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Keynes vs. Keynesianism

from Lars Syll

keynes3But these more recent writers like their predecessors were still dealing with a system in which the amount of the factors employed was given and the other relevant facts were known more or less for certain. This does not mean that they were dealing with a system in which change was ruled out, or even one in which the disappointment of expectation was ruled out. But at any given time facts and expectations were assumed to be given in a definite and calculable form; and risks, of which, tho admitted, not much notice was taken, were supposed to be capable of an exact actuarial computation. The calculus of probability, tho mention of it was kept in the background, was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself …

Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders Wealth a peculiarly unsuitable subject for the methods of the classical economic theory.

John Maynard Keynes QJE 1937

And this emphasis on the importance of uncertainty is not even mentioned in IS-LM or ‘New’ Keynesianism …

  1. April 8, 2018 at 2:19 am

    That’s presumably because New Keynesianism of the IS-LM variety has no grasp of Knightian Uncertainty, apparently never heard of it.

  2. April 8, 2018 at 4:36 am

    Uncertainty is one of four characteristics that Marc Lavoie classifies among the third set of prepositions that characterizes post-Keynesianism. Other three are (1) monetized economy, (1) importance of historical and irreversible time, and (3) the concept of non-ergodicity (Lavoie 2014 Post-Keynesian economics: new foundations, Edward Elgar, p.35).

    These are self-claimed prepositions of post-Keynesian analysis. However, the trouble with post-Keynesian economics is that the emphasis of (fundamental) uncertainty remains at the stage of methodological attitude and does not realize as theories. I am sympathetic to post-Keynesians but many of their models are simple macroeconomics with no theoretical foundations. Combining empirical laws in a system of differential equations does not produce a more predictive or explanatory model or deeper theory than basic laws.

    I have asked a question in ResearchGate: Does Post Keynesian Economics need no theoretical foundations?

    Up to date, there are 59 answers, 34 followers, and 459 reads. But I cannot claim that discussions were very productive. Entries of post-Keynesian specialists are required.

    • April 8, 2018 at 11:50 am

      “Combining empirical laws in a system of differential equations does not produce a more predictive or explanatory model or deeper theory than basic laws.”

      Note that if the alternative “basic laws” in question are fallacious, empirical laws in a system of differential equations not based on those basic laws can indeed produce a more predictive or explanatory model.

      Of course, the benchmark must be “as much as can be predicted or explained in the real world”, since allowing a theory to “win” a “prediction race” by predicting more than is empirically knowable is not a scientific approach to modeling.

    • April 8, 2018 at 3:18 pm

      I do not think it is wise to participate a “prediction race.” Economic theories have much important things to do. Or at least we should aim to construct such a theory or a system of theories.

  3. David Harold Chester
    April 8, 2018 at 9:57 am

    Again its a confusing of micro- and macro-economics that is to blame ! Uncertainty is the nature of business in the micro-economics field. In macro-economics there are always aggregate quantities and there is no need to consider the probability of the exchanges, because on average the amount is known almost completely for certain (with variations being due only to recent perturbation in the whole system).

    Unfortunately Keynesian economics does not properly distinguish between the scales of these two kinds of activities and hence the question about the theoretical foundations for it cannot be answered until we know about which of these two kinds of economics we are to discuss. In macro-economics the answer is clear and the basis is vital, but before it is modeled it needs axioms to better show about what we are thinking.

    • Prof James Beckman, Germany
      April 8, 2018 at 2:14 pm

      Hi, David,it is interesting that the macro-micro duality in economics is matched by the physics of outer space with its gravity waves (for example) & the multiple location/wave-particle Planckian world when looking inside the atom.

      • David Harold Chester
        April 9, 2018 at 9:27 am

        This point can be better expressed in that in Quantum Theory one necessarily has to consider possibilities of events occurring. This concept is shared theoretically by micro-economics events too. However, the world of traditional physics takes the aggregate properties of large numbers of atoms/molecules (example–gas theory), as does theoretical macro-economics. I discuss this in my book, write to me for an e-copy of “Consequential Macroeconomics” which makes it an almost exact science (at last!) chesterdh@hotmail.com

      • Prof James Beckman, Germany
        April 9, 2018 at 5:20 pm

        Thanks, David, for the offer. I will take you up on it. The deep space aspect is very interesting as it introduces the 4th dimension of time, which might have been on Planck’s mind. The gravitational wave is an attempt to unify large-scale physics, which of course has been on the mind of macro-economists for a long time.

