Download What is Post Keynesianism and Who Is A Post Keynedsian?

WHAT IS POST KEYNESIANISM AND WHO IS A POST KEYNESIAN? RESPONSES
TO LAVOIE , KING AND DOW ON.?
By
Paul Davidson*
Lavoie, King and Dow share one common theme in their criticism of my review of King’s
[2001] book A History of Post Keynesian Economics. They all object, in different ways and in
different degrees to (1) my definition of the boundary lines that encompass Post Keynesian
economics and (2) who, in the 21 century, should be entitled to be labeled a Post Keynesian.
In essence I am being censured for refusing to provide shelter for many schools of nonmainstream economists under the Post Keynesian tent. All three scorn my decision to limit the
term Post Keynesian to those who adopt the analytical framework of Keynes’s general theory
principle of effective demand as the basis of further theoretical development.
To understand my response to this criticism, the reader needs some background
information. My small tent definition of who is a Post Keynesian relies on Keynes’s own
formulation of why his general theory was a revolutionary way of thinking about real world
economic problems. Keynes [1936, p. 16] accused the mainstream classical economists of his
time of resembling “Euclidean geometers in a non-Euclidean world who, discovering that in
experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight
-- as the only remedy for the unfortunate collisions which are occurring. Yet in truth there is no
remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry.”
In the second volume of his biography of Keynes, Skidelsky [1992, p.486-7] notes that
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Keynes recognized that Einstein began his “The General Theory of Relativity” by using a
similar metaphor where Einstein suggests that his revolutionary scientific analysis is similar to
casting doubt on the ubiquitous use of Euclidean Geometry to explain important real world
physical phenomena. In a wonderful essay explaining the relationship between Einstein’s timespace continuum and Keynes’s market-money connection, Jamie Galbraith [1996, pp. 14-5]
suggests that it is not coincidental that the title of both the revolutionary theory of Einstein and
that of Keynes starts with the same three words --- “The General Theory”. Galbraith [1996, p.
14] states that the first three words of the title to Keynes’s 1936 masterpiece “are evidently
cribbed from Albert Einstein” for both Einstein and Keynes believed they had created a
scientific revolution in their discipline in the sense that realism required overthrowing some
fundamental classical axioms. To throw over an axiom is to reject what the faithful believe are
"universal truths".
Keynes’s economic theory required rejecting basic mainstream axioms in order to
develop a logical foundation for a non-Say's Law model more closely related to the real world in
which we happen to live. In light of Keynes's analogy with Euclidean geometry Keynes and
those Post Keynesians who start from Keynes’s [1936, Ch. 2] principle of effective demand
theory might be called non-Euclidean economists!
The restrictive classical axioms rejected by Keynes in his logical analysis were [1] the
gross substitution axiom, [2] the neutrality of money axiom, and [3] the axiom of an ergodic
economic world. If these axioms were rejected, then Keynes believed that essential
characteristics of the real world where involuntary unemployment rather than full employment
was the typical laissez-faire outcome could be understood.
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I. Lavoie’s criticism.
Lavoie accuses me of being inconsistent in my [Davidson, 2003] definition of who is a Post
Keynesian vis-a-vis my 1970s [Davidson, 1972) and early 1980s [Davidson,1980,1982] view of
who could be included in the Post Keynesian camp. Nevertheless, Lavoie notes that even 20
years ago I listed some key characteristics of Post Keynesian economics as:
1. The notion that the economic system is a process moving irreversibly through calendar time.
2. Expectations play a key role in an uncertain world.
3. There is an essential difference between financial and real capital.
4. Income effects dominant substitution effects.
Apparently Lavoie does not realize that the irreversibility concept in #1 (above) and the
uncertainty concept of #2 requires the rejection of the classical ergodic axiom. Moreover, the
difference between financial and real capital specified in (3) requires the rejection of the
neutrality of money axiom while (4) requires that the gross substitution axiom not be
ubiquitously applicable in all demand functions. So in referring to my 1980s list of key
characteristics of Post Keynesian theory, Lavoie has apparently unknowingly endorsed a small
tent Post Keynesian concept. Logical consistency suggests that this list of the key characteristics
would exclude those heterodox economists whose theory conflicted with these key
characteristics even though they wanted to be sheltered under the Post Keynesian tent.
