Sunday, June 29, 2008

It's Herd Behavior, Uh Huh, It's Evolution, Baby

Anybody interested in institutional economics should be interested in evolutionary theory, a theory that I can stand to learn more about. The interest in evolution among institutionalists goes back to Veblen. A more-or-less mid twentieth expression of interest can be seen in Ayres's biography of Thomas Huxley, also known as "Charles Darwin's bulldog". Geoffrey Hodgson is a current institutialist interested in evolution. Wht evolves in economies? I suggest organizational forms, business processes, and technology, at least.

I never saw anything interesting when operating Tierra on my old computer. Perhaps I understand neither the assembly language nor the visualization well-enough. Or perhaps I should have designed experiments and let it operate for more generations. I was never into Core Wars either. John Conway's Game of Life was more my speed. I don't seem to have executables for any of these for my OS X Macintosh.

But I think Thearling and Ray (1994) describe a neat idea. In Tierra, programs composed of machine instructions reproduce, perhaps with mutations. Memory is not protected, and programs can overwrite one another's code. An ability to more successfully protect one's own code and data and overwrite others is selected for.

One can do repeatable experiments with a computer program. Each generation can be saved, and the simulation can be rerun from any point in time, with random number generators restarted with new seeds. Lenski et al (2003) report such experiments with Avida, a computer simulation much like Tierra. In Avida, evolving computer programs collect energy to run their code. Programs that can do advanced logical operators are more fit. Lenski et al show that the evolution of a complex feature may depend on the prior evolutionary history of an organism providing the potential of the last few steps, even if previous mutations do not increase fitness.

I was surprised to find last week not only that repeatable experiments with evolution have been performed on simulations, but that Richard Lenski has been performing such a repeatable experiment on real-world organisms - namely, E. Coli - since 1988. (I must have missed Carl Zimmer's article, of 26 June 2008 in The New York Times, on the Long Term Evolution Experiment (LTEE).) Anyway, Blount, Borland, and Lenski's 2008 article reports on recent results.

In the LTEE, populations of each generation are isolated in a solution containing glucose for the E. Coli to eat. The isolated solution, I guess, acts like the simulated core memory in Tierra. And the E. Coli of any generation and evolutionary history can be frozen and restarted, just as an image of the computer core memory in a simulation run can be saved and reloaded. One run yielded a mutation that seems to have surprised Linski. This mutation allows the E. Coli to thrive on citrate, whatever that is, in the solution even "under oxic conditions". The ability to sample previous generations and look at other isolated population histories starting from the same initial conditions allows Linski and his colleagues to understand something about this mutation even before genetic sequencing. It is not the result of a single gene mutating, but is dependent on prior mutations in the history. These prior mutations may not have increased fitness themselves, but prepared the E. Coli to become dramatically more well-adapted for their specific environment after a couple more mutations. History matters.

References

Tuesday, June 24, 2008

Conversations Elsewhere

Over at the Austrian Economists' blog, the comments on one post are mostly about Sraffa versus Hayek. The defenders of Hayek want to redefine the "natural rate" of interest to be the rate that would prevail in a monetary economy if the financial system did not "distort" prices somehow. This definition is opposed to the definition as the interest rate that would prevail in a barter economy. The defenders don't seem to realize that this redefinition addresses neither Sraffa's 1930s point that there are as many natural rates as there are commodities in an intertemporal equilibrium nor the 1960s reswitching results.

A Yahoo group is about Sraffa. Spanish-language discussions do me little good since I am limited to English.

Update: Gabriel Mihalache has a discussion about General Equilibrium theory that ends up overlapping with a discussion of Sraffa.

Saturday, June 21, 2008

Brouhaha Over Marglin

I have been thinking about whether I want to read Stephen Marglin's new book, The Dismal Science: How Thinking Like an Economist Undermines Community. It sounds to me too much like Duncan Foley's recent book, Adam's Fallacy. A couple of reviews of Marglin's book are now available. Deirdre McCloskey has a generally positive review in the 27 March issue of the Times Higher Education. E. Roy Weintraub has a negative review in Science.

A couple of bloggers have posted on Weintraub's review. I find these posts fairly useless for clarifying either Marglin or Weintraub's perspective.

