VALUE AND CAPITAL: Fifty Years Later This is lEA conference volume no. 94 Series Standing Order If you would like to receive future titles in this series as they are published, you can make use of our standing order facility. To place a standing order please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address and the name of the series. Please state with which title you wish to begin your standing order. (If you live outside the United Kingdom we may not have the rights for your area, in which case we will forward your order to the publisher concerned.) Customer Services Department, Macmillan Distribution Ltd Houndmills, Basingstoke, Hampshire, RG2l 2XS, England. Value and Capital Fifty Years Later Proceedings of a Conference held by the International Economic Association at Bologna, Italy Edited by Lionel W. McKenzie and Stefano Zamagni in association with the M Palgrave Macmillan MACMILLAN © International Economic Association 1991 UNESCO Subvention 1990-1991/DG/7.6.2./SUB.16 (SHS) Softcover reprint ofthe hardcover 1st edition 1991 978-0-333-49875-0 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Design and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 33--4 Alfred Place, London WClE 7DP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1991 Published by MACMILLAN ACADEMIC AND PROFESSIONAL LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world British Library Cataloguing in Publication Data Value and Capital: fifty years later: proceedings of a conference held by the International Economic Association at Bologna, Italy. 1. Economics I. McKenzie, Lionel W. II. Zamagni, Stefano III. International Economic Association 330 ISBN 978-1-349-11031-5 ISBN 978-1-349-11029-2 (eBook) DOI 10.1007/978-1-349-11029-2 Contents The International Economic Association viii Acknowledgements X List of Contributors and Participants xu Abbreviations and Acronyms xvi Preface xvii Introduction xviii Lionel W. McKenzie and Stefano Zamagni In Memoriam: Sir John Hicks, 1904-89 XXX PART I 1 Temporary Equilibrium: Money, Expectations and Dynamics Jean-Michel Grandmont 3 Comment Lionello F. Punzo 31 PART II 2 Certainty Equivalence and lnequivalence for Prices Kenneth J. Arrow 41 3 Hicksian Themes on Stability Frank Hahn 64 Comment Anjan Mukherji 85 4 Time Preference and an Extension of the Fisher-Hicksian Equation Hirofumi Uzawa 90 v vi Contents Comment Werner Hildenbrand 111 PART III 5 Perfect Equilibrium with Incomplete Financial Markets: An Elementary Exposition David Cass 121 Comment John Geanakoplos 145 6 Underinvestment and the Demand for Liquid Assets Douglas Gale 151 Comment Carlo Casarosa 171 PARTlY 7 Incomplete Market Clearing Edmond Malinvaud 179 Comment Dieter Sondermann 197 8 Inventories and the Fixprice Method Guy Laroque 205 Comment Lars E. 0. Svensson 232 PARTY 9 Substitution over Time in Consumption and Work Robert E. Hall 239 Comment Larry G. Epstein 268 10 Value and Capital in the Equilibrium Business Cycle Programme Robert G. King 279 11 Hicksian Non-linearity William A. Brock 310 Contents vii PART VI 12 Liquidity, Flexibility and Processes of Economic Change Mario Amendola 333 Comment Don Patinkin 352 13 Fiscal Responsibility, Monetary Policy and the Exchange Rate Giampaolo Galli and Rainer S. Masera 358 Comment Torsten Persson 387 14 On the Rate of Interest in a 'Neo-Austrian' Theory of Capital Hiroshi Atsumi 393 Comment Lionel McKenzie 410 PART VII 15 Intertemporal General Equilibrium Roy Radner 423 Comment Darrell Duffie 461 Postscript John R. Hicks 471 Index of Names 477 Subject Index 485 The International Economic Association A non-profit organisation with purely scientific aims, the Inter­ national Economic Association (lEA) was founded in 1950. It is in fact a federation of national economic associations and presently includes fifty-eight such professional organisations from all parts of the world. Its basic purpose is the development of economics as an intellectual discipline. Its approach recognises a diversity of prob­ lems, systems and values in the world and also takes note of method­ ological diversities. The lEA has, since its creation, tried to fulfil that purpose by promoting mutual understanding of economists from the West and the East as well as from the North and the South through the organisation of scientific meetings and common research pro­ grammes and by means of publications on problems of current importance. During its thirty-seven years of existence, it has organ­ ised seventy-nine round-table conferences for specialists on