Patinkin, Don
Patinkin, Don 1922-1995
Don Patinkin was born in Chicago on January 8, 1922, to Russian Jewish immigrants, and he died in Jerusalem on August 6, 1995. His main contribution was the integration of the theories of value and money developed in Money, Interest, and Prices, the most influential book on monetary macroeconomics in the 1950s and 1960s. That book grew out of Patinkin’s PhD thesis, submitted to the University of Chicago in 1947 after an academic year as research assistant at the Cowles Commission for Economic Research, where he interacted with well-known economists such as Lawrence Klein, Kenneth Arrow, Trygve Haavelmo, and Jacob Marschak, among others. In 1949, after a brief period as assistant and associate professor at the Universities of Chicago (1947–1948) and Illinois (1948–1949) respectively, Patinkin moved to Israel to take up a position as lecturer in the newly created department of economics at the Hebrew University, where he stayed until the end of his life. Apart from his academic appointments at the university (as full professor after 1957 and emeritus after 1989), Patinkin also served as the first director of the Maurice Falk Institute for Economic Research in Israel from 1956 to 1972.
REAL BALANCE EFFECT
Patinkin’s 1956 book may be regarded as the most important contribution to the neo-Walrasian synthesis (named after French economist Léon Walras)—that is, the attempt to build the theoretical framework of macroeconomics on a developed general equilibrium system—after John Hicks’s 1939 Value and Capital. The process of adjustment to equilibrium was firmly grounded by Patinkin on the “method of successive approximation,” Walras’s theory of tatonnement, which had been largely neglected in the literature. Together with Paul A. Samuelson’s stability analysis, the tatonnement provided the backbone of Patinkin’s discussion of how the market solves the excess-demand equations. He criticized traditional “classical” monetary analysis for assuming that the equations of excess demand for goods determine relative prices (called the “homogeneity postulate”), while the price level is determined by the equation of exchange in the market for money. Partly motivated by the work of his former Chicago teacher Oskar Lange, Patinkin showed that this “dichotomization” of the economy into real and monetary sectors was logically inconsistent. In particular he was the first to realize that if the demand for money depended on the price level then—because of the budget constraint of agents—the demand for goods also depended on that level. Logical consistency required that the equations of excess demand for goods include real money balances as an argument in the individual utility functions, named “real balance effect” by Patinkin. The invalid dichotomization described above should be, according to Patinkin, distinguished from the “valid dichotomy” between the real and monetary sectors, expressed by the quantity theory of money as formulated in his book: Under the assumption the agents are free of money illusion, changes in the quantity of money affect only nominal variables and leave the equilibrium value of real variables unaffected (i.e., money is neutral in the long-run).
Although the stabilizing effect of changes in the price level on real balances and, therefore, on aggregate demand had been discussed before, specifically by Gottfried Haberler in his 1937 book Prosperity and Depression and by A. C. Pigou in his 1943 article “The Classical Stationary State,” they did not work out its implications for the integration of monetary and value theory. According to Harry G. Johnson in his 1962 article “Monetary Theory and Policy,” Patinkin’s criticism of classical monetary theory sparked off a debate about the accuracy of his historical account and the import of his theoretical claims, known as “the Patinkin controversy.” A few years later, Frank Hahn argued in his 1965 article “On Some Problems of Proving the Existence of an Equilibrium in a Monetary Economy,” that Patinkin left unsolved a fundamental problem of monetary theory: to prove the existence of a general equilibrium with a positive value for money.
DISEQUILIBRIUM MACROECONOMICS
Patinkin’s second main theme was the contrast between the Keynesian model (named after British economist John Maynard Keynes)—where markets do not clear and quantities respond to quantities—and the Walrasian system, which assumes that trades are only made at a market-clearing price vector. According to Patinkin, unemployment is a disequilibrium phenomenon that should be understood as the result of the effect of aggregate demand constraint on the behavior of firms and workers. Patinkin’s disequilibrium analysis of the labor market, with both firms and workers off their respective labor demand and labor supply curves, was later complemented by Robert W. Clower’s analogous interpretation of consumption as a function of income in the goods market in his 1965 publication “The Keynesian Counter-Revolution: A Theoretical Appraisal.” In their 1971 article “A General Disequilibrium Model of Income and Employment,” Robert J. Barro and Herschel I. Grossman combined Patinkin’s and Clower’s analyses in a fixed-price model that quickly became the most influential exposition of disequilibrium macroeconomics. It was largely thanks to the Barro-Grossman model—which may be regarded as an outgrowth of chapter 13 of Money, Interest, and Prices — that Patinkin’s approach to unemployment finally penetrated the macroeconomic literature. After this theoretical contribution to Keynesian economics, Patinkin became engaged in the 1970s and 1980s in an extensive investigation of the historical development of Keynes’s thought. He concluded that the “central message” of Keynes’s macroeconomics was the role of changes in aggregate income in bringing the goods market to less than full employment equilibrium, based on the assumption that the marginal propensity to consume is less than one.