Brad DeLong comments on Weintraub's review, too. DeLong uses a German term that is not in my vocabulary:
"The gemeinschaft that is the professional community of Ivy League economists in which Marglin has been embedded for the past forty years has not treated him with 'reciprocity, altruism, and mutual obligation' but has--rather--in a very gemeinschaftlich way done what gemeinschaften traditionally do to corral their deviant members and to discourage others from imitating them. It has not been pretty.

But it seems to have had no effect on Marglin's thinking, none at all, for reasons I do not understand." -- Brad DeLong
I've had something to say about the ugliness in Harvard's economics department. Some highlights: Harvard denied tenure to those among Marglin's colleagues who could provide useful feedback on his ideas. I doubt very few in the Harvard department have anything useful to say about Marglin's ideas on unemployment and inflation, some of which he developed in collaboration with Amit Bhaduri. More recently, Harvard has refused to let Marglin to teach a section of the intro course for credit as a prerequisite and as a counter to Mankiw's lies.

Weintraub is part of a trend in the history of ideas that tends to see more discontinuities and at a lower level than previously:
"in the disciplines that we call the history of ideas, the history of science, the history of philosophy the history of thought, and the history of literature (we can ignore their specificity for the moment), in those disciplines which, despite their names, evade very largely the work and methods of the historian, attention has been turned, on the contrary, away from vast unities like 'periods' or 'centuries' to the phenomena of rupture, of discontinuity. Beneath the great continuities of thought, beneath the solid, homogeneous manifestations of a single mind or of a collective mentality, beneath the stubborn development of a science striving to exist and to reach completion at the very outset, beneath the persistence of a particular genre, form, discipline, or theoretical activity, one is now trying to detect the incidence of interruptions. Interruptions whose status and nature vary considerably. There are the epistemological acts and thresholds described by Bachelard: they suspend the continuous accumulation of knowledge, interrupt its slow development, cut it off from its empirical origin and its original motivations, cleanse it of its imaginary complicities; they direct historical analysis away from the search for silent beginnings, and the never-ending tracing-back to the original precursors, towards the search for a new type of rationality and its various effects. There are the displacements and transformations of concepts: the analyses of G. Canguilhem may serve as models; they show that the history of a concept is not wholly and entirely that of its progressive refinement, its continuously increasing rationality, its abstraction gradient, but that of its various fields of constitution and validity, that of its successive rules of use, that of the many theoretical contexts in which it developed and matured..." -- Michel Foucault (1972) The Archaeology of Knowledge, Pantheon Books.
I do not know the historians of ideas Foucault references, but his descriptions could perhaps characterize aspects of "thick histories".

Along with embracing these standards, Weintraub thinks they should be professionalized. Historians of economics should be writing for and to the standards of historians of science. The history of economics should not to be done by dilettantes in history taking a break from their professional work as modern economists. History is not to be done by hopping from one great book to another, ignoring all the minor thinkers of the time that contextualizes the contents of each book. And the story should be told forward, without imposing on the actors in the story a desire to get to where they ended up after much stumbling. One should look for what standards evolved in the protangonists' milieus. Historians of economics should not be in the business of rating past economists by current ideas and current standards of argument.

Weintraub also doesn't like the classification of the history of economic thought as heterodox economics. For him, history is not supposed to be a morality tale. Weintraub non-judgemental approach to history raises some questions. What is the usefulness of history? Why should economists, as part of their professional training, receive any information about the history of their discipline? Should university economics departments devote any resources to studying that history? I am not providing answers to these questions here. Obviously I find Weintraub's writings of enough interest to think I can assign views to him without giving any specific citations.

Without having read Marglin's book, let me finally turn to a substantial point in Weintraub's review. I can see how one might doubt that the ideas Weintraub says are engaged by Marglin were all grown up in the nineteenth century. But I have noted how some are in embryo in J. S. Mill.

I am disappointed that Weintraub cites Coleman's book positively.

For reference, here is Weintraub's review:
"ECONOMICS: First, Kill the Economists",

"The prophet Jeremiah is alive and well and teaching economics at Harvard. It is not often that a scholar with no particular historical or philosophical expertise trashes the Western enlightenment in order to stomp on the discipline of economics as a manifestation of all that was lost in creating the modern world. Stephen A. Marglin's argument in The Dismal Science is that economics--with its focus on an individual's preferences, the freedom to engage in activities to promote his or her well-being, and the pursuit of self-interest variously construed--perverts a natural moral order: 'the foundational assumptions of economics are in my view simply the tacit assumptions of modernity. The centerpiece in both is the rational, calculating, self-interested individual with unlimited wants for whom society is the nation-state.' And what modernity shunned was 'community.'

