Capital, Accumulation, and Money: An Integration of Capital, Growth, and Monetary Theory

271 Pages·2000·9.18 MB·English

by  Lester D. Taylor (auth.)

CAPITAL, ACCUMULATION, AND MONEY
AN INTEGRATION OF CAPITAL, GROWTH, AND
MONETARY THEORY
CAPITAL, ACCUMULATION, AND MONEY
AN INTEGRATION OF CAPITAL, GROWTH,
AND MONETARY THEORY
by
Lester D. Taylor
University of Arizona.
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Library of Congress Cataloging-in-Publication
Taylor, Lester D.
Capital, accumulation, and money : an integration of capital, growth, and
Monetary theory I by Lester D. Taylor.
p. em.
Includes bibliographical references and index.
ISBN 978-1-4757-4711-9 ISBN 978-1-4757-4709-6 (eBook)
DOI 10.1007/978-1-4757-4709-6
1. Capital. 2. Saving and investment. 3. Money. 4. Economic Development.
5. Macroeconomics. I. Title.
HBSOI.T37255 2000
332.4-dc21 00-024640
Copyright© 2000 by Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers in 2000
This printing is a digital duplication of the original edition.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic, mechanical, photo-copying,
microfilming, recording, or otherwise, without the prior written permission of the publisher,
with the exception of any material supplied specifically for the purpose of being entered and
executed on a computer system, for exclusive use by the purchaser of the work.
Permission for books published in the USA: [email protected]
Permissions for books published in Europe: [email protected]
Printed on acid-free paper.
To H.S. Houthakker,
teacher, collaborator, and friend
TABLE OF CONTENTS
LIST OF FIGURES ......................................... xi
PREFACE ............................................... xiii
PROLOGUE: TALES OF MYROS: EMERGENCE OF A PRIMITIVE ECONOMY
FROM AN ECONOMIC STATE OF NATURE ...................... 1
CHAPTER 1: PREMISES AND AN OVERVIEW . . . . . . . . . . . . . . . . . . . . 9
CHAPTER 2: MYROS AND OTHER CONCEPTS AND DEFINITIONS .... 15
I. Myros .............................................. 16
II. Myros Recovery Charges ................................ 20
III. Human and Nonhuman Capital ........................... 21
IV. A Glossary of Concepts and Definitions .................... 22
CHAPTER 3: THE MACROECONOMIC FRAMEWORK . . . . . . . . . . . . . . 25
I. An Overview ......................................... 25
II. Constraints (or 'Conservation Laws') Imposed by the Pool of
Fluid Capital ......................................... 31
III. The Determination of Asset Values ........................ 34
IV. Aggregate Demand and Supply ........................... 38
V. Macroeconomic Equilibrium ............................. 40
CHAPTER 4: INTEREST AND MONEY . . . . . . . . . . . . . . . . . . . . . . . . . 43
I. Factors Making for the Existence of Interest ................. 44
II. Determination of Money and Natural Rates of Interest ......... 46
III. A World with Fiat Money ............................... 55
IV. The Concept of Velocity and the Demand for Money .......... 57
V. Power of the Monetary Authority ......................... 59
VI. The Commercial Paper Market ........................... 61
VII. Some Notes on Monetary Policy .......................... 62
CHAPTER 5: PRODUCTION AND INVESTMENT . . . . . . . . . . . . . . . . . . 65
I. Capital and Production ................................. 66
viii Capital, Accumulation, and Money
II. From Production to Investment ........................... 69
III. Roles of the Money and Natural Rates of Interest ............. 8I
IV. Financing oflnvestment: An Illustration .................... 8I
CHAPTER 6: THE GENERAL PRICE LEVEL AND INFLATION ........ 85
I. Defining the General Price Level ......................... 85
II. Problems Arising from Excessive Monetization of Assets ....... 94
III. The General Price Level and the Natural Rate of Interest ....... 97
IV. Equilibrium in the Natural and Money Rates oflnterest ........ 98
CHAPTER 7: CAPITAL VALUES, WEALTH, AND RELATED TOPICS .. 101
I. The Aggregate Wealth of an Economy .................... IOl
II. Money As Wealth and Real-Balance Effects ................ 102
III. Some Implications of Old Masters As a Store of Value ........ I 03
IV. Taxation of Capital Gains .............................. 105
V. Forced Saving and Investment .......................... I08
VI. More on Excess Monetization of Assets . . . . . . . . . . . . . . . . . . . II 0
VII. Loan Defaults and the Stock of Money .................... 1II
VIII. Crowding-Out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II2
IX. Burden of the National Debt ............................ 1I6
X. Ricardian Equivalence ................................ 1I7
XI. Commodity Money ................................... 118
XII. Fluid Capital and the Gold Standard ...................... 1I9
XIII. Demonetization and Monetization of Economies ............. I23
XIV. Economic Growth With Deflation: 1873-1896 in the U.S ....... I26
CHAPTER 8: MACROECONOMIC EQUILIBRIUM AND EMPLOYMENT . 129
CHAPTER 9: CAPITAL THEORY IN PERSPECTIVE . . . . . . . . . . . . . . . 139
I. Schumpeter ......................................... 139
II. Keynes ............................................ 142
III. Irving Fisher ........................................ 144
IV. Bohm-Bawerk ....................................... 145
V. Jevons and Wicksell .................................. 146
VI. Capital As Embedded (or Stored) Labor ................... 147
VII. Capital Theory As the Economics of Time ................. 149
VIII. Capital Accounting ................................... 151
IX. Capital and Nonrenewable Natural Resources ............... I 54
CHAPTER 10: OPPORTUNITY AND SUNK COSTS . . . . . . . . . . . . . . . . 157
I. Opportunity Costs .................................... 157
II. The Measurement of Unit Incremental Cost ................ 160
III. Sunk Costs ......................................... 161
Table of Contents ix
CHAPTER 11: TRADE, TRANSFERS, AND MONETARY OVERHANGS . . 165
I. Trade and Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
II. Monetary Overhangs and Capital Levies ................... 167
III. Wealth Transfers and Monetary Overhangs: A Stylized
Analysis ........................................... 170
IV. Policies for Eliminating a Monetary Overhang: The Case of
German Reunification ................................. 178