PATINKIN’S IMPACT
Patinkin’s search for the microfoundations of macroeconomics has had a deep impact on economic theory. His contribution to the money-in-the-utility-function approach has become part of modern monetary theory mainly through the work of Miguel Sidrauski (1967). Although the real balance effect has lost space to substitution effects in monetary economics—its acceptance nowadays depends on the theoretical assumption that the intertemporal utility function is not separable in consumption and money balances, and on the empirical evidence about its size at business-cycle frequencies— according to Richard J. Sweeney (1988) and Peter N. Ireland (2005) it still plays a role as part of the broader wealth effect in models with specified intertemporal budget constraints and forward looking agents. In the same vein, despite the diminishing interest on disequilibrium macroeconomics since the late 1970s, Patinkin’s pathbreaking search for the compatibility of macroeconomics and microeconomics has left its mark on the research agenda of Keynesian and neoclassical economists alike.
SEE ALSO Arrow, Kenneth J.; Barro-Grossman Model; Economics, Classical; Economics, Keynesian; Economics, New Keynesian; Equilibrium in Economics; General Equilibrium; Hicks, John R.; ISLM Model; Klein, Lawrence; Macroeconomics; Market Clearing; Microeconomics; Microfoundations; Tatonnement; Walras’ Law; Walras, Lé on
BIBLIOGRAPHY
PRIMARY WORKS
Patinkin, Don. 1948. Price Flexibility and Full Employment. The American Economic Review 38 (4): 543–564.
Patinkin, Don. 1949a. The Indeterminacy of Absolute Prices in Classical Economic Theory. Econometrica 17 (1): 1–27.
Patinkin, Don. 1949b. Involuntary Unemployment and the Keynesian Supply Function. Economic Journal 59 (235): 360–383.
Patinkin, Don. 1959. The Israel Economy: The First Decade. Jerusalem: The Maurice Falk Institute for Economic Research in Israel.
Patinkin, Don. 1972. Studies in Monetary Economics. New York: Harper & Row.
Patinkin, Don. 1976. Keynes’ Monetary Thought: A Study of Its Development. Durham, NC: Duke University Press.
Patinkin, Don. 1981. Essays On and In the Chicago Tradition. Durham, NC: Duke University Press.
Patinkin, Don. 1982. Anticipations of the General Theory? And Other Essays on Keynes. Chicago: University of Chicago Press.
Patinkin, Don. 1989. Money, Interest, and Prices: An Integration of Monetary and Value Theory. 2nd ed., abridged. Cambridge, MA: MIT Press. (Orig. pub. 1956.)
Patinkin, Don. 1993. Israel’s Stabilization Program of 1985, Or Some Simple Truths of Monetary Theory. Journal of Economic Perspectives 7 (2): 103–128.
SECONDARY WORKS
Barkai, Haim, Stanley Fischer, and Nissan Liviatan, eds. 1993. Monetary Theory and Thought: Essays in Honour of Don Patinkin. London: Macmillan.
Barro, Robert J., and Herschel I. Grossman. 1971. A General Disequilibrium Model of Income and Employment. American Economic Review 61 (1): 82–93.
Boianovsky, M. 2006. The Making of Chapters 13 and 14 of Patinkin’s Money, Interest, and Prices. History of Political Economy 38 (2): 193–249.
Clower, Robert W. 1965. The Keynesian Counter-Revolution: A Theoretical Appraisal. In The Theory of Interest Rates, eds. F. Hahn and F. Brechling, 270–297. London: Macmillan.
De Vroey, Michel, and Pascal Bridel, eds. 2002. Patinkin and the Development of Modern Economic Theory. Special issue of the European Journal of the History of Economic Thought 9 (2).
Haberler, Gottfried. 1937. Prosperity and Depression: A Theoretical Analysis of Cyclical Movements. Geneva, Switzerland: League of Nations.
Hahn, F. H. 1965. On Some Problems of Proving the Existence of an Equilibrium in a Monetary Economy. In The Theory of Interest Rates, eds. F. Hahn and F. Brechling, 126–135. London: Macmillan.
Hicks, Sir John Richard. 1939. Value and Capital: An Inquiry into Some Fundamental Principles of Economic Theory. Oxford: Clarendon Press.
Ireland, Peter N. 2005. The Liquidity Trap, the Real Balance Effect and the Friedman Rule. International Economic Review 46 (4): 1271–1301.
Johnson, Harry G. 1962. Monetary Theory and Policy. American Economic Review 52 (3): 335–384.
Lange, Oskar. 1944. Price Flexibility and Employment. Bloomington, IN: The Principia Press.
Pigou, A. C. 1943. The Classical Stationary State. Economic Journal 53 (212): 343–351.
Sidrauski, Miguel. 1967. Rational Choice and Patterns of Growth in a Monetary Economy. American Economic Review 57 (2): 534–544.
Sweeney, Richard J. 1988. Wealth Effects and Monetary Theory. New York: Blackwell.
Weintraub, E. Roy. 1979. Microfoundations: The Compatibility of Microeconomics and Macroeconomics. Cambridge, U.K.: Cambridge University Press.
Mauro Boianovsky