But the reader may ask why was I willing to include these heterodox economists in my
Post Keynesian amalgam in the 1970s and early 1980s if their theories did not overthrow all the
classical axioms that Keynes required to be discarded to obtain a general theory. The answer is
that I was naive in two distinctive ways.
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First I was adopting a political strategy to try to produce a large united front of
heterodox economists to help extricate classical economics from its position of dominance in the
economics profession. In those days, the political motto that Sidney Weintraub and I adopted
was “The enemy of my enemy is my friend”.
Second, I thought that if these alternative schools proclaimed that they believed in the
Keynesian revolution, then, in time, I could convince them to modify their analytical framework
by removing the same three classical axioms that Keynes had overthrown. Once they adopted
this “non-Euclidean” approach as the basic foundation for economic theory, then these heterodox
economists would be free to add explicit additional postulates as necessary to deal with the
specific queries on which they wished to focus. Any conclusions that they reached that could not
be reached via Keynes’s basic analytical foundation could then be directly attributed to the
invoking of additional specific axioms. Accordingly the applicability of their results to the real
world could be judged directly on the basis of the realism of the additional restrictive axioms that
they added to Keynes’s general theory.
Unfortunately, the history of this wide tent amalgam that Sidney Weintraub, I (and
others) attempted to cobble together in the last decades of the 20th century merely demonstrated
how idealistic our political view was and how ineffective my powers of persuasion would be.
Despite more than 20 years of my discussions, with Sraffians, Kaleckians, Circuit theorists,
Marxians, and other heterodox economists , on the need to reject these classical axioms to
achieve a real world analysis of an entrepreneurial economy, these latter groups insist on
maintaining one or more of these restrictive classical axioms.
History has shown that the enemies of my enemy often were not Post Keynesian friends.
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In the last decades of the 20th century although the various heterodox theoretical schools of
thought crowded into the Post Keynesian tent, many denied Keynes’s call for a non-Euclidean
economics. Instead they insisted their analytical framework captured the essence of Keynes’s
revolution despite the fact that their theoretical models were logically inconsistent with Keynes’s
general theory.
This unwillingness of many heterodox economists to adopt Keynes’s analytical
framework while still claiming to be Post Keynesians permitted important mainstream
economists to argue that Post Keynesianism was not a coherent theoretical school. For example
Tobin [1985, p. 115] wrote “A school of self-styled post Keynesians . . . reject equilibrium
analysis altogether1... and emphasize the macroeconomic implications of the noncompetitive
structure of economics. Their valid points do not add up to a coherent theory”. Or as Solow
[1976, pp. 343-4] wrote “Modern Post Keynesians seem to say that Keynes’s basic contribution
to macrotheory was the rejection of the equilibrium concept as hopelessly ahistoric. The
textbook model. . . ignored the essential importance of finance. Now some of this is almost
incomprehensible to me, and the part I do understand strikes me as way out of proportion... Thus
far so-called post-Keynesianism seems to be more of a state of mind than a theory”. Or as the
Dornbusch and Fischer’s mainstream textbook (1990) notes “post Keynesian economics remains
an eclectic collection of ideas, not a systematic challenge to neoclassical theory” (p. 220).
By permitting other heterodox economists to use the Post Keynesian name while they
argued against (1) Marshall’s and Keynes’s concepts as equilibrium analysis and their approach
to supply and demand function analysis, and (2) the need for an axiomatic formal logical
approach to developing a theoretical framework, Post Keynesians made it easy for orthodox
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economists to dismiss the Post Keynesian movement as merely an incoherent babble of a rag-tag
group whose ideas were often incoherent and who were not scientific enough to do hi-tech
mathematical theory as a check of coherence and consistency. And if Nobel Prize winning
establishment “Keynesian” economists such as Tobin and Solow summarily dismiss Post
Keynesian theory as incoherent babble, why should the thousands of graduate students, trying to
become professional economists and gain an academic position at a prestigious university, take
Post Keynesianism seriously?