V. The German Reunification: An Assessment ................ 183
CHAPTER 12: QUESTIONS RELATED TO CONSUMPTION AND
SAVING ............................................. 185
I. The Macroeconomics of Retirement Saving and Consumption .. 185
II. Questions Related to Position Goods ...................... 187
III. Questions Related to Engel Curves and Income Elasticities ..... 190
IV. The Hierarchical Nature ofthe Pool of Fluid Capital .......... 192
CHAPTER 13: QUESTIONS RELATED TO ECONOMIC GROWTH ...... 195
I. The General Mechanics of Economic Growth ............... 195
II. Some Basic Truths Concerning Economic Development ....... 197
III. Keynes and Economic Bliss ............................ 198
IV. The Endogenous Nature of Economic Growth ............... 199
V. The Role of Technological Change ....................... 200
VI. Investment in Research and Development .................. 200
VII. Economic Growth in Reverse: Large-Scale Disasters in Low-
Income Economies ................................... 201
VIII. Economic Growth and Different Stages of Development ....... 204
CHAPTER 14: THEMES AND COUNTER THEMES: FLUID CAPITAL IN
RETROSPECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
APPENDIX 1: ON THE ROLE OF THEORY IN ECONOMIC ANALYSIS .. 213
I. Introduction ........................................ 213
II. Economic Theory in Action: The Theory of Consumer Choice .. 214
III. Modeling Real-Time Dynamics .......................... 217
IV. Conclusions ........................................ 220
APPENDIX II: INVESTMENT FUNCTIONS DONT NECESSARILY SLOPE
DOWNWARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
I. Introduction ........................................ 223
II. The Relationship Between Investment and the Rates of Interest . 224
III. Further Discussion and Conclusions ...................... 227
APPENDIX Ill: PRODUCTIVITY IMPLICATIONS OF THE OIL PRICE
INCREASES OF THE 1970s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
x Capital, Accumulation, and Money
I. Introduction ........................................ 229
II. Instantaneous Effects of the Oil Price Increases .............. 230
III. Some Real-Time Dynamics ............................. 232
IV. Implications for Subsequent Productivity Growth ............ 233
V. Financial Recycling .................................. 236
VI. Conclusion ......................................... 237
APPENDIX IV: ADDITIONAL TALES INVOLVING A PRIMITIVE
ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
BIBLIOGRAPHY 249
INDEX ................................................ 259
LIST OF FIGURES
Figure 1 ................................................ 26
Figure 2 ................................................ 31
Figure 3 ................................................ 36
Figure 4 ................................................ 47
Figure 5 ................................................ 68
Figure 6 ................................................ 70
Figure 7 ................................................ 74
Figure 8 ................................................ 78
Figure 9 ................................................ 79
Figure 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Figure 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Figure 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Figure 13 ................................................ 93
Figure 14 ................................................ 95
Figure 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Figure 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Figure 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Figure 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Preface
This book has been long in the making. About 25 years ago, I began
spending a lot of time puzzling over what capital is and what is meant by capital
theory. I read and read, but the more I read, the more confused I became. For a
number of years, my hope was that the problem lay with me, that capital theory
was a consistent whole, with a great deal of relevance to the real world, and that
I was simply unable to grasp what it was all about. Eventually, it became
evident that to search for a single concept of capital in the canon of economics
is a will-o' -the-wisp and that the problem is not a single concept of capital, but
a surfeit of concepts. There are physical capital, capital goods, financial capital,
working capital, circulating capital, fixed capital, etc. When appearing without
an adjective, and depending upon the writer, 'capital' can refer to one, a subset,
or all of the concepts at once. Vagueness and ambiguity concerning capital
appear in the writings of all of the great capital theorists, whether Smith,
Ricardo, Marx, Jevons, Walras, Bohm-Bawerk, Clark, Wicksell, Schumpeter,
Fisher, Hayek, Keynes, Hicks, Robinson, Samuelson or Solow. When I finally
came to understand this, it also became clear what to do: develop my own
concept of capital and then proceed to theorize about it. The concept of myros is
the result. 1
Myros (or fluid capital, as it will eventually also be called) is the unifying
concept of the book. The basic ideas underlying myros are introduced in the
Prologue in the context of a subsistence, but otherwise idyllic, island economy
whose only good is bread that each person mines each day for his/her own use.
1 I have chosen the word myros because of its sonority (at least to my ears and mind) and because
of its beguiling hint of a tranquil mythical isle in the Aegean. Its inspiration is clearly Greek, but as far
as I am aware the word is 'clean'. My friend, Phil Fleming, who is an expert on Classical Greek, tells
me that there is no obvious Greek root for the word; however, my friend and colleague, Dick
Newcomb, and also my consultant on Latin, says that there is a Latin root, murus (walls), from which
myros might be seen as a transliteration. As I know nothing about Classical Greek and Latin, I rely on
these experts' judgement in support of my whim that myros is an appropriate word for the purpose I
have in mind, which is to employ a word for capital that is not burdened by centuries of verbal and
analytical baggage and connotations. Later, as the concept becomes understood, I will replace the
word myros by a more conventional term, .fluid capital.