His main line is that 'The market undermines community because it replaces personal ties of economic necessity by impersonal market transactions.... The ambivalent relationship between noneconomists and economics reflects the ambivalence with which modernity is regarded.' To be sure, sociologists deal with community, as do anthropologists, as do political scientists, and so on. But economics, for Marglin, is different: 'Economics is not only descriptive; it is not only evaluative; it is at the same time constructive--economists seek to fashion a world in the image of economic theory.' Economics and thinking like an economist are bad for the health of the world. Indeed, he closes his volume stating that 'There are many ways of resolving the tensions between individualism and holism, between self-interest and obligation to others, between algorithm and experience, between the claims of various communities on our allegiance, between material prosperity and spiritual health. Economics offers one way, but as presently constituted, economics is hobbled by an ideology in which these tensions are replaced by a set of pseudo-universals about human nature. A dismal science indeed.' The argument about the proper way to do economics is an old one. An 1832 complaint in The Eclectic Review charged the work of Thomas Malthus and David Ricardo with leading the public far from 'the true path of inquiry' and making political economy 'a hideous chain of paradoxes at apparent war with religion and humanity.' In the past century or two, we have heard this lamentation from time to time from both secular and religious figures.

In much of Europe, what we now call economics developed in order to understand various matters of business law, contracts, taxation, international trade, and project management. Issues like tariff policy and currency management were discussed by individuals who were variously lawyers, engineers, politicians, managers, and business people, and training in such expertise developed pari passu.

The professionalization of economics was a late 19th century phenomenon. Cambridge's Alfred Marshall, in attempting to construct a scientific economics, was not able to establish economics as a separate discipline until the death of Henry Sidgwick, the university's professor of moral philosophy, under whose direction lectures in political economy had been organized. In the United States at that time, economics was growing from different sources. One stream followed from individuals who had obtained Ph.D.'s in Germany, where social policy issues--labor unions, socialism, the nascent welfare state, etc.--were galvanizing the universities. But a second stream nurturing the American progressive economists grew from the social gospel movement, which sought to promote the kingdom of God on Earth through enlightened social policy and the kind of market interventions that Adam Smith in fact quite welcomed.

The kind of economics from which Marglin recoils is, however, not of the sort that was present in writings of individuals (e.g., Smith, Ricardo, John Stuart Mill, Marshall, and John Commons) who have been claimed as ancestors by modern economists. It is instead what developed in the post-World War II stabilization of economic discourse and the final professionalization of the discipline. It was during that postwar period, not in the Enlightenment, that economic science became normal in Thomas Kuhn's sense.

Marglin's account appears confused by this history. Moreover, he appears to believe that the ideas he engages and then casts aside (ideas about the economic agent, preferences, equilibrium, models, and markets) all grew up not in the 20th century but hundreds of years earlier--and that those ideas have had stable meanings ever since: 'For four hundred years, economists have been active in the enterprise of constructing the modern economy and society, both by legitimizing the market and by promoting the values, attitudes, and behaviors that make for economic success. No apology is due for this--except for the pretense of scientific detachment and neutrality and the unwillingness to confront the ideological beam in our collective eye.' The ahistoricity of such a statement is startling; for instance, it assumes wrongly that there were individuals called economists 400 years ago and that science in 1600 meant the same thing as it does in 2008.

In his critique, Marglin moves back and forth between moralizing about the loss of community and contempt for the economists' tools and models. He claims, 'By promoting market relationships, economics undermines reciprocity, altruism, and mutual obligation, and therewith the necessity of community. The very foundations of economics, by justifying the expansion of markets, lead inexorably to the weakening of community.' He complains that 'it is difficult to tell a plausible story of how individuals acquire meaningful preferences between consumption today and consumption a decade or two hence, in the way one can imagine learning about peaches today and pears today.' But is not Marglin's Harvard College teaching an instruction of the young designed to shape their preferences, especially preferences about long-term versus short-term goals?

From the first times economic arguments were parsed and markets described, there were those who found both contemptible, and this was well before the Enlightenment. Attacks on money lending at interest go back even earlier than Jesus on the temple steps. Recall Aquinas's ideas about the 'just price.' One mustn't forget Shakespeare's Shylock, either. Tax collecting for kings and emperors requires economic management skills, but no one likes to pay taxes. In a prize-winning book (1), William Coleman showed how over the centuries the very idea of economics has been loathed by left, right, and center; Christian, Jew, and anti-Semite; pope and communist dictator; lawyer and business mogul; and scientist and humanist.

In this same tradition of anti-economics, Marglin sees the future of the field as bleak, with the current generation of economics students avoiding large questions in their search for career advancement. And the problems that economics creates will only get worse, he claims, because globalization will make the national community as obsolete as the market has made the local community.

I note in closing that the lead dust-jacket blurb for this volume was provided by the noted economist and social theorist Bianca Jagger (sic). Whatever was Harvard University Press thinking?" -- E. Roy Weintraub,

Wednesday, June 18, 2008

Real Utopias

I haven't begun to explore this "Real Utopias" project. It seems to me to have a flavor of Analytical Marxism.

Hat tip to taavi

Sunday, June 15, 2008

The Moving Finger Writes...

...and, having writ,
Moves on: nor all your piety nor wit
Shall lure it back to cancel half a line,
nor all your tears wash out a word of it.

1.0 Introduction
Neoclassical economics emphasizes equilibria, for example in General Equilibrium models. In equilibria, all agents are optimizing and their plans are all pre-coordinated. But no reason exists for economists to expect actually existing more-or-less capitalist economies to ever be in such equilibria.

This post demonstrates that economies need not be near equilibria by means of an example. This example has been available for almost a half century (Scarf 1960) and is often referenced (e.g., Ackerman 1999, Hahn 1961 and 1970, McCauley 2004, Saari 1995, Sonnenschein 1972). The example is of a pure exchange economy. Since no production occurs in the example, it cannot be considered an example of a Sraffian model. Furthermore, the example is of brain-dead tâtonnement dynamics. No trading occurs at any prices other than equilibrium prices. Since the example has one locally unstable equilibrium, equilibrium prices are never achieved.

Neoclassical economic theory imposes almost no restriction on excess demand functions. The most substantial restriction is the unfounded conservation law expressed by the symmetry of the Slutsky matrix. This lack of any empirical implications of neoclassical theory for market behavior is an implication of the Sonnenschein-Mantel-Debreu results. Another implication is that any price dynamics are possible in a tâtonnement process, including chaos. So this example does not even represent the most general or complex dynamics possible in neoclassical models.

2.0 Data
This example economy consists of three individuals, each endowed with one unit of a different commodity (Table 1). The individuals also differ in tastes, as expressed by the utility functions in Table 2. Our problem is to determine equibrium prices for this simple economy and the price dynamics.

Table 1: Agents' Endowments
AgentEndowment
ApplesBananasCantalopes
Mary100
Nancy010
Olivia001

Table 2: Agents' Preferences
AgentUtility Function
MaryUM = min( xA, xB )
NancyUN = min( xB, xC )
OliviaUO = min( xA, xC )


3.0 Demand Functions
Each agent maximizes their utility, subject to their budget constraint. Consider a single agent, for example, Mary. Mary chooses non-negative xA, xB, xC to maximize
UM = min( xA, xB )          (1)
such that

pA xA + pB xB + pC xCpA          (2)
Since Mary derives no utility from cantalopes, she will not consume any of them. Thus, Mary's problem can be graphed in a two-dimensional space (Figure 1). The graph also shows the quantities Mary demands of apples and bananas. These quantities are on the intersection of the budget constraint with a particular isoquant of the utility function. Symbolically:

xA* = xB* = pA/(pA + pB)          (3)

xC* = 0          (4)
Figure 1: Mary's Utility Maximizing Problem

One can find Nancy and Olivia's demand functions by symmetrical arguments. Aggregate excess demand functions are the difference between aggregate demands and aggregate supplies. Aggregate demands are individual demand functions summed across the individuals. Aggregate supplies, in this pure exchange economy, are endowments summed across individuals. In fact, the aggregate supply of each commodity is one unit here. A bit of algebra yields:

zA = pC/(pA + pC) - pB/(pA + pB)          (5)

zB = pA/(pA + pB) - pC/(pB + pC)          (6)

zC = pB/(pB + pC) - pA/(pA + pC)          (7)
where zB, zB, and zC are the aggregate excess demand functions for apples, bananas, and cantelopes, respectively.

The numeraire is arbitrary. One can confine prices to lie on the unit sphere:

pA2 + pB2 + pC2 = 1          (8)

4.0 Equilibrium

In equilibrium, aggregate excess demand functions are zero. The only equilibrium is one in which all prices are equal:
pA* = pB* = pC* = (1/3)1/2          (9)

5.0 Tâtonnement Dynamics
I postulate that when the aggregate excess demand for a particular commodity is positive, the price of that commodity rises. Likewise, when aggregate excess demand is negative, the price falls. The simplest dynamical system with these properties is one in which the rate of change of prices with respect to time is equal to the aggregate excess demands:
dpA/dt = pC/(pA + pC) - pB/(pA + pB)          (10)

dpB/dt = pA/(pA + pB) - pC/(pB + pC)          (11)

dpC/dt = pB/(pB + pC) - pA/(pA + pC)          (12)
Under these dynamics, the equilibrium is unstable. Solutions around the equilibrium spiral out on the unit sphere to a limit cycle. Figure 2 shows a two-dimensional projection of that limit cycle.

Figure 2: Two-Dimensional Projection of Dynamics

6.0 Conclusion
The failure of General Equilibrium Theory to limit dynamics, I gather, is intrinsic to methodological individualism, in which independent agents can have arbitrary preferences and endowments. Attempts to explain economies seem to need to postulate influences on tastes and income above the level of the individual, for example, by others in one's social class or through some sort of structuralist theory. In other words, there is too such a thing as society. I take Kirman (1989) to point in this direction.

I might as well mention that the arbitrary dynamics implied by orthodox economic theory undermines a certain political outlook. I refer to the idea that we ought to loosen restrictions on trade, but ensure some sort of redistribution so as to ensure that everybody participates in the supposedly enlarged pie. I take the second welfare theorem to be the basis for this view. But that redistribution doesn't necessarily lead to the economy converging to the original equilibrium, as altered by free trade.

References
  • Frank Ackerman (1999) "Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory", Global Development and Environment Institute, Working Paper No. 00-01
  • Frank H. Hahn (1961) "A Stable Adjustment Process for a Competitive Economy", The Review of Economic Studies, V. 29, N. 1 (October): pp 62-65.
  • Frank H. Hahn (1970) "Some Adjustment Problems", Econometrica, V. 38, N. 1 (January): 1-17
  • Alan Kirman (1989) "The Intrinsic Limits of Modern Economic Theory: The Emperor Has No Clothes", Economic Journal, V. 99, N. 395: 126-139
  • Joseph L. McCauley (2004) Dynamics of Markets: Econophysics and Finance, Cambridge University Press
  • Donald Saari (1995) "Mathematical Complexity of Simple Economics", Notices of the AMS, V. 42, N. 2 (February): 222-230
  • Herbert Scarf (1960) "Some Examples of Global Instability of the Competitive Equilibrium", International Economic Review, V. 1, N. 3 (September): 157-172
  • Hugo Sonnenschein (1972) "Market Excess Demand Functions", Econometrica, V. 40, N. 3 (May): 549-563

Tuesday, June 10, 2008

What Is Apathy? I Don't Care.

As far as I can see, Varian implies in the following combination of quotations that the student need not care about vast chunks of his textbook:
"...we show that the theory of utility-maximization implies certain testable restrictions on the observed choices of consumers. Such restrictions have several sorts of uses. For example, one can use these observed restrictions to test the model against actual behavior of economic units. Given some data, one can ask if it could have been generated by a maximizing unit..." -- Hal R. Varian (1978) Microeconomic Analysis, Second Edition, W. W. Norton & Company, p. 2
"...the utility maximization hypothesis imposes certain observable restrictions on consumer behavior. In particular, we know that the matrix of substitution terms... must be a symmetric, negative semidefinite matrix." -- Hal R. Varian (1978) Microeconomic Analysis, Second Edition, W. W. Norton & Company, p. 135-136
"It can be shown that any continuous function that satisfies Walras' law is an excess demand function for some economy; i.e., the utility maximization hypothesis places no restrictions on aggregate demand behavior... Thus, any dynamical system on the price sphere can arise from our model of economic behavior." -- Hal R. Varian (1978) Microeconomic Analysis, Second Edition, W. W. Norton & Company, p. 246
In other words, the empirical content of the "utility maximization hypothesis" on the level of the theory of markets is close to empty.

Friday, June 06, 2008

The Influence of Chris Hayes?

A couple of weeks back, The Nation notes Hillary Clinton's statement: "I'm not going to put my lot in with economists." I gather that Clinton's gas tax holiday is not a good idea. But, "Clinton had a point, though, not about the gas tax but about the undue influence of a certain brand of mainstream economists who dominate prestigious universities." The Nation editorialist further says:
"Hillary Clinton ... also apparently thinks the economists she knows--the ones who had her husband's ear--represent the totality of solid and relevant economic thought. In fact, many good economists have different views on trade and fiscal policies and cannot get a hearing."

Susan Jacoby, in an editorial for the New York Times has a different take:
"Senator Hillary Clinton's use of the phrase 'elite opinion' to dismiss the near unanimous opposition of economists to her proposal for a gas tax holiday was a landmark in the use of elite to attack expertise supposedly beyond the comprehension of average Americans. One might as well say that there is no point in consulting musicians about music or ichthyologists about fish."
Jacoby doesn't approve of elite-bashing. I think this point would work better if we were not talking about economists.

Sunday, June 01, 2008

Steven Horwitz and Post Keynesians

Steven Horwitz has kindly made his papers available online. I find that Horwitz has engaged in a couple of controversies with Post Keynesians, broadly defined. I refer to these interchanges:
  • Hill (1996a), Horwitz (1996c), Hill (1996b), and Horwitz (1998)
  • Horwitz (1996a), Cottrell (1996?), and Horwitz (1996b)
What worries me about these is whether I need to add to my already-too-long critique of Austrian Business Cycle Theory (ABCT) in yet another revision. (The latest publicly available version of my critique of ABCT is here. I have submitted an even more recent version to some journal.) Luckily, nobody in these interchanges seems to bring up my points from capital theory. I already reference his later book, Horwitz (2000). I hadn't known that he developed these ideas partly by arguing with Post Keynesians. In the remainder of this post, I illustrate some deficiencies of Horwitz's arguments.

Horwitz clearly states the mistaken Austrian view that, in a coordinated state, the length of production processes is inversely related to the interest rate:
"The capital structure ... reflects ... 'roundaboutness,' of production... Recent developments of Austrian capital theory have abandoned Böhm-Bawerk's emphasis on the 'average' period of production, the idea of the capital structure as reflecting roundaboutness remains. ... At higher rates of interest we would expect shorter processes of production ... Conversely, lower rates of interest should lengthen the capital structure, as the lower cost of time will make more roundabout, and hence more productive, processes more feasible... The capital structure needs to embody some notion of intertemporal coordination, i.e., the lengths of current processes of production should correspond to the willingness of consumers to wait for the availability of consumer goods. If the capital structure is not intertemporally coordinated, ...then there is avoidable economic waste." -- Horwitz (1996a)
Allin Cottrell takes Horwitz to task for ignoring established criticisms of ABCT and for simplifying Hayek to the point of misrepresentation. One of these criticisms is a Cottrell paper, which I do cover in my critique. Cottrell's comments are focused on monetary theory, not on the capital-theoretic analysis I write about.

Consider an imaginary coordinated state of the economy in which the expectations and plans of all agents are largely consistent and in which those expectations are being fulfilled. In such a coordinated state, must all markets clear? Must the labor market clear? Keynes answers these questions in the negative. He argues that if agents' plans and expectations were being more-or-less achieved, the level of unemployment would not need to be zero or whatever level is consistent with frictional unemployment. By the way, it is along these lines that I think a synthesis of Keynes and Sraffa can be achieved. Jan Kregel probably puts this better. Horwitz, in his responses to Hill, begs these questions. I refer to Horwitz discussion of savings, investment, interest rates, and banking. To me, Keynes and the Post Keynesians are more perceptive than Austrians both about what is seen and what is not seen in a capitalist economy. Since Horwitz does not understand the argument, he cannot credibly dispute me.

Here's another example of Horwitz's lack of understanding of Keynes: he attacks Keynes with a strawperson:
"Cash is not fundamentally different than other goods or services; if the public wishes to hold more of it, there is no reason that the laws of supply and demand should take a holiday. Keynes assumed that cash is 'barren' because it provides no yield to the holder, such that holding cash was socially wasteful. If one defines 'yield' to be some sort of financial return, then Keynes was right, but the same is true of any other good or service. Compact disc players do not yield a pecuniary return, yet people choose to hold 'stocks' of them because they provide a service - the playing of music. Cash is no different, in that it provides the service of being available to buy things. By Keynes's logic, fire trucks standing in fire stations are 'doing nothing' and yield no benefits. But they provide the benefit of being available for use when needed." -- Horwitz (1996c)
This is wrong for at least two reasons. First, for Keynes, money does not necessarily have no financial yield. In chapter 13 of the General Theory, Keynes states that one can
"draw the line between "'money' and 'debts' at whatever point is most convenient for handling a particular problem... It is often convenient to include in money time-deposits with banks and, occasionally, even such instruments as (e.g.) treasury bills." -- John Maynard Keynes (1936)
Second, and more seriously, Keynes is quite aware that money is liquid, that is, available to buy things. In chapter 17 of the General Theory, Keynes states that the expected return from the ownership of an asset is "equal to its yield minus its carrying cost plus its liquidity premium".

Horwitz seems to miss the point here too:
"Hill notes that 'to hold cash is to take refuge from uncertainty.' He then quotes G. L. S. Shackle, who argues that taking refuge from uncertainty (presumably by holding cash) means that we also take refuge 'from enterprise, from the giving of employment.' In the short run, my decision to hold more money in the form of bank deposits redistributes employment among different people, but does not reduce 'the giving of employment.' And in the long run, my uncertainty-induced decision to hold more bank deposits will generate increased employment.

In really existing capitalism with central banks, an increased relative demand for currency due to uncertainty can indeed touch off a decline in aggregate demand (assuming anything less than perfectly flexible prices) if the central bank does not react properly. However, in a banking system where individual banks were allowed to create their own currencies in the same manner as their deposits, this would not be the case. Where currency is a liability of the banking system, taking refuge from uncertainty in currency is no different from taking refuge in bank deposits and the effects are the same: an increase in wealth over time, due to the increase in saving... By making currency a bank liability rather than a reserve medium, a 'free banking' system would allow one less way for the public to withdraw bank reserves and cause a major contraction in credit and aggregate demand. The problem with contemporary central-bank-controlled capitalism is the very fact that when the public wants more of certain kinds of money, private enterprise cannot legally 'produce more of it.' Such a prohibition is not an irremediable fact of the world, but a particular institutional condition of modern capitalism that could be changed by ending government control over money." -- Horwitz (1998)
Whether or not the supply of money is endogenous, the demand for money does not directly give employment (excluding data entry for those changing some bits on a computer in some bank). This contrasts for the demand for an illiquid asset which must be manufactured to be supplied. As for the indirect effects, I find nothing but argued assertion in Horwitz.

I'm not even sure that Horwitz understands his own theory. Consider this assertion of the consistency of time preference and liquidity preference theories:
"Hill is implying that ... that cash trades off against such securities, ... that the demand for money is caused by interest rates and that, therefore, the interest rate is ... overwhelmingly a function of the supply and demand for money. However, the fact that I prefer the present to the future is intimately linked with the fact that the future is uncertain. ... I never denied that people hold money due to uncertainty. In fact, that is precisely why they hold it, as I have argued elsewhere ... The desire for liquidity or availability services is a manifestation of the more fundamental concept of time-preference. If I choose to sell bonds and acquire cash, this suggests that I am worried about the future and want cash so as to leave my options open. My time preferences have shifted toward the present. When I sell my bonds, bond prices fall and interest rates rise, as they should to reflect my concerns about the future. There is no contradiction between recognizing money's liquidity or availability services and a time preference theory of the interest rate." -- Horwitz (1998)
Time preference relates to time profile of ones desired consumption stream, to whether one wants to consume goods now or later. A change in what assets one holds for transferring purchasing power in the future is not a manifestation of a change in time preference. When the financial value of my savings and income stay unchanged, but I change the assets in which my savings are held to be more liquid, my time preferences have not not shifted, toward the present or otherwise.

By the way, Horwitz points out in his second reply to Hill that he is not arguing about theories that describe actually existing economies. He is explaining how the world would work if his utopian blueprint, especially for the banking system was adopted. I like how supposed fans of Hayek exhibit no appreciation for Popper.

References