Lars P. Syll — What is Post Keynesian Economics?

Paul Davidson's view.

Lars P. Syll’s Blog
What is Post Keynesian Economics?
Lars P. Syll | Professor, Malmo University

Lars P. Syll — The non-existence of Paul Krugman’s ‘Keynes/Hicks macroeconomic theory’

Paul Krugman = Not Keynes and Not Hicks.

Lars P. Syll’s Blog
The non-existence of Paul Krugman’s ‘Keynes/Hicks macroeconomic theory’
Lars P. Syll | Professor, Malmo University

Jason Smith — On the use of hypotheses: or, what do you get when you assume non-ergodicity?

Jason Smith replies to Lars Syll (and Paul Davidson).

What comes out of assuming ergodicity? All of basic thermodynamics and much of basic economics. If we assume economic (or thermodynamic) systems aren't ergodic -- what does that give us?

Essentially, assuming non-ergodicity is analogous to the assumption that I(A) < I(B) in the information transfer framework (ergoditicy is the assumption that I(A) ≈ I(B) ... the information in the two macro observable is the same, from which you can derive supply and demand). 

What can we get from the assumption I(A) < I(B)? Nothing. 

That is to say that while ergodicity is a useful assumption, non-ergodicity is a completely useless assumption. It doesn't prove that economies are quasi-periodic chaotic systems or that they are some other kind of complex system -- you need evidence for that! Show us a model that that is empirically successful. Or at least more empirically successful than assuming ergodicity.

Yes, that's a point that Keynes made and which Davidson and Syll elaborate:

Many thanks for sending me your article I enjoyed it very much. I am sure these matters need discussing in that sort of way. There is one point, to which in practice I attach a great importance, you do not allude to. In many of these statistical researches, in order to get enough observations they have to be scattered over a lengthy period of time; and for a lengthy period of time it very seldom remains true that the environment is sufficiently stable. That is the dilemma of many of these enquiries, which they do not seem to me to face. Either they are dependent on too few observations, or they cannot rely on the stability of the environment. It is only rarely that this dilemma can be avoided.
Letter from J. M. Keynes to T. Koopmans, May 29, 1941

Of course, that is a bit of a hand wave but Keynes is much more specific about it in other places. But the idea is that the basis for neoclassical assumptions is too non-representation of the subject matter to yield a useful methodology. Neoclassical methods are not useful for telling us what we really need to know, in particular for policy formulation. Keynes proposed a new economic method based on a monetary production economy in which money is non-neutral and uncertainty dominates.

Keynes was not only a theoretician but an economic "engineer" who are active in the world of policy at the time of the Great Depression and his ideas are credited with saving the day — other than by neoclassical economists that have sought to "correct" this, for which the world is now suffering another prolonged contraction.

In the Keynesian view, econometric models are essentially a waste of time. According to old Keynesians and Post Keynesians, Paul Samuelson "bastardized" Keynes by introducing key assumptions that Keynes specifically rejected.

In this view, macroeconometricians should be doing something else, like looking for types of models that actually are useful, like the stock-flow consistent approach developed independently by James Tobin and Wynne Godley, and set forth in Godley & Cripps, Macroeconomics (1983) and Godley and Lavoie (2007, 2nd ed. rev., 2012). See Lavoie (2010).

Information Transfer Economics
On the use of hypotheses: or, what do you get when you assume non-ergodicity?

Jason Smith

Lord Keynes — Davidson on Nominal Contracts and Uncertainty

Short and sweet explanation of why capital not only produces wage and price rigidity but also requires it operationally.

No, it's not the unions, or inflexible workers unwilling to accept flexible wages.

Rather, it's an attempt to introduce a modicum of predictability in a non-ergodic system through forward contracts.

Social Democracy For The 21St Century: A Post Keynesian Perspective
Davidson on Nominal Contracts and Uncertainty
Lord Keynes

What Is Post Keynesian Economics?

Encyclopedia entry by Davidson.

Lars P. Syll
What Is Post Keynesian Economics?
Paul Davidson | Holly Professor of Excellence, Emeritus at the University of Tennessee in Knoxville and a Visiting Scholar at the Schwartz Center For Economic Policy Analysis at the New School

Paul Davidson — Bitcoin and MMT

What is Bitcoin? According to Modern Money Theory, bitcoin can not be money since it is not accepted in payment of taxes by any government — nor is it issued by any government via the governed purchase of goods and/or services from the private sector. So what is bitcoin in terms of MMT?? I do not know what MMT proponents would respond to this query?

Professor Davidson seems to be confused over necessary v. sufficient conditionality wrt state money aka currency (Chartalism), and money as an IOU that is transferrable (Innes, Minsky).

Requirement of state money aka currency is sufficient to create demand for the unit of account that the state issues as the sole provider. In this sense, currency is a tax credit. Other forms of money are not unless the state agrees to accept them at its payment offices. If it doesn't then they must be exchanged for currency for payment of taxes, fees, fines, or other financial obligations to the state required to be settled in the state's unit of account.

Any IOU can serve as "money" as an exchange medium if a counterparty will accept in exchange.

However, the rest of Davidson's post is interesting. Bitcoins are neither issued by any state, nor does any state accept them in payment of taxes as far as I know, and they are not anyone's IOU either, in that they are "mined" digitally as an analogy to precious metals, gold in particular. Is gold bullion money? Some would say yes. Others would say it remains a commodity that can be bartered for other commodities, unless it is minted and issued as a money thing. How does Bitcoin fit into this scheme?

Real-World Economics Review Blog
What is Bitcoin?
Paul Davidson | Holly Professor of Excellence, Emeritus at the University of Tennessee in Knoxville

Paul Davidson — What is Post Keynesian Economics?

Paul Davidson summarizes PKE.

PKE rejects ergodicity, gross substitutability, and money neutrality.

Lars P. Syll's Blog
What is Post Keynesian Economics?
Paul Davidson in International Encyclopedia of Social Sciences

Lord Keynes — M. E. Brady’s Critique of Post Keynesianism

While charge (1) is probably true, I think it is clear that charge (2) is false: there are Post Keynesians who do recognise degrees of uncertainty, such as, for example, Dow (1994 and 1995), Jespersen (2009: 8), Lars Syll, and (if he self-identifies as a Post Keynesian) Crocco (2002).

But I would like to see someone respond to charge (3).

Wonkish, but I have been wondering about this myself.

Social Democracy For The 21St Century: A Post Keynesian Perspective
M. E. Brady’s Critique of Post Keynesianism
Lord Keynes

See also Lord Keynes, Brady and Arthmar on “Keynes, Boole and the Interval Approach to Probability”

Fred Zaman — Rethinking Keynes’ non-Euclidian theory of the economy

What did Keynes (and Davidson) miss? Institutional power. Why did they forget or ignore this? Likely because it is "Marxist." Sociologists have acknowledged that power is fundamental institutionally. Conventional economics rules out its consideration, assuming that the labor market is nearly perfectly competitive, information is symmetrical, and power is equal, which is nonsense sociologically.

Two axioms of classical economics that Keynes kept, however, and with
which keeping Davidson concurs, are (1) people are self-interested and try to
 protect their income and wealth; and that (2) firms try to maximize profits
($REF).

These two axioms keep hidden far more than they disclose,
however. For people are not only individually inclined to protect (and increase)
their income and wealth: (1A) they collectively also are very much inclined to
 protect (and increase) their income and wealth in common cause, to the extent
 deemed necessary even at the expense of others not of their own group. And firms
 also: (2A) collectively in common cause to the same extent, are similarly
 inclined to maximize their profits above all else, even at the expense of other
 groups not of their own. Understanding this truth about collective action in
 economics (in politics also), one can replace the word “collisions” in the above
 quotation of Keynes with “collusions,” for collusion (by the favored few) is
generally the best means by which to accomplish axioms (1A) and
(2A).

What are we to make of these axioms in the Euclidian analogy of
economics, regarding behavior collectively favoring for those of one’s own kind,
and conversely detrimental to those not of one’s own kind? It is simply that the 
lines running parallel to each other, which in this analogy represent full
employment in an efficient market, are actually not straight and do meet, simply
 because of collusion against workers (and the general populace) by capitalists
 working behind closed doors. The efficient market thus is degraded through the
 collusion of others (both individuals and firms) working according to the 
non-Euclidean axioms 1A and 2A. The free market, when it thus is not subject to
government regulation and oversight that minimizes the detrimental effects (to
workers and the general populace) of these non-Euclidean axioms (tends to make
 the economic lines more parallel), is inherently a very non-Euclidean space....

Real-World Economics Review Blog
Rethinking Keynes’ non-Euclidian theory of the economy
Fred Zaman

Lars P. Syll — Ergodicity – the biggest mistake ever made in economics

Paul Samuelson claimed that the “ergodic hypothesis” is essential for advancing economics from the realm of history to the realm of science.

But is it really tenable to assume – as Samuelson and most other neoclassical economists – that ergodicity is essential to economics?

The answer can only be – as I have argued here, here, here, here and here – NO WAY!

Lars P. Syll's Blog
Ergodicity – the biggest mistake ever made in economics
Lars P. Syll | Professor of Economics, Malmo University

See also Mauboussin on Strategy: Shaking the Foundation: An interview with Ole Peters challenges some of the foundational assumptions in economics and finance, Legg Mason Capital Management, and Towers Watson: The Irreversibility of Time: Or Why You Should Not Listen To Financial Economists
(hat tip Rick Bookstaber)

See also Paul Davidson: Is economics a science? Should economics be rigorous?

Lars Syll — Keynes and Knight on uncertainty – ontology vs. epistemology

Report of a conversation between Lars and Paul Davidson on the philosophical underpinning of probability and its relevance in economics and finance.

Keynes and Knight both asserted uncertainty but their concept of it were different. Keynes asserted ontological non-ergodicity, whereas Knight assumed ontological ergodicity and asserted only epistemological non-ergodicity.

Lars and Paul Davidson explore the implications of this distinctions and come down on the side of Keynes.

These distinctions are key in understanding the fundamental difference between the mainstream and Post Keynesianism.

Read it at Lars P. Syll's Blog
Keynes and Knight on uncertainty – ontology vs. epistemology
Lars P. Syll

Warren Mosler on monopoly and ELR

The government has the same pricing options with its money of any monopoly supplier of an absolute necessity. An analogy can be drawn, for example, with an electric utility monopoly although taxes give the currency monopolist a tool to regulate demand that the electric utility monopolist does not have.

How does the monopolist price his product? There are two options:

1. Set price, p, and let quantity, q, float, or
2. Set q and let p float.

The first option is generally preferred, with a gold standard or the proposed ELR program two examples of using the first option.
However, the government is currently employing the second option. It sets a budget that determines q (spending), and lets the market determine p (price level) as all purchases are made at market prices. If the monopolist decides to set q, and let the market decide p, it must constrain q so that demand exceeds q, or, for all practical purposes, the price of its product will fall towards 0. Government constraint of q to control p means using continuous unemployment and excess capacity to maintain price stability. Surely this would never be considered a viable option in running an electric utility monopoly, for example...... 

The ELR proposal uses the option of setting one price, the ELR wage, paying market prices for other purchases, and letting the total quantity of government spending be market determined.
With a gold standard, gold can always be considered fully employed as gold can always be sold to the government at the fixed price. Likewise, with an ELR policy, labor can always find a buyer.

Warren Mosler, Full Employment and Price Stability
(h/t Anonymous from the comments)

Joe Firestone adds in a comment:

The "full employment and price stability paper by Paul Davidson  [Warren Mosler] refers to the govt as the monopoly supplier of *its* money, or *its* currency.

Pavlina's paper refers to the govt as a "money monopolist" of the money it demands in payment of taxes.

Wray has argued in the past that "money" as the unit of account, or "money" as an institution, is a "public monopoly" - and distinguishes this from what he calls the particular "money-thing" such as currency or credit.

Easy to see why people get confused about all this.

real-world economics review available — articles by Paul Davidson and Matias Verengo

Read it at real-world economics review
(Issue no. 59, 12 March 2012 )

Paul Davidson on global prosperity — Interview by Philip Pilkington

Paul Davidson is America’s foremost post-Keynesian economist. Davidson is currently the Holly Professor of Excellence, Emeritus at the University of Tennessee in Knoxville. In 1978 Davidson and Sydney Weintraub founded the Journal for Post-Keynesian Economics. Davidson is the author of numerous books, the most recent of which is an introduction to a post-Keynesian perspective on the recent crisis entitled ‘The Keynes Solution: The Path to Global Prosperity’.

Read it at Naked Capitalism
Navigating Global Prosperity: An Interview with Paul Davidson

Interview by Philip Pilkington

Paul Davidson — What Makes Economists So Sure of Themselves, Anyway?

Read it at Naked Capitalism
What Makes Economists So Sure of Themselves, Anyway?

by Paul Davidson

Paul Davidson: A response to John Kay

INET published a paper, written by John Kay, that deals with the relationship between economics and the world we live in. The Map Is Not the Territory: An Essay on the State of Economics spells out methodological critiques of economic theory in general, and of DSGE models and rational expectations in particular.



INET forwarded Kay's paper to a handful economists and invited them to respond. Here we offer a perspective by Paul Davidson, Editor of the Journal of Post Keynesian Economics, and Visiting Scholar at the Schwartz Center for Economic Policy Analysis.

Davidson takes issue with the “classical” axioms, in particular with what he calls the "ergodic axiom": the notion that the future is predetermined by the past and present state of affairs, that past and knowable probability distributions govern future events. He praises rigor, consistency, and the deductive approach, but says the classical axioms are inapplicable to the world we live in: “The financial crisis of 2007-2009 should have been sufficient empirical evidence to indicate that the axiomatic basis of the mainstream theory needs to be replaced.”

Read Davidson's response to John Kay at INET.

(h/t Edward Harrison)

Krugman moralizes — "Free to die"

Paul Krugman's observation that America in becoming less compassionate can be taken as a sociological observation with economic policy implications, or as liberal moralization. George Lakoff would argue that all policy decisions, being political choices, are fundamentally moral in character, since practical politics is about different worldviews based on different moral norms.

In the past, conservatives accepted the need for a government-provided safety net on humanitarian grounds. Don’t take it from me, take it from Friedrich Hayek, the conservative intellectual hero, who specifically declared in “The Road to Serfdom” his support for “a comprehensive system of social insurance” to protect citizens against “the common hazards of life,” and singled out health in particular.

Given the agreed-upon desirability of protecting citizens against the worst, the question then became one of costs and benefits — and health care was one of those areas where even conservatives used to be willing to accept government intervention in the name of compassion, given the clear evidence that covering the uninsured would not, in fact, cost very much money. As many observers have pointed out, the Obama health care plan was largely based on past Republican plans, and is virtually identical to Mitt Romney’s health reform in Massachusetts.

Now, however, compassion is out of fashion — indeed, lack of compassion has become a matter of principle, at least among the G.O.P.’s base.

Read it all at The New York Times, Free To Die

UPDATE: Read in conjunction with Joshua Holland's Has American-Style Conservatism Become a Religion?

But I think another belief may be more telling; that cutting taxes always brings in more revenues to the government's coffers. There are two reasons this claim is more a manifestation of religious dogma than just the usual spin. First, it represents a perfect article of faith – universally held among the brethren but without any discernible basis in reality (see here for more explanation).

In 2007, Time magazine reporter Justin Fox surveyed conservatives on whether they believed the myth. He found a perfect split: all conservative politicians, pundits and operatives bought into it while conservative economists or budget experts -- people who have to remain somewhat grounded in evidence -- didn't hesitate to call it out for the nonsense it is, and that included “virtually every economics Ph.D. who has worked in a prominent role in the Bush administration.”

Love, Prostitution and Economics

Do you know the difference between love and prostitution? Or even better, the difference between love and prostitution as it relates to economics?

In Economics For A Civilized Society, Paul and [son] Greg Davidson examine that question, among others you might not have expected in a book on how our economic system should work. But there is actually a direct correlation between love and prostitution and the sort of cost-benefit analysis mindset that fuels the way we’ve been convinced over recent decades to look at and think about the economy. The authors write that in a free market vision, “prostitution is a valuable service that some people are willing to pay for, while love is not for sale and therefore is worthless.” They observe that “this philosophy of market valuations provides the basis for all values in conservative economics.”

Love won’t pay the bills. Yet would you want a society without it?

Read the whole at post at New Deal 2.0, Love, Prostitution and Economics