Patinkin controversy: the classical dichotomy and the neutrality of money
Creators: name: Gusella, Richard Allan
Publisher: name: University of Calgary
Year: 1969
Subjects: subject: HG 221 G 86 1969 Microfilm
subject: Patinkin, Don
subject: Money

description: Bibliography: p. 101-106.
description: The impact of t he writings of J. M. Keynes and the apparently successful performance which accompanied the application in various national economies of the implicit policy recommendations of his theory stimulated a reassessment by economists of existing theory. The reappraisal of Classical and Neo- Classical theory was spearheaded by Hicks, Lange, Modigliani and Patinkin; simultaneously, the famous Keynes versus Classics debate was carried out by numerous economists at various levels of abstraction. The generally-accepted outcome of the debate and reappraisal was that while Keynesian theory was more useful on a practical level as a policy tool, Neo-Classical models expressed in a general equilibrium framework were both 'more general (that is, Keynes' theory was a special case of Neo- Classical theory) and theoretically superior. The fact that economists have not been able to agree upon all the criteria to use in assessing the validity of theory meant, however, that no definitive and final statements could be tendered, and a continual reassessment of both bodies of theory has been a feature of recent economic literature. In his investigation of Classical and Neo- Classical theory, Lange charged that these bodies of theory precluded any meaningful monetary theory for a money economy because of a reliance on Say's Law. Patinkin took up this charge, elaborating upon and refining Lange's initial assertions. Patinkin further argued that the Walrasian and Casselian general equilibrium theory was logically inconsistent and therefore invalid; economists recognize logical consistency as a necessary condition for the validity of theory. The crux of Patinkin's argument was that Neo-Classical theorists had failed to consistently integrate their monetary and value theories. The general equilibrium theorists were charged with invalidly dichotomizing the pricing process of a monetary economy by assuring that the real sector depended upon and determined relative prices, and that the monetary sector depended upon and determined absolute prices. While their monetary theory provided for automatic adjustment to disturbances of equilibrium, their value theory precluded any adjustment because it was assumed t h at demand and supply functions were homogeneous of degree zero in absolute prices. A controversy ensued, but Patinkin emerged as the unquestionable victor. The task which faced Patinkin was whether it was possible to reconstruct a logically-consistent Neo-Classical theory which retained the essential features of the traditional theory. Traditional theory held that changes in the money supply were neutral with respect to the interest rate, relative prices and real income. Patinkin's reformulation relies upon the real-balance effect construct to eliminate the invalid dichotomy, and retains the neutrality of money. The hypothesis of this study is that while Patinkin's assertions about traditional theory were correct, and while he was able to reformulate the theory successfully, the restrictive assumptions of the new basic model deny it both the generality and theoretical superiority usually attributed to general equilibrium models, and it is of little assistance to economists in their attempts to understand economic life in the real world.