New vs. Post Keynesians

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

FROM:  Paul Davidson
"      Economics Department
"      523 Stokely Management Center     974-4221
Dear Jim: "quantity-constrained" demand curves are merely what I have
called ad hoc restrictions on the aggregate supply curve. This quantity
constraint is usually justified by assuming quantities adjust more rapidly than
prices, i.e., dQ/dT>dP/dT, where T is time. This relative speed of adjustment
argument was first developed by Leijonhuvud in his 1968 book. But after Axel
was a referee on a paper of mine ("Disequilibrium Market Adjustment: Marshall R
Revisited", ECONOMIC INQUIRY, 1974) which attempted to trash this argument that
Keynes simply reversed the usuall Marshallian price vs. quantity speed of
adjustment, Leijnohufvud recanted. In a HOPE article on Aggregate supply, Axel
wrote; "It is not correct to attribute to Keynes a general reversion of the Mar
shallian ranking of relative price and quantity adjustment velocities. In the s
hortest run for which system behavior can be defined in Keynes's model, output-
prices must be treated as perfectly flexible"> [HOPE, 1974, p. 169].

     Similarly, in 1977, Hahn indicated that "Keynes did not posit fix prices.
Rather the reverse. Nor did he seem to argue that prices change more slowly tha
n quantities, as can be verified in the chapter which tells us why labour
cannot control its real wage."

    So my first response to you Jim is that if one want's to have a general
theory -- one can not merely take the classical microfoundations and hang
onto it an assumption that dQ/dT>dP/dT, to explain involunatry unemployment.

     Perhaps more importantly, the message of Keynes's general theory --
especially when he is dealing directly with the labour market [Chapters 19
and 20] is that the marginal product curve is not a demand curve for labor.
In Fall 1983 JPKE I wrote an article entitled "The marginal product curve is no
t the demand curve for labor and Lucas's labor supply curve is not the
supply curve for labor in the real world", explaining this very important
point.  Only in a non-monetary economy would the marginal product curve and
the demand curve for labor coincide. The MP curve can be considered in Patinkin
's terminology "a market equilibirum" curve which specifies the real wage outco
meassociated with any given equilibrium level of employment AS DETERMINED BY
THE POINT OF EFFECTIVE DEMAND. [See Patinkin's book, pp. 391-2 for definition
of a market equilibrium curve.] Do not be like Pavlov's dogs -- just because
you see a downward sloping curve, don't salivate demand curve.

     All of this is developed in my POST KEYNESIAN MACROECONOMIC THEORY book
at a level that even sophmores and juniors can understand. (It may take Profess
ors of economics more time -- they will have to unlearn some knee-jerk response
s and rethink why a monetary economy (be it linear or nonlinear) operates
differently from a barter economy. Robinson Crusoe and Friday never had to
worry about unemployment -- and yet they had no price system at all.

      Thanks for the questions Jim. I hope the response perks up your
interest in rethinking economics. Paul Davidson

Have a good day!