Iowa State University Capstones, Theses and Retrospective Theses and Dissertations Dissertations 1986 Equilibrium, interest and money: three essays in the history of economic theory Michael Syron Lawlor Iowa State University Follow this and additional works at: https://lib.dr.iastate.edu/rtd Part of the Economics Commons Recommended Citation Lawlor, Michael Syron, "Equilibrium, interest and money: three essays in the history of economic theory " (1986). Retrospective Theses and Dissertations. 8263. https://lib.dr.iastate.edu/rtd/8263 This Dissertation is brought to you for free and open access by the Iowa State University Capstones, Theses and Dissertations at Iowa State University Digital Repository. It has been accepted for inclusion in Retrospective Theses and Dissertations by an authorized administrator of Iowa State University Digital Repository. For more information, please contact [email protected]. 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Iowa State University Ames, Iowa 1986 ii TABLE OF CONTENTS Page INTRODUCTION 1 ESSAY I. IS THE ECONOMY A CLOSED SYSTEM? GENERAL EQUILIBRIUM AND GENERAL SYSTEMS THEORY 5 I. INTRODUCTION 6 II. THE METHODOLOGY OF SYSTEMS THEORY 9 III. THE WALRASIAN SYSTEM 18 IV. GENERAL EQUILIBRIUM THEORY AS GENERAL SYSTEMS THEORY 25 V. ENDNOTES 43 ESSAY II. IN SEARCH OF A MONETARY THEORY OF VALUE; SRAFFA, KEYNES AND THE OWN-RATES THEORY OF INTEREST 51 I. INTRODUCTION 52 II. THE KEYNES LEGACY; MUDDY WATERS 59 III. REDUCTIONISTS, FUNDAMENTALISTS AND KEYNES ON INTEREST AND MONEY 66 IV. SRAFFA; OWN-RATES IN A NONMONETARY ECONOMY 95 V. KEYNES; OWN-RATES IN A MONETARY ECONOMY 116 VI. ENDNOTES 170 ESSAY III. THE SRAFFA-HAYEK DEBATE IN ANALYTICAL PERSPECTIVE 178 I. INTRODUCTION 179 II. SRAFFA AND KEYNES' USE OF OWN-RATES 182 III. HAYEK'S DEFENSE 189 IV. INTERTEMPORAL EQUILIBRIUM RECONSIDERED 209 V. ENDNOTES 229 A CONCLUDING WORD 232 Page BIBLIOGRAPHY 235 ACKNOWLEDGMENTS 247 1 INTRODUCTION The following essays share a degree of unity In outlook, a degree of diversity in subject matter treated, and, hopefully, also a degree of Interconnectedness in meaning. The unity consists of the common stance they take toward theoretical problems. It is one underlying theme of each of these papers that theoretical insight into contemporary problems in economic theory Is at least partially illuminated by scholarship in the history of economic thought. Accordingly, each paper involves an element of historical research. And what is more, the purpose of the historical work is not to establish historical primacy, or even always (though sometimes this is the case) to describe the actual evolution of doctrines. Instead, we at times take liberty with the grand historical march of ideas in order to rearrange thought by scrambling dates. Thus, for example, a comparison of the most modern views of the mathematical general equilibrium theorists and the more antiquated long-period equilibrium approach is essayed in Essay III. Such an obvious violence to historical context is justified by the very nature of the discipline of economics. For it is peculiarly the case in economics, that while it continually lays claim to the status of science, with all of the procedural rules and social standing such a claim implies, it is also continually subject to internal disputes of a more philosophical, or even theological, nature. By this claim is meant something more than just the influence of precognltlve "visions" that Schumpeter made so much of—although this is part of the claim. But more 2 than this (and contrary to Schumpeter's view of the history of economic analysis), economic*s peculiar relation with its historical record (at least peculiar for a science) is that new work never seems to kill off the old* Parts of this record may lie dormant for a time, and some may experience longer-term growth than others, but all of it seems to possess an irreducible potentiality that can spring to life In a quite sudden and surprising fashion. Again, Schumpeter (1942) provides us with a clear example. Just such a rebirth of economic doctrine is chronicled in his piercing study of the influence of Marx. Of course, this view does not replace the study of the actual context and meaning of the original doctrines, a pursuit that is more properly the domain of specialists in the history of economic thought. What it does, instead, is to lend contemporary relevance (and vigor) to this specialist work in the eyes of the profession as a whole. For Inevitably when an economic research program appears to be proceeding along in quiet pursuit of scientific truth, some incubus of dissatisfaction is concurrently brewing in the wings. More often than not, the heretical brew that purports to tear down the old and bring in the new will also Include an ample dose of ideas from dusty old books. Such is the progress of economic science. If this Is the theme that underlies the unity of the following essays, it is applied in a different manner in each. Essay I Is an attempt to pursue the old economic tradition of borrowing concepts of equilibrium from the natural sciences (notwithstanding the view that Darwin borrowed his vision of evolution through competition from 3 economics!). In this case, we attempt a comparison of the most developed views of the equilibrium of physical systems, General Systems Theory, with the standard Walraslan approach to economic equilibrium. If such physical analogies have any meaning for economics, then the view of the economy as an open system yields some Interesting Insights Into the problems of the Walraslan concept that still dominates so much of economic theory. In particular, drawing on Hayek's work on the foundations of economic equilibrium theory, we conclude that the crucial failing of the Walraslan approach Is the lack of a good homeostatlc explanation of equiflnal equilibriums. Essay II switches gears from general equilibrium theory to macroeconomics. In particular, this essay shows the usefulness of Keynes' own-rate theory of interest in giving analytical focus to his complex views on "the essential properties of Interest and money." By tracing the development of this own-rates doctrine from a review of Hayek by Plero Sraffa In 1932 to Keynes' use of it in Chapter 17 of the General Theory, we pursue two puzzles. First, the own-rates framework offers a rehabilitation of the traditional neglect of Keynes' emphasis on monetary matters in the standard versions of Keyneslan Macroeconomics. Secondly, the attention to the development of the own-rates framework sheds a shadow of suspicion over more modern attempts to Interpret Keynes as a Wlckselllan monetary theorist. Instead of considering monetary concerns as the source of disequilibrium disturbances to an otherwise smoothly operating "real" system (as in the Wlckselllan tradition), we show Keynes to be an equilibrium theorist of a different color. 4 Finally, In the last essay we follow out the meaning of the notion of equilibrium Involved In three views of prices, money and Interest, in reviewing the Sraffa-Hayek debate, we get a clear glimpse of the traditional long-period approach to monetary theory as a disturbing cause. Then, by tracing Hayek's defense of this position to a confusion over the role of money and Interest In value theory, we find a whole new conception of monetary equilibrium. This third conception (after the traditional long-period conception and Keynes' own-rates equilibrium) of monetary equilibrium, the "Intertemporal equilibrium" method, turns out to be a variant of the Walraslan conception we started with In Essay I. Since each of these conceptions can be cast In terms of the own-rates of Interest, it is illuminating to compare each on this basis. Our final conclusion is that Keynes' conception, lying somewhere intermediate between the other two, offers one method of providing the social level homeostatlc mechanism that the Walraslan system was shown to lack in Essay I. 5 ESSAY I. IS THE ECONOMY A CLOSED SYSTEM? GENERAL EQUILIBRIUM AND GENERAL SYSTEMS THEORY 6 I.