Re: Keynes & New Keynesianism, Davidson's post

[Paul Davidson <PB108928%UTKVM1.BITNET@xxxxxxxxxxxxxxxxx>]

FROM:  Paul Davidson
"      Economics Department
"      523 Stokely Management Center     974-4221
Dear Alan Isaac: Please note that Keynes specifically indicates (on p. 3) that
he places the emphasis on the word GENERAL to distiguish his theory from the
the classical theory based on the "postulates of theclassical theory are
applicable to a special case and not to the general case". Then on
page 16 he uses his famous classical economist -Euclidean geometer analogue;
non-Euclidean geometry is the general case obtained by throwing out the
 "axiom of parallels... Something similar is required today in economics".
Note: that in non-Euclidean geometry the shortest distance between two
points is an arc of a great circle which under the special case axioms of
Euclidean geometry becomes a straight line.
       Keynes's search for "nonEuclidean" economics was to provide a theory
of employment equilibrium (in the Marshallian sense) with fewer axioms than
the classical (Euclidean) theory. So Keynes did associate GENERAL with
fewer axioms.
        Regarding fewer restrictions on the form of the functions, please
see Keynes's response to Dunlop and Tarshis in 1939 where he notes that his tas
k would have been much easier had it merely assumed imperfect competition.
(after all preKeynesian classical economists already had demonstrated that
unemplyment was due to a rigidity in wages (or prices). Keynes argued that
it was necessary to concede a little"to the other side" to show that  even
with the perfect flexibility of wages and prices, no endogenous forces
were in the system to move it off an unemployment equilibrium.
     Regarding the endogenity of money: Keynes recognized in 1937 in his
notes on the "finance motive" that he had ignored the pssibility ofthe
endogenity of money. I published this rediscoveryin the March 1965 issue
of the Oxford Economic Papers and have since made it the basis of my Post
Keynesian monetary analysis in MONEY AND THE REAL WORLD. You might be
interested in knowing that Roy Harrod (who was a colleague of mine in 1964 at
University of Penn) thought highly of this finance motive piece and was influen
tial in getting it published in the OEP. Also when I met Hicks in 1974, this pi
ece starting an ongoing conversation between us over the years that finally
led to my publishing Hicks's repudiation of the ISLM system in the JPKE in 1980

Finally Sidney Weintraub generalized Keynes's aggregate supply and demand analy
sis to cover the problems of income distribution in his 1958 book.  These
income distribution aspects were made a central portion of the textbook
that Gene Smolensky and I wrote in 1964: AGGREGATE SUPPLY AND DEMAND ANALYSIS
-- a book that failed the market test -- selling less than 4000 copies in
its published life. Nevertheless I still make income distribution an
important component on my Post Keynesian approach as my forthcoming text
POST KEYNESIAN MACROECONOMIC THEORY makes absolutely clear.
   Finally, I cannot help but comment on the fact that Modigliani's life-
cycle hypothesis is not only empirically incorrect but has shunted macro-
economics further down a wrong track. The empirical evidence is clear.
In an article published in the JPKE almost a decade ago, Danziger,
Smolensky, Taussig and Vander Haag all working at the Poverity Institute
of the Univ of Wisconsin and using cross-sectional panel data over time
demonstrated that for those over 65 years of age their propensity to save
is greater than those under 65. And those over 70 had a larger savings
propensity than those between 65 and 69, etc. What were these old-timers
saving for? Didn't they know about the life cylce hypothesis and the
permanent income hypothesis? How come since the Poverty Institute'sfindings
our economist brethern who want to be empirically correct still ignore the fact
s.  No one has yet provided any empirical study to disprove this finding
by the Poverty Imstitute people.
   The life-cycle hypothesis is not correct empirically. Moreover it is
logically incompatible with the taxonomy set us for expenditures (D1 and
D2) set up by Keynes in the General Theory. Unfortunately economists
are not like the "hard" scientists they admire so much. They do not
understand that one cannot be scientific until one agrees on a taxonomy
for the discipline and then sticks to it in scientific investigations
and in setting up hypotheses. All of this is covered in my forthcoming
text. Paul Davidson

Have a good day!