But even worse than the dismissal of Post Keynesian theory by Nobel Laureates is the
fact that various individuals within the wide tent Post Keynesian movement often said
disparaging things about those of us who used Keynes’s principle of effective demand as the
basis of Post Keynesian analysis2. Moreover some of these wide-tent Post Keynesians explicitly
rejected Keynes’s general theory aggregate supply and demand analysis as a useful analytical
tool e.g., the Sraffians, Minsky, Kaleckians.
Consequently, if Lavoie is claiming I am being inconsistent when I changed my vision
of who to include in the Post Keynesian tent, my response is similar to one made by Keynes
many years ago when he was charged with being inconsistent because he changed his position
on some topic. Keynes response was “when events prove my position is wrong, I change my
mind. What do you do sir?”
II. King’s Comments
I admire John King’s willingness to admit that, as an historian, he is embarrassed by the fact that
in his book, he was “clearly wrong on the origin of concept of ergodicity” . King had attributed
the origin of the discussion of the ergodic axiom in the Post Keynesian literature to Lawson
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rather than Davidson. (Of course King means associating Keynes’s uncertainty with the rejection
of the classical ergodic axiom -- but that is a minor quibble.)
King also admits that he was not correct when he suggested that the New Keynesian’s
efficiency wage theories “should be acceptable to Post Keynesians”. King now asserts that what
he meant to write that some [wide-tent] Post Keynesians “had - probably mistakenly – been
attracted to them [New Keynesian theories]”. But it is not surprising that those wide tent
occupants such as followers of Kalecki, whose theory emphasizes monopoly elements, would be
attracted to the New Keynesian argument that it was the existence of fixity of money wages and
prices that “caused” unemployment. Of course had King used my small tent definition of Post
Keynesianism he would have immediately recognized that the attraction to New Keynesians’
efficiency wage theory by some of King’s wide-tent “Post Keynesians” is due to these
economists accepting one or more of the three classical axioms that Keynes had thrown over.
Moreover King still defends the non-Keynesian ISLM apparatus as an essential
description of Keynes’s general theory framework even though John Hicks [1982], more than
two decades ago, in an article published in the Journal of Post Keynesian Economics,
specifically noted that he (Hicks) was wrong when, in 1937 he interpreted Keynes in terms of
his ISLM framework. Further, although King rejects my claim that Marx was a classical
economist, he does quote Joan Robinson as pointing out that despite Marx’s dismissal of Say’s
Law, Marx set about “discovering a theory of crisis which would apply to a world in which
Say’s Law was fulfilled”. One might similarly argue that Samuelson, Modigliani, Tobin, and the
younger J. R. Hicks did not use classical analysis because they set about to explain how
unemployment can exist in a world of flexible prices as long as money prices and money wages
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are fixed.
I shall not even try to rebut King’s points where he indicates the differences between his
and my interpretation of Kalecki, Sraffa, Minsky, and Hicks of the JPKE. Having met Sraffa and
known and had significant and long theoretical discussions with both Minsky and Hicks I will
stick to my interpretation of who ultimately supported (and who rejected) Keynes’s principle of
effective demand developed from Keynes’s aggregate supply and demand functions as
fundamental to the Keynes vision. In his book King [2000, p. 113-4] explicitly notes that
Minsky had “almost as much affinity for the New Keynesians”, and Minsky’s unwillingness to
adopt the Keynes aggregate demand and supply analysis is well known. Minsky’s affinity for the
New Keynesians is partly due to the fact that, like Minsky, New Keynesians reject Keynes’s
effective demand analysis and Keynes’s aggregate supply and demand functions as the
fundamental framework for Keynes’s general theory.
King does raise the issue as to whether my own Post Keynesian approach is coherent
since, King [ 2002, p. ] claims my analysis
“ is subject to the Sraffa capital critique” . In
response, I note that, first, there is nothing in Keynes’s general theory or my Post Keynesian
writings that is subject to the Sraffa critique. Sraffa’s critique is against the use, as the demand
curve for real capital, of a specifically shaped downward sloping marginal productivity of
capital curve that does not have reswitching points. As I specifically noted [Davidson, 1984] the
marginal productivity curve for labor is not the demand curve for labor. From this argument it
follows that a marginal productivity curve for capital no matter what its shape is not the demand
curve for capital in a money using, market oriented entrepreneurial system. In my view King’s
invoking the Sraffa critique regarding Keynes and my writings is merely as a “red herring”.