topics ranging from fundamental theories to methods and tools of analysis and major problems of the present-day world. Eight triennial World Congresses have also been held, which have regularly attracted the participation of a great many economists from all over the world. The Association is governed by a Council, composed of represen­ tatives of all member associations, and by a fifteen-member Execu­ tive Committee which is elected by the Council. The present Executive Committee (1986- 1989) is composed as follows: President: Professor Amartya Sen, India Vice- President: Professor Bela Csik6s-Nagy, Hungary Treasurer: Professor Luis Angel Rojo, Spain Past President: Professor Kenneth 1. Arrow, USA Other Members: Professor Edmar Lisboa Bacha, Brazil Professor Ragnar Bentzel, Sweden Professor Oleg T. Bogomolov, USSR Professor Silvio Borner, Switzerland Professor P.R. Brahmananda, India Professor Phyllis Deane, UK viii The International Economic Association ix Professor Luo Yuanzheng, China Professor Edmond Malinvaud, France Professor Luigi Pasinetti, Italy Professor Don Patinkin, Israel Professor Takashi Shiraishi, Japan Adviser: Professor Tigran S. Khachaturov, USSR Professor Mohammed Germouni, Morocco Secretary-General: Professor Jean-Paul Fitoussi, France General Editor: Mr Michael Kaser, UK Adviser to General Editor: Professor Sir Austin Robinson, UK Conference Editor: Dr Patricia M. Hillebrandt, UK The Association has also been fortunate in having secured the following outstanding economists to serve as President: Gottfried Haberler (1950--3), HowardS. Ellis (1953-6), Erik Lindahl (1956-9), E. A. G. Robinson (1959--{)2), G. Ugo Papi (1962-5), Paul A. Samuelson (1965-8), Erik Lundberg (1968-71), Fritz Machlup (1971-4), Edmond Malinvaud (1974-7), Shigeto Tsuru (1977-80), Victor L. Urquidi (1980--3), Kenneth J. Arrow (1983-6). The activities of the Association are mainly funded from the subscriptions of members and grants from a number of organisations, including continuing support from UNESCO. Acknowledgements The lEA conference reported in this volume was part of the official celebrations of the University of Bologna on its 900th anniversary. We were privileged to participate in this way. We should like first to thank Bologna University for serving as the site of the conference and for its hospitality not only for the formal proceedings but also for the social events which provided such delightful settings for the continuation of discussions. We are grateful to the Department of Economics of the University of Bologna for providing administrative arrangements. Financial and logistic support was provided generously by public foundations and private firms. We would especially mention: Banca d'ltalia, Rome Banca del Monte di Lombardia, Milan Banca Popolare di Milano, Milan Banco di Roma, Bologna Consiglio Nazionale delle Ricerche, Rome Credito Romagnolo, Bologna FHF, Bologna lstituto San Paolo, Turin Mediocredito Emilia-Romagna, Bologna Mediocredito Lombardo, Milan Monte dei Paschi, Siena Unione Camere di Commercia Emilia-Romagna, Bologna Unipol, Bologna. The organisation of the conference was secured by a local commit­ tee with the following members: Professor Giorgio Basevi, Professor Guido Gambetta, Professor Renzo Orsi, Professor Stefano Zamagni. The International Economic Association expresses its thanks to the International Social Science Council under whose auspices the publications programme is carried out, and to UNESCO for its financial support with a grant (1990-1991/DG/7.6.2./SUB.l6 (SHS)). Programme committee Professor Lionel McKenzie } Co-Chairmen Professor Stefano Zamagni X Acknowledgements Xl Professor Kenneth Arrow Professor Frank Hahn Professor Edmond Malinvaud Professor Luigi Pasinetti Professor Hirofumi Uzawa List of Participants and Contributors Professor Mario Amendola, 'La Sapienza', University of Rome, Italy Professor Kenneth J, Arrow, Stanford University, USA Professor Hiroshi Atsumi, Institute of Socio-Economic Planning, University of Tsukuba, Sakura, Ibaraki, Japan Professor Ragnar Bentzel, Uppsala University, Sweden Academician Oleg T. Bogomolov, Academy of Sciences of the USSR Professor Silvio Borner, Institut fiir Angewandte Wirtschaftsfors­ chung, Basel, Switzerland Professor William Brock, Department of Economics, University of Wisconsin, Madison, USA Professor Carlo Casarosa, University of Pisa, Italy Professor David Cass, University of Pennsylvania, USA Professor Onorato Castellino, University of Turin, Italy Professor Terenzio Cozzi,