      • David Harold Chester
        April 10, 2018 at 10:03 am

        Thanks for “taking up my offer”. To do so I need your e-mail address and I will send you the e-copy.

  4. Prof James Beckman, Germany
    April 8, 2018 at 10:02 am

    Since I do current macro trade analysis & organizational innovation, I only add that the world is changing so fast in how individuals & firms earn their living that finding stable, measurable variables is very challenging. A lot of this is due to financial economics which delights in derivatives of numerous kinds, etc. Personally, all I can do is to look at today’s data & try to make sense of it in what remains of our historic categories with data to measure them.
    If China, for example, is as clever as they seem to be, they will beat down Mr Trump with a collection of political, domestic production, patent-focused, etc issues to drive his advisors a bit mad. Another world is that of dark, untaxed assets in the tens of trillions of dollars.

  5. Norman L. Roth
    April 8, 2018 at 9:30 pm

    Messrs. Chester and Beckmann,

    ….”Recent perturbation in the whole system…? …”The physics of outer space…”

    Sounds familiar. Please reference page 129 of the 197 page edition of TELOS & TECHNOS Last two sentences of the 2nd paragraph…
    .”Such models also contain much reference to “perturbations” and ‘impact periods’; Perhaps reflecting an extension of the energy physics metaphor {mid 19th century vintage} to an Astro -physics metaphor.
    .’Technology shock’ is occasionally credited with its own ‘internal laws of motion’.

    I urge you fellows to read that in context…Of the whole book. Don’t fall into the same old bear pit that is strewn with the bones of so many earnest metaphor hunters.
    At your service. You don’t have to explore the same cul-de-sacs over and over again.
    With respect: Please GOOGLE: Norman L. Roth

  6. April 8, 2018 at 11:17 pm

    “The calculus of probability, tho mention of it was kept in the background, was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself …”
    A way of saying it to be remembered.

    • Prof James Beckman, Germany
      April 9, 2018 at 7:03 am

      So true, Jim, so virtually every statement I make to my students or as a consultant is couched in probabilistic terms.

  7. Craig
    April 9, 2018 at 8:00 am

    The reason Keynesianism morphed into the neo-classical synthesis is because it was a mere reform. It was also the fall back position of Finance as Social Credit had become a world wide movement in the time between the world wars and its policies threatened their paradigm. Douglas was a much better observer and more insightful than Keynes, but I’m not sure even he, let alone his followers, ever truly comprehended the paradigm changing capabilities of Social Credit’s policies as the term was not known at the time, plus Social Crediters were also mostly afflicted with the false orthodoxy of general equilibrium and so did not realize the inversion/transformation of a problematic duality or ratio signature of paradigm change.

    You never hear economists talking about Social Credit I suspect because it became so buried by the distraction of the war, relief at its ending, the rise of Keynesianism and finance unfairly tarring it as anti-semitic even though its entire philosophy was based on the natural philosophical concept of grace-graciousness.

    • Prof James Beckman, Germany
      April 9, 2018 at 9:31 am

      Craig,as I was raised in America, Social Credit spoke of the horrid ideas of Socialism. The cultural divide given by the Atlantic Ocean made most Americans believe in opportunity which was to be given to all who worked & kept their eyes open. That’s why my ancestors came from Germany, Sweden, France & Scotland in the 1880’s & 1890’s.

      • Craig
        April 9, 2018 at 8:23 pm

        My ancestors came from Germany, England and Ireland in the 1880’s as well in order to find opportunity and to avoid conscription in Bismarck’s wars.

        Socialism has almost as horrid and fallacious a history as capitalism and its current horrid manifestation finance capitalism. I will not dispute that some mixed systems of democratic socialism are somewhat less horrid than finance capitalism, but they are still laden with fallacies, unworkabilities and palliative “solutions” for monetary economic systems. For instance, given that MMT has shown that sovereign fiat money systems do not actually need taxes….then why do we need re-distributive taxation? The truth is we don’t, what we need is direct funding by the government and economic and monetary policies that will both prevent inflation and ideally can integrate deflation into profit making systems…..like the ones I’ve been enumerating here lately. These policies would eliminate what all heterodox economists have identified as a problem namely systemic austerity for all agents, and they align with fragmentary suggested policies like UBI and “a modern debt jubilee”. It’s just that the heterodox are not aware of the significances, opportunities and benefits of tying monetary policy directly to the point of retail sale…..yet.

        Integrate truths and keep on integrating them, and it will become increasingly difficult to “put a foot wrong”.

      • Prof James Beckman, Germany
        April 10, 2018 at 10:13 am

        Craig, thanks for your ideas. Right on.

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