Banking - Yojana

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maximization of profits issubject to
a constraint imposed by legal
reserve requirements.
The "newview"isnot directed to
diminish the existing differences in
the regulatory treatment of banks
and competing intermediaries,
either byrelaxing constraints on the
one or bytightening controls on the
othe'r.
Monetary growth theory is
concerned with the role of money
in a growing econpmy. Tobin first
presented the: neoclassical
monetary growth model in 1965,
and development was made
possible by the pioneering work of
Robert Solow and T.W.Swan. Most
models of economic growth are
non-monetary. The non~monetary
neo-classical growth models offer
no place for significant choices of
the second kind-portfolio choices.
They admit only one type of asset
that can serve wealth owners as a
store of value namely reproducible
capital.
Tobin in 1955 generalised Lloyd
Metzler's wealth effect into a theory
of portfolio balance in which the
rate of interest equates the public's
desire to old monetary and nonmonetary
wealth with the existing
stocks of monetary and nonmonetary
wealth. As a
consequence, portfolio balance
became the necessary and sufficient
condition for price stability and
macro economic equilibrium in
general. Tobin considers money to
be an alternative asset or a partial
substitute for real capital for the
wealth-portfolio holders. In the case
of money being government debt
or "outside money", the monetary
authority by controlling its rate of
growth, can affect the economy's
steady-state properties.
Neoclassical monetary growth
models developed byJames Tobin,
David Levhari and Don Patinkin
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and others use portfolio balance as
the mechanism that may explain a
non-neutrality of money in the longrun.
The purpose of Tobin's paper
on "Moneyand Economic Growth"
is discussing the roles of monetary
factors in determining the degree
of capital intensity of an economy.
Tobin's monetary growth theory is
concerned with the influence of
money on the rate of growth and
steady-state characteristics of a
growing economy.
The core of the path-breaking
neoclassical monetary growth
theory, that is, the notion of
portfolio balance and its implied
assumption that'money and real
capital are substitutes as assets, has
been recently criticised by E.shaw
(1973) and R. McKinnon (1973).
Based on observations concerning
less developed economies, Shaw
and McKinnion believe that any
positive correlation among the
propensity to save, stocks of
monetary assets,and rates of growth
necessitates a reconstruction of
monetary growth theory along lines
that viewmoney and real capital as
complements rather than
substitutes.
New Campaign
The discussion of "net economic
welfare" on NEW is drawn from
William Nordhaus and James
Tobin, "Is Growth Obsolete?"
(National Bureau of Economic
Research, Columbia University
Press, NewYork,1972). The earlier
concept, a measure of economic
welfare (MEW) has been replaced
by a more informative label net
ecdnomic welfare (NEW). "Net
ecdnomic welfare is an adjusted
m~asure of total national output
that includes onlyconsumption and
investment items that contribute
directly to economic well-being."
(Paul A. Samuleson and William D.
Nordhaus, Economics, McGraw-
Hill Book Company, New York,
1989, p. 117). William Nordhaus
and James Tobin launched a new
campaign againstgrowth aiming to
acquire a life style, which has as its
goal maximum freedom and
happiness forthe individual, not a
maximum Gross National Product.
GNP and NNP are measures of
production rather than of welfare
and they count many activities that
are evidently not directly sources of
utility themselves. An obvious
shortcoming of GNP is that it is an
index of production, note
consumption. "The goal of
economic activity, after all is
consumption" (Nordhaus and
Tobin). 'Per capita' rather than
aggregate consumption is the
welfare objective. "The economic
profession has been slowto develop,
either conceptually or statistically,
a measure of economic
performance orien ted to
consumption, broadly defined and
carefully calculated" (Nordhaus
and Tobin). In proposing a welfare
measure Nordhause and Tobin in
no waydeny the importance of the
conventional national income
accoun tsor of the output measures.
Their MEW (or NEW) is largely a
rearrangement of items of the
national income accounts.
The wealth interpretation of
income as the primary determinant
of consumption is dominant in the
'General Theory' of J.M. keynes
(1936). Keynes himself alluded to
the' possible influence o'
"Unforeseen' changes in money
valueofwealth".He even catalogued
"changes in expectation of the
relation between the present and the
future level of income". Recent
emphasis on permanent (M.
Friedman, 1957) and lifetime
income (A.Ando and F.Modigliani,
1963; F. Modigliani and R.
Brumberg, 1954) has brought the
wealth interpretation to the fore.
G. Ackley (1951) and other
YOJANAJuly2002