That doesn't mean it's wrong, of course...)

Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu