Re: Colander and New Keynesian Economics <Steve.Keen@unsw.EDU.AU>

["Alan G. Isaac" <AISAAC@xxxxxxxxxxxx>]

On Sat, 15 Jan 1994 19:55:23 -0700 <Steve.Keen@xxxxxxxxxxx> said:
>                                             . Informally, NK's
>axiomatic foundation is that of neoclassical theory. This
>is an exchange-based model predicated on individual utility-
>maximising behaviour, with the goal of reaching a personal equilibrium.
>In its pure rendition (Arrow-Debreu), this individual maximising
>behaviour results in a global maximising equilibrium which is unique
>and stable.

This is not correct.
Equilibria  in an  Arrow-Debreu framework have no claim to
uniqueness in the absence of strong supplementary assumptions.
In addition, since the Arrow-Debreu framework is inherently static,
there is no inherent notion of stability. (Some work has tried
to augment the A-D framework with ad hoc characterizations of
dynamic questions in order to explore stability issues.)

>NK makes a set of (defensible) "ad-hoc" assumptions to try
>to cope with the real world failure of such a situation to eventuate,
>and these extensions result in the possibility of multiple
>(stable or unstable) equilibria. How then is the individual--
>whose utility maximising is at the heart of the model--to respond?
>Can he/she know that the global equilibrium to which she is
>responding is only one of many? Can she know what the others are,
>and what her utility position would be under them? Can she embark
>on any course of action at all without introducing fundamental
>(in the PK sense) uncertainty?

I think it is important to recognize that this problem plagues
PK theory as well. There is no well artculated model of
individual responses to "fundamental uncertainty". Instead,
we are currently stuck with psychologizing about rules of
thumb or speculating about unverified (and usually inadequately
specified) mechanisms for the "evolutionary" production of decision
rules.

>
>That is the kind of axiom/conclusion inconsistency I am thinking
>of: the conclusions generate a world in which the axioms themselves
>cannot operate.

This remains unclear to me. Surely it is not a charge of _logical_
inconsistency? Is it a question about the unmodelled dynamic
movement between equilibria? I think there is general consent
that this remains inadequate, even in the mainstream literature.
But this critique is surely two edged.

>
>The PK axioms, on the other hand--and I am in complete agreement
>with the list you nominated--are consonant with fundamental
>uncertainty. Generating a set of far-from-equilibrium results at
>the macro level is therefore entirely consistent with the under-
>pinnings of the theory. I also believe that PKers should develop
>far-from-equilibrium explanations of economic stability (thus
>eschewing an equilibrium methodology), whereas such a methodology
>is endemic to neoclassical analysis.

Not all PKs agree that we should eschew equilibrium methodology.
I certainly don't. However, perhaps our disagreement will turn
partlyon what we mean by 'equilibrium methodology'. For example,
I would characterize the General Theory as reflecting Keynes'
equilibrium methodology, however mucy it diverges from
neoclassical equilibrium analysis.



[][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][]
[] |¢   |   |¢   |¢  |       Alan G. Isaac, Associate Professor   []
[] |-¢  |   |-¢  | ¢ |       Economics, The American University   []
[] |  ¢ |__ |  ¢ |  ¢|       Washington, DC 20016        U.S.A.   []
[] FAX:  (202)885-3790       Internet: AISAAC@xxxxxxxxxxxx        []
[] Phone:(202)885-3785       Bitnet:   AISAAC@xxxxxxxxxxxxxxxxx   []
[][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][]