J. Allan Hynes

The Rate of Time Preference and Dynamic Economic Analysis

Strong restrictions on the structure of preferences are a central feature in the received theory of intertemporal allocation. In fact, most of the modern literature concerned with capital-theoretic problems represents preferences by a functional in which an additive utility function is discounted by a constant rate of time preference. This specification is attractive because it is analytically tractable in dynamic models, and it clearly delineates how tastes and opportunities interact to determine an economys (households) paths of consumption and capital formation. However, its rigid structure (constancy of time preference) severely limits the conclusions and explanatory power of the corresponding models. This paper considers a class of utility functionals (in continuous time) which have the appealing feature that the rate of time preference depends systematically on an index of aggregate future consumption. The more flexible structure embodied in these functionals leads to important generalizations and modifications of standard conclusions. We highlight this added richness by examining five basic problems in dynamic economic analysis.

The Emergence of the Neoclassical Consumption Function: The Formative Years, 1940–1952

History, if viewed as a repository for more than anecdote or chronology, could produce a decisive transformation in the image of science by which we are now possessed (Kuhn, 1962a, p. 1). Certain types of experimental findings serve as benchmarks, permanent facts about phenomena which any future theory must accommodate, and which in conjunction with comparable theoretical benchmarks, pretty permanently force us in one direction. … The remarkable fact about recent physical science is that it creates a new, collective, human artifact, by giving full range to three fundamental human interests, speculation, calculation, and experiment. By engaging in collaboration between the three, it enriches each in a way that would be impossible otherwise (Hacking, 1983, p. 248).

Debt illusion and imperfect information

The output and employment effects of bond finance depend critically on the assumption that government bonds are regarded by the public as net wealth. This paper analyzes the possibility that debt illusion can exist because of uncertainty about the economic opportunities: there is a learning problem. In some cases, traditional wealth effects can be rationalized in terms of rational short run learning behavior. In other cases, the same general considerations may lead to responses that are opposite to those usually assumed. And policies that have short run effects in the direction conventionally assumd may, in the long rung, reverse their direction of impact, thus giving rise to critical timing problems.

Capital Immobility, Adjustment Costs, and the Theoretical Foundations of Income-Expenditure Models

This paper reexamines traditional macrotheoretical questions in models that fully integrate conditions of production into the structure. The relative price of capital and consumer goods and the real rate of interest are required to equal the technical rates of transformation. Capital stocks are immobile between sectors, and increasing marginal costs of introducing new capital goods into the production process are assumed. Given plausible values of the parameters, standard fiscal policies may not change aggregate demand in the directions predicted by the IS-LM approach. And to judge what outcome is most likely requires considerable information about an economys structure of production.

Deficit Finance and 'First-Round' Crowding Out: A Clarification

pirical work. They have great appeal given their simplicity. We are concerned that the costs be counted along with the benefits, and that the restrictions associated with homotheticity be clearly recognized by researchers. Our results can be incorporated fairly simply into intermediate theory courses, not only providing a useful special case for clarifying a confusing topic, but also bringing the textbooks closer to work being done on the frontiers of research.

The Contribution of Real Money Balances to the Level of Wealth

MONETARY THEORISTS IN THE POST-KEYNESIAN PERIOD have been increasingly interested in the contributions that are made by a given real quantity of money to the level of an economys wealth. Research on this subject has focused on the apparent contribution to wealth that arises from an excess of monetary assets over monetary liabilities in the portfolio of the private sector. The money supply has been designated as outside money and included in measures of wealth when, for example, it is currency directly issued by the government with no offsetting liability in the private sectors balance sheet. It has been designated as inside money, and omitted from many wealth aggregates, when money is the debt instrument of a private financial institution (see Johnson [7], and Patinkin [13] ). Unfortunately, phrasing the issue in this manner has resulted in neglect of the fact that any instrument that is money provides real flows of services independent of whether it is government debt or a liability of a private bank. A complete analysis must thus examine the relation between the real service flow emanating from the money stock and the real resource cost of producing this flow. When an economy opts to accept some debt instrument or commodity as money, it does so because it will be able to enjoy a larger flow of final output than would otherwise be possible; the opportunity set of the community is enlarged. For ex-

The Structure of Production, the Composition of Final Demand, and the Determination of the Price Level and Employment

MORE THAN FORTY YEARS have passed since Professor Hicks introduced the IS-LM model [5]. In this interval there has been criticism and modification of certain features of the original structure, but the essential framework remains as the cornerstone of the modern theory of static macroeconomic equilibrium. It is the basis of virtually all undergraduate and graduate texts in the field; the construction of macroeconomic econometric models is guided by the principles embodied in this structure; and it is the foundation for most contemporary discussions of monetary and fiscal policies. The degree of acceptance is further illustrated by the fact that, though the IS-LM model is considered to be a synthesis of important Keynesian advances, the professions leading monetarist [3] has recently utilized it to summarize his views about certain fundamentals of monetary theory. Recent research within the IS-LM framework has (1) improved the price theoretic foundations of individual structural equations, (2) introduced dynamic behavior by means of distributed lag formulations, and (3) added richer detail through disaggregation. However, the more sophisticated versions that have emerged retain the basic links between the real and monetary sectors and yield the same qualitative predictions about the eSects of monetary and fiscal policies that are implied by the more elementary textbook formulations. The

Economics' Past and Present: Historical Analysis and Current Practice

The place for the teaching of and research dealing with the history of economics continues to draw attention, at least from within our speciality. Recent examples are the History of Political Economy mini-symposium (1992) that was anchored to Margaret Schabass paper and Donald Walkers affirming essay in the Journal of the History of Economic Thought (1999). The former asked whether the history of economics, given the neglect shown by mainstream economics, should be incorporated into history of science programs. The latter argued that this neglect is unfortunate because there is a place for the history of economics in the training of economists. (The neglect is documented by Aslanbegui and Naples (1997).) An important feature of Walkers essay is that the argument was based on structural aspects of the discipline. His point of departure was Donald Gordons (1965) claim that there is little in the history of economic analysis that facilitates the understanding of current economics and the research problems with which it is concerned. Certainly the education of natural scientists, as Gordon noted, is consistent with this claim. George Stigler (1969) made a similar claim, and both more or less took the conclusion to be self-evident. Walkers response was that, at least among a variety of important sub-disciplines, there is not professional consensus and, therefore, there may not be a sharp distinction between current and past theory. This suggests that some form of historical analysis may be useful. Walkers paper moved the discussion away from arguments that begin with the presumption that every educated economist should be versed in the origins of economics. Instead, he focused on questions relating to history as a tool for understanding and for doing todays economics. In this respect, Walker returned to an issue addressed by Filippo Cesarano (1983)—they both focused on historical studies as a source of illumination for current economic analysis.