Sunday, March 27, 2011

Paul Davidson on John Maynard Keynes

Post Keynesian economics has an interesting history in the context of Keynesian economics more generally. For roughly the first 25 years after the publication of the General Theory, there was little controversy over how to interpret it. But, beginning in the 1960's, several different interpretations began to surface, and the battle over Keynesian economics was now underway. Two interpretations that eventually found their way into what would later become Post Keynesian economics were those of G. L. S. Shackle and Sidney Weintraub. Shackle, of course, emphasized the primacy of uncertainty in Keynes' message, while Weintraub attempted to elucidate the concept of the aggregate supply curve and its impact on wage-induced inflation. We can see both these influences in all of Paul Davidson's work. Paul Davidson talks about money and uncertainty in the same way as did Shackle, and he almost always includes a chapter on inflation and the Z-D model in all of his published books.

Paul Davidson's most recent book is entitled "John Maynard Keynes" and was published in 2007. Paul Davidson summarizes his life work on Keynes in this short book. The basic message is that, while Bastard Keynesian had economic policy right, they failed to understand the underlying theory behind it. Davidson then proceeds to explain what Keynes' new theory was all about. When it comes to economic policy, Post Keynesians are Keynesians; on matter of pure theory, however, they are radically different.

Thus Paul Davidson argues that government should occupy a central place in economic policy. Here are some quotes:

"the inability of the enrpreneurial system to provide full employment can be ameliorated by developing corrective fiscal policies and regulatory institutions for stabilizing financial markets."

"Keynes's rejection of the ergodic axiom meant that realistic theories cannot demonstrate that unregulated financial markets can optimally allocate investment funds into those projects that in the future will earn the greatest return."

Now, for Davidson, this is true because the world is non-ergodic (i.e. unpredictable). But Davidson's insistence on a "transmutable" reality seems to me to defeat and undermine any principled advocacy of government fiscal policy and regulation. Just because markets cannot cope with an uncertain future does not mean that governments can fare any better. Davidson spends several pages attacking (Austrians included) economic theories that rely on an immutable reality with epistemic ignorance. Davidson, however, believes, with Shackle, that the world is "ontologically uncertain," that it "remains to be written," and depends on the choices we make today.

Does it make sense to take this radical view of the world and then argue that governments should play a central role in increasing (stabilizing) effective demand? Shackle didn't think so. In his 1967 book, he argued quite forcefully that uncertainty "is beyond the reach of legislation."

Post Keynesians have the "theory" right; but their economic policies are all confused. Their own theory doesn't even permit them to defend "Keynesian policies." I get the impression when reading Davidson and others that Post Keynesians haven't yet fully traced out all the implications of "ontological uncertainty" and "transmutable reality." They are basically Keynesians who have enjoyed reading Shackle.

1 comment:

  1. This is a very substantial comment. Uncertainty is equally defined in the Austrian School and the Post Keynesian school as not quantifiable risk, but the outcome for both theories is quite different. For the Austrians uncertainty has also some productive aspects in market processes. Market actors compete with different expecations and assumptions. In the end the market will find the right result. On the other side for post Keynesians uncertainty is something not good for the economy. In cases of rising uncertainty entrepeneurs increase their liquidity from the precautionary motive. This also means that money for new investments decreases. So, regulation is neccessary to drop liquidity and enhance investments. The first question is whether markets are really efficient or, if not, governments could regulate more efficiently the economy. Or are both institutions ineffecient? The question is in what we believe. Sowjet communism has shown that state ordered economy is completely inefficient. I also have doubts that markets can regulate everything most efficiently. The correct answer could be that we need a balanced solution of market regulation. But this is not science. To find aout the right balance is an art.