Re: [Pen-l] Paul Davidson sums up

[Ted Winslow <egwinslow@xxxxxxxxxx>]

Shane Taylor pointed to a lecture by Paul Davidson:

> On his university home page, he provides a PDF of a recent lecture,  
> "Risk and Uncertainty in Economics":

There we find the following claims about "the Keynes liquidity theory"..

"The Keynes liquidity theory on the other hand, presumes that decision  
makers 'know'
that they do not, and can not , know the future outcome of certain  
crucial economic decisions
made today.  Thus the Keynes theory explains how the capitalist  
economic system creates
institutions that permit decision makers to  deal with an uncertain  
future while making allocative
decisions and then sleep at night."

"For decisions that involved potential large spending outflows or  
possible large income inflows
that span a significant length of time,  people  'know' that they do  
not know what the future will
be."

As I've pointed out before (including to Davidson himself many, many,  
many times), Keynes's liquidity theory doesn't presume this.  The  
claim about  "those concerned with the buying and selling of  
securities" on which it's based is that:

"The vast majority of those who are concerned with the buying and  
selling of securities know almost nothing whatever about what they are  
doing.  They do not possess even the rudiments of what is required for  
a valid judgment, and are the prey of hopes and fears easily aroused  
by transient events and as easily dispelled.  This is one of the odd  
characteristics of the capitalist system under which we live, which,  
when we are dealing with the real world, is not to be  
overlooked." (Keynes, Collected Writings, vol. VI, p. 323)

Moreover, it attributes significant irrationality to behaviour in  
financial markets, one very significant form of this being denial of  
(rather than conscious awareness of and "sensible" response to) the  
fact of "uncertainty", a denial made necessary by the psychological  
fact that: "Peace and comfort of mind require that we should hide from  
ourselves how little we foresee."  Specifically, Keynes claims the  
"vast majority"  "assume, contrary to all likelihood, that the future  
will resemble the past"; they "assume the future to be much more like  
the past than is reasonable".  (vol. XIV pp. 124-5)

The presumption Davidson mistakenly attributes to Keynes is false, as  
Davidson himself (who identifies "science" with axiomatic deductive  
reasoning) then goes on implicitly and self-contradictorily to point  
out.

"The highly complex computer models used by investment bankers in Wall  
Street in
recent years to evaluate and manage the risks of dealings with  
financial assets is based on
statistical probability analysis of historical data to predict the  
future. Given the necessity of the
government, in 2008, to bail out all these Wall Street investment  
bankers when their risk
management tools failed, it should be obvious that their risk  
management computer models
presumed the ergodic axiom while the real world environment was  
nonergodic. That is why all
these risk management models failed to predict the 2008 future.  
(Hopefully Alan Greenspan will
now understand why his ergodic axiom based intellectual edifice  
failed.)"

"If future outcomes can not be reliably predicted on the basis of
existing past and present data, then there is no actuarial basis for  
insurance companies to provide
holders of these assets protection against  unfavorable outcomes.  
Accordingly, it should not be
surprising that insurance companies such as AIG that have written  
policies to protect asset holders
against possible  unfavorable outcomes resulting from assets traded in  
these failing securitized
markets find they have experienced billions of dollars more in losses  
than the companies had
previously estimated. [Morgenson, 2008].  In a nonergodic world, it is  
impossible to actuarially
estimate insurance payouts in the future."

Though Davidson doesn't notice it, these and other facts, while  
contradicting his own assumptions, confirm Keynes's.

As I just pointed out over on LBO, an article from Wired posted there  
by Charles Brown documents another significant impact of the EMH on  
the practices that have led to the present crisis.  <http://mailman.lbo-talk.org/pipermail/lbo-talk/Week-of-Mon-20090302/003637.html 
>

Ted

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