Abstracts of Doctoral Dissertations

Abstract

S OF DOCTORAL DISSERTATIONS THE DICHOTOMY BETWEEN MONETARY AND VALUE THEORY IN CLASSICAL AND NEOCLASSICAL ECONOMICS* CHARLES W. BAIRD University of California, Los Angeles IN 1942 Oscar Lange demonstrated that if Law is interpreted as an identity, Walras' Law implies that the excess-demand-for-money function is identically zero. If Classical and Neoclassical writers are interpreted to hold Say's any monetary theory that they may advance (e.g., the Quantity Theory) would necessarily be incorrect. Clearly the excess-demand-for-money function cannot be both nonzero and identically zero. According to Don Patinkin, even if Law is interpreted as an equilibrium condition rather than an identity, there exists an invalid dichotomy between the monetary and value theories of Classical and Neoclassical writers. If the homogeneity postulate of Classical and Neoclassical theory is interpreted to mean that changes in the money supply and/or changes in the absolute money price level exert absolutely no effect on the demand functions for goods, a logical contradiction will arise. Starting from full equilibrium, where all excess demands are zero, an increase in the nominal supply of money creates a negative excess demand for money. If the absolute price level or money balances are not arguments of at least one other excess-demand function no offsetting positive excess demand will arise and Walras' Law will be violated. My hypothesis is that a careful reading of John Stuart Mill, Alfred Marshall, Knut Wicksell, and Irving Fisher reveals that each avoided the logical traps discussed above. Patinkin is very careful not to assert that any of these authors was consistently wrong. In fact he quotes key passages in Wicksell and Fisher which indicate that they both had more than just a glimpse of the real-balance effect. However, he immediately depreciates the value of these passages by noting other passages from both which indicate that they imperfectly understood the real-balance effect. But there is no reason to expect that anyone writing before the 1942 Lange paper would have gone through the analysis of the real-balance effect to the extent that Patinkin demands-they simply had no motivation to do so. In fact, if Lange had not made the unsupported contention that the Classics held to Identity, the elaborate taxonomy of dichotomies in Patinkin's book might never have been formulated. The question addressed in the thesis is whether or not in light of the latter-day theoretical discussion the early writers had consistent models. The results of my search of the literature are as follows. Mill included monetary and nonmonetary wealth as arguments in the demand functions of the goods market. Furthermore, he correctly specified the homogeneity postulate by defining the conditions necessary for reattainment of equilibrium after an injection of new outside money. Mill's statements on the relationship between Law and Walras' Law and their implications for monetary theory are second to none in clarity and accuracy. * A dissertation completed at the University of California, Berkeley in 1968.