THE EMPIRICAL SIGNIFICANCE OF THE REAL BALANCE EFFECT

In early 1940's Professor developed what was later to be called Pigou effect.' This idea was presented as a refutation on a quite abstract level of Keynesian underemployment equilibrium thesis. On this level was successful; Keynesian criticism was limited primarily to a lower level of abstraction. Thus, a frequent criticism was that effect required an impractically large price decrease -in spite of fact that had admitted that the puzzles we have been considering in last section are academic exercises, of some slight use perhaps for clarifying thought, but with very little chance of ever being posed on chequer board of actual life.2 This discussion was conducted mainly in short articles and notes in technical journals with most, though not all, contributors raising a single point or two rather than presenting a detailed formal analysis. But in 1956 a formal treatise embodying effect did appear. Professor Patinkin's Money, Interest, and Prices3 not only worked out formal aspects of effect in a rigorous and beautifully constructed model, but transformed effect in three major ways. First, he combined effect and Keynes effect.4 Second, he returned to Pigou's original high level of abstrac-