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King incorrectly argues that Keynes acceptance of the first “classical postulate” required
Keynes’s analysis to be limited to a purely competitive model. On page 245 of the General
Theory Keynes specifically noted that his general theory was applicable to any given degree of
competition – and not only pure competition. Moreover, in his response to Dunlop and Tarshis
in The Economic Journal Keynes [1939] complained that Dunlop And Tarshis were attacking
him wrongly merely because he was “conceding a little to the other view” [Keynes, 1939, p.
411] when he appeared to accept the first classical postulate. For despite this concession to “the
other [classical] view”, Keynes could still demonstrate that pure competition and completely
flexible prices could not assure an automatic market mechanism for achieving full employment
equilibrium either inthe short-run or the long-run. So King’s attempt to flog Keynes and my Post
Keynesian theoretical model by dragging out purely competitive pricing and well behaved twice
differential production functions, is just, I am sorry to say, wrong.
Over forty years ago Davidson and Smolensky [1964] showed how Keynes’s aggregate
supply and demand analysis could be used to analyze the hiring behavior of profit maximizing
entrepreneurs given any degree of monopoly including pure competition. We also demonstrated
how entrepreneurs’s hiring decision would be handled by Keynes’s aggregate supply and
demand analysis if entrepreneurs did not profit maximize but instead targeted a specific rate of
profit, or even some minimum level of profit. So King’s argument that Keynes’s and my analysis
are only applicable to purely competitive product and labor market and cannot deal with
monopoly or monposony situations, or even non profit maximizing conditions is incorrect.
But King’s claim is an illustration of my point that if you permit a wide-tent definition of
Post Keynesianism then you encourage persons to enter the tent who, for some self-interest
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motivation, see it as desirable to announce to the world that Keynes and the narrow tent Post
Keynesians are just a bunch of charlatans who do not recognize that it was elements of
monopoly and non-flexible prices that are the (sole?) cause of unemployment3. With friends like
these who needs enemies?
Finally King gets to the question of what is coherence and why it is important in
developing a theoretical framework . I agree wholeheartedly with King’s weak version definition
of analytical coherence where any theoretical analysis that contains logical errors can not be
coherent. But King goes further and argues that a “strong version” of coherence “ requires the
articulation of a single, unquestioned, universal theoretical framework, which can be invoked in
all manner of analytical and policy contexts, in the way general equilibrium theory used to [why
the past tense John?] operate in neoclassical economics?”
King has misrepresented not only what Keynes said about his general theory but also my
position in this matter of the need for a coherent theoretical framework. In my dictionary.
coherence is defined as “the quality of and/or state of cohering esp. logical or orderly
relationship of parts.” In my mind there is no question that since no one has been able to show
any logical inconsistency in Debreu’s general equilibrium theory, therefore Debreu’s theory is
coherent. Coherence, however, is a necessary but not a sufficient condition for a theory to be
applicable to real world economic problems. Debreu’s framework is coherent but irrelevant for a
real world entrepreneurial system since it is based on several restrictive axioms that can not be
justified as relevant to what Keynes [1936, p. 3] called the “world of experience”.
A coherent realistic theory possessing the maximum level of generality must be the
fundamental analytical foundation upon which all further theoretical developments are
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constructed. Keynes’s theory has the maximum level of generality because, as Keynes indicated,
it has fewer restrictive axioms than any classical theory currently existing. Debreu, on the other
hand, believes that a “good general theory does not search for the maximum generality, but for
the right generality” (Weintraub, 2002, p. 113). Debreu invokes the additional restrictive axioms
of gross substitution , neutral money, and ergodicity (or the ordering axiom in deterministic
models) to get what he [Debreu] believes is the right level of generality. Narrow tent Post
Keynesians can specify exactly why Debreu’s analysis is irrelevant for problems of real world
entrepreneurial economies by citing Debreu’s need for these restrictive axioms.
If heterodox economists accept Keynes’s theory as the most general, real world analytical
framework, then they can add restrictive additional axioms to expand this general theory for
specific analytical and policy contexts when they believe that Keynes’s theory cannot shed any
light upon the phenomena under investigation. But it is for those who add additional restrictive
axioms to defend the insertion of those postulates and not for those who rely on the basic general
theory to prove a negative.
If, for any given set of conditions, a general theory to which supplementary restrictive
axioms have been added obtains logical results that are different than what one would obtain
from the basic general theory, as does Debreu’s analysis vis-a-vis Keynes’s analysis, then it is
clear that the different conclusions can be attributed directly to the specified additional postulates
imposed by the investigator. In this way, economists who provide policy prescriptions can be
judge strictly by whether the specific additional postulates added by any investigator are
relevant for the real world problem under investigation. That is the approach taken by Keynes
[1936, p. 3] when he argued that the “postulates of the classical theory are applicable to a special
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case and not the general case ....[and ] the characteristics of the special case assumed by
classical theory happen not to be those of the economic society in which we actually live, with
the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of
experience”.
Following this line of argument, I have demonstrated that for Arrow-Debreu models,
rational expectations models, and other mainstream models (e.g., old or new Keynesian models),
the results obtained are due to adding one or more of the three classical axioms that Keynes and
small tent Post Keynesians reject as applicable to the real world.
In his “strong sense” view of coherence, King has conflated the concept of coherence
with the concept of Bourbakian rigor. With the development of Bourbakian mathematics and its
introduction by Debreu into economics, rigor per se has become the relevant criteria for
justifying a theoretical framework so that the very “truth” of a theory or model need not be tested
or confirmed by its applicability to reality. Modern mainstream economists, e.g., Debreu,
Samuelson, Von Neumann, and Morgenstern, claim that their mathematical (economic) models
are rigorous and therefore true in the only useful scientific sense of the word. In this view, truth
and consistency are intertwined and truth is established solely by providing a “model” known to
be internally consistent.
This raises the important question: “what does one mean by “truth” in economic
analysis?” Is “truth” reached merely by the use of any mathematical theory that makes it
possible to check its consistent relative to an extended set of axioms? If a real world observation
(e.g., involuntary unemployment) is not “true” within this extended rigorous mathematical
approach, then the addition of one or more additional axioms (e.g., the assumption of rigid
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money wages and prices) can make the system more complete and the empirical observation
“true” within the enlarged rigorous mathematical system.
Alternatively is “truth” obtained by an axiomatic theory based on the least number of
assumptions (“a general theory of employment, interest and money”) that is descriptive and
applicable to reality? This alternative was Keynes’s vision -- as suggested in his analogy of
comparing classical economists with Euclidean geometers in a non-Euclidean world. It is also
the belief that underlies Sidney Weintraub and my vision of a Post Keynesian economic theory
where that the axiomatic base should be a small as possible by rejecting restrictive postulates
that are clearly inapplicable to the real world. Additional consistent axioms added to this
maximum level of generality will produce special case theories that may be true within their
restrictive larger axiomatic foundation but these cases may, or may not, be applicable to the real
world. The onus is on those who add such restrictive axioms, e.g., Debreu, Samuelson, Solow,
Tobin, Stiglitz, Mankiw, etc. to demonstrate the relevance of their specific case axioms to the
real world.
If, on the other hand, we accept King’s wide tent Post Keynesian definition, then what is
to stop Debreu from being awarded the right to use the Post Keynesian nomenclature (if he
wanted to)? After all Debreu’s theoretical model is nothing more than Keynes’s axiomatic
general theory with sufficient additional restrictive classical axioms to achieve what Debreu
boasts is the “right level of generality” rather than the most general theory available.
What criteria do King and Lavoie have for criticizing the market oriented policies
derived from Arrow-Debreu rational expectations type models that lay our unemployment
problem to a government social safety net which coddles workers into accepting leisure instead
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of working at the market clearing real wage?
Ultimately King fears that a small tent Post Keynesianism is more likely to get trampled
on than a widespread temple of Babel. So his wide tent concept is essentially a hope that despite
the discord in the wide tent which turns occupant against occupant and therefore does the
theoretical (ethnic) cleansing job that otherwise mainstream economists would have to try to do
themselves, somehow a large number of cacophonous voices will be heard. Unless an economic
catastrophe such as the Great Depression should again cloud economic reality, I fear that if we
follow King’s wide tent philosophy, we are accepting the mainstream’s “final solution” for
Keynes and the Post Keynesians.
III. Dow’s criticism
I find that Sheila’ Dow’s comments represent a significant, but not complete, change in her view
of the need for a Babylonian approach. In her earlier calls for a Babylonian approach (Dow,
1985) differences were welcomed merely because this assured that there would be no single
accepted way to begin analyzing economic problems. At this early stage of development of
Dow’s Babylonian position, apparently any approach other than the mainstream general
equilibrium approach was acceptable. Babylonianism was then presented, as Dow [2005] states
in her current comment, as a stark “counterpoint to the axiomatic-deductive logical structure of
Cartesian-Euclidean thought”.
Dow seems to think that I am prone to express Keynes’s general theory analytical
framework and my Post Keynesian writings in terms of an axiomatic-logic approach primarily
(solely?) “in the interests of persuasion” of mainstream economists. Dow believes my view of
Keynes and Post Keynesianism is only a strategy for persuasion and not the “true” Babylonian
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methodological approach embedded in Keynes’s general theory. “If mainstream economists
accept only one form of logic, then the argument seems to go that the case has to be made in
terms of that logic, or be branded as illogical. And indeed it is an element of pluralist strategy for
heterodox economics that some lines of argument are expressed in the language of the
orthodoxy.” (Dow, 2005, emphasis added].
In her next paragraph, however, Dow [2005] questions the “reasonableness to represent
Keynes’s own approach, far less that of Post Keynesians, as axiomatic”. If we are to take this
comment at face value, then Dow is suggesting we should ignore Keynes’s [1936, p. 16] own
Euclidean vs. non-Euclidean analogy where one merely “overthrows” the axiom of parallels to
work out an axiomatic non-Euclidean economics. Dow’s view of Keynes’s approach flies in the
face of Keynes’s own belief in the revolutionary approach he developed in juxtaposing his
general theory vis-a-vis classical economic theory in a similar way to Einstein’s general theory
relative to Newtonian classical theory..
Jamie Galbraith [1996, p. 15] has noted that classical Newtonian theory presupposes an
absolute separation and therefore independence of space and time. Einstein’s revolution involved
a “general theory of relativity” where space and time were interrelated. In classical economic
theory money and markets are assumed to be absolutely separate and independent (i.e., money is
neutral) so that changes in the money supply do not affect the quantity sold on markets any more
than time affected space in Newton’s classical view of the physical world. Keynes’s theory, on
the other hand, permitted money and markets to be interrelated -- just as Einstein’s theory let
time and space be interrelated..
Keynes, like Einstein, did not abandon logical axiomatic based coherence. Since “space-
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time is curved” Einstein merely extended “the Reimannian geometry of curved space to the
physical universe...Keynes’s reference to overthrowing Euclid’s axiom of parallels is an
unmistakable allusion to this feature of Einstein’s theory” [Galbraith, 1996, p. 17]. In
overthrowing some of the restrictive axioms of classical theory Keynes could demonstrate the
interrelationship between markets, real output and the quantity of money. As Keynes noted in the
preface to the German language edition to his masterpiece, he called the book a general theory
because it was based on fewer axioms than classical economic theory [Keynes 1937]. It was the
restrictive classical axioms that Keynes overthrew that had separated money from markets and
real output outcomes in classical (and modern Walrasian -Debreu) theory. Keynes never argued
that his general theory had abandoned axiomatic-logical methodology.
Dow apparently conflates (1) the Debreu Bourbakian mathematical argument that the
right level of generality requires an axiomatic mathematically rigorous system where money is
presumed to be neutral with (2) Keynes’s requirement for a logical theoretical framework to
understand real world economic problems and processes. The latter requires an axiomatic base
that is readily applicable to the real world.
The fact that for important crucial decisions, the economic system is nonergodic and
therefore decision makers “know that they do not know just what will happen” (as Hicks [1982]
put it), does not mean that rigorous deductive logic has no role to play in a theory of economic
decision making. Nevertheless Dow suggests she wishes to replace rigorous deductive logic
with “ordinary logic” or “human logic” .
Dow claims that it is “a requirement for deductive axiomatic logic that the knowledge of
axioms be held with certainty” and therefore the existence of uncertainty in the world under
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investigation, makes the use of axiomatic logic inapplicable. Here Dow apparently conflates the
uncertainty that the decision makers in one’s model (and the real world) face, with the
investigator’s willing to recognize and “know” that as decision makers’s fear of the uncertain
future increases, decision makers will search for instruments and institutions that permit them to
postpone using their command for committing real resources today. In modern day
entrepreneurial economies, the existence of money and well-organized spot market for liquid
assets permits such an abstention. In economic systems without such human institutions, e.g., a
kibbutz, a feudal economy, a Robinson Crusoe economy, such a postponement is not possible.
The decision makers in such environments know that despite the uncertain future, they are
required to use all their currently earned command over real resources immediately.
In other words, the existence of an uncertain future per se does not invalidate the use of
axiomatic deductive logic. Even in a nonergodic (uncertain) environment, if an economy does
not use money and markets to organize production and exchange activities, Say’s Law will
apply. Thus we should not be surprised that classical economics does a good job of representing
decision makers’s behavior regarding output and employment results in command economies
such as feudalism, a monastery, or a nunnery, etc. What is logically different about a monetary
entrepreneurial economy from a nonmonetary system is the existence of money and liquidity
creating institutions that allow income recipients to separate in time the income earning process
from the spending on goods and services process. In a consistent logical theory that rejects the
neutral money axiom, when decision makers become more fearful of a future that they “know”
they can not know, then they can postpone using their today’s earnings to purchase real goods
and services currently and instead buy liquid assets. This rush to liquidity is possible when the
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general theory permits the existence of money contracts, money, and well-organized spot
markets that make assets that possess specific essential properties liquid. The essential properties
of these liquid assets are [Keynes,1936, ch. 17] elasticities of production and substitution of
approximately zero. These elasticity properties means that money and all other liquid assets do
not grow on trees, (i.e., are not reproducible) , and that producibles are not gross substitutes for
liquid assets.
I am not quite sure what Dow means when she says that “it is a requirement of deductive
axiomatic logic that the knowledge of axioms be known with certainty”. Just because Keynes
and the Post Keynesians develop a theory of economic decision making when the decision
makers “know” they do not know what will happen in the future does not mean that the theory
builder can not know with “certainty”, that if liquid assets exist, then as fear of the future
increases among the actors in our theory, the aggregate demand for liquid assets will rise at the
expense of aggregate spending income on real goods and services.
In her discussion of “ontology and axioms”, Dow makes the very valid point that “long
chains of [axiomatic deductive] reasoning are very vulnerable to error being multiplied down the
chain”. This, however, does not mean one should not use the axiom based deductive logic
methodology. It only means theorists should be careful not to make logical errors in their
deductive reasoning. Debreu’s analysis and classical theory in general -- which assures a full
employment equilibrium outcome-- is apparently free of logical errors despite the long chains of
deductive reasoning. Classical theory’s “teaching is misleading and disastrous if we attempt to
apply it to the facts of experience” [Keynes, 1936, p. 3]. not because its deductive chain contains
errors (which it does not), but rather because its axiomatic foundation implies characteristics for
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the economic system that “happen not to be those of the economic society in which we actually
live” [Keynes, 1936, p. 3].
Logically consistent classical theorists such as Nobel Prize winners Debreu, Friedman,
and Lucas are, like Ricardo, offering “us the supreme intellectual achievement, unattainable by
weaker spirits, of adopting a hypothetical world remote from experience as though it was the
world of experience and then living in it consistently” [Keynes, 1936, p. 192]. For Old and New
Keynesians theorists who attempt to develop Keynesian policies while utilizing an ArrowDebreu microeconomic foundation and/ or a rational expectations model, their “common sense
cannot help breaking in - [to their long chains of deductive reasoning] with injury to their logical
consistency” [Keynes, p. 192] as they introduce logical errors and/or inconsistencies into these
models they call “Neoclassical Synthesis Keynesian” or “New Keynesian models (with rational
expectations )”. With such inconsistencies inherent in mainstream “Keynesian” models, it is it
any wonder that the classical analysis of Messrs. Friedman, Debreu, and Lucas vanquished
Keynes and conquered mainstream economic theory in the last decades of the 20th century?
Ultimately, Dow retreats from her original argument [Dow, 1985] for a wide open
Babylonian methodology where intuition, and animal spirits can override axiomatic rigorous
formal logic. Dow now calls for a “structured pluralism”. In this structured pluralistic view each
heterodox school is free to invent its own ontology – as long as they have a shared starting point
of the social world being understood as an open, organic system. Somehow it seems that this call
for different ontologies justifies ignoring the use of “mathematical formalism”.
Dow then admits that my Post Keynesian view of a nonergodic ontology (and I assume
Dow would consider Keynes’s analysis with his emphasis on uncertainty and the nonstationarity
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of economic data) is an acceptable methodological approach. I would, however, challenge Dow
and others to describe another “open and organic” ontology approach which does not require the
system to encompass a nonergodic economic environment . If other heterodox school ontologies
throw out the need for explicitly stating that the environment is nonergodic, then, by necessity
these other heterodox systems have built into them pre-existing laws of motion that govern
future outcomes – and we are back into the classical world, even if we introduce the institution
of money and financial markets. Uncertainty then becomes merely an epistemological problem
that the Austrian economic school has already dealt with for more than a century. If Dow and
other open system advocates are willing to admit that a non-ergodic environment is a necessary
and sufficient condition for an “open, organic system”, then they are agreeing that Keynes’s
theory represents the maximum level of generality and that the small tent definition of Post
Keynesian economics is the only logical approach to open, organic systems.
I rest my case.
REFERENCES
Davidson, P. (1972), Money and The Real World, Macmillan, London.
Davidson, P. (1980), “Post Keynesian Economics: Solving The Crisis In Economic Theory”,
Public Interest. pp. 151-73.
Davidson, P. (1982), International Money and the Real World, Macmillan, London.
Davidson, P. (1983), “The Marginal P:roduct Curve Is Not The Demand Curve For Labor and
Lucas’s Labor Supply Function Is Not the Supply Curve For Labor In The Real World”, Journal
of Post Keynesian Economics, 6., pp. 105-117.
Davidson, P. (2003-4), “Setting The Record Straight on A History of Post Keynesian
20
Economics”, Journal of Post Keynesian Economics, 25, pp.245-72.
Dornbusch R. and Fischer, S. (1990), Economics, McGraw Hill, New York.
Dow, S. C. (1985) , Macroeconomic Thought: A methodological Approach (Oxford, Basil
Blackwell)
Galbraith, J. K. (1996), “Keynes, Einstein and Scientific Revolution” in Keynes, Money and The
Open Economy, Essayed in honor of Paul Davidson, vol. 1, edited by Philip Arestis (Elgar,
Cheltenham).
Hicks, J. L.(1981), “ISLM: An Explanation”, Journal of Post Keynesian Economics, 2. Pp. 13954.
Keynes, J. M. (1936), The General Theory of Employment Interest and Money. Harcourt, Brace,
New York.
Keynes, J. M. (1937), “Preface to German language edition, The General Theory of Employment
Interest and Money, Duncker and Humblot, Berlin.
Keynes, J. M. (1939), “Relative Movements of Real Wages and Output”, The Economic Journal,
49, reprinted in The Collected Writings of John Maynard Keynes, VII, edited by D. Moggridge,
Macmillan London.
Skidelsky, R.(1992), John Maynard Keynes, The Economist As Saviour, (Macmillan , London).
Solow, R.W. (1976). “Alternative Approaches to Macroeconomics”, Canadian Journal of
Economics.
Tobin, J. (1985) “Theoretical Issues in Macroeconomic” in Issues in Contemporary
Macroeconomics and Distribution, edited by G. Feiwel (Albany State University6 of New York
Press, Albany).
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Weintraub, E. R. (2002), How Economics Became A Mathematica Science, Duke University
Press, Durham.
NOTES
*The author is Visiting Scholar, New School University
1. This may be true of some heterodox economists but it is not correct to attribute it to those who
adopt Keynes’s principle of effective demand.
2. King [ 2003, p.113] notes that “Minsky’s Post Keynesianism was highly individual... [and] he
was even critical of Paul Davidson’s monetary theory... in his [Minsky’s] dismissive review of
the latter’s [Davidson’s] Money and The Real World.”
3. After all decades before Keynes’s general theory classical economists already recognized that
monopoly and fixed money wages and prices prevented the markets from automatically
achieving full employment
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