Re: Colander and New Keynesian Economics

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

FROM: Paul Davidson
"      Economics Department
"      523 Stokely Management Center     974-4221
Dear Barkley:
      I believe we are making some progress. Pkers are not censors. We permit
economists to play with anything they think is "interesting"  -- even when they
"think none of these things hold" in the real world. I am not against the
writing of "fiction" inliterature -- even if it is the economic literature. As
long as it is clearly labelled as fiction. Superman was a great comic strip
when I was a kid, but I always knew mortals could not "leap buildings in a
single bound".
      Now what about Expectations? and self fullfilling expectations?
Grandmont (who you continually cite) in an article with Malgrange (1986) indica
ted that in the long-run even sun spot theories assure a long-run full-
employment classical solution. Grandmont and Malgrange wrote that although
"there is generally a large multiplicity of of intertemporal equilibria
with self-fullfilling expectations.....traders are bound to make siginificant
forecasting errors...while they learn the dynamic laws....during the period tow
ards an hypothetical long run equilibrium -- if it ever reaches one along which
forecasting errors vanish eventually" (p. 9). In other words, the dynamic
laws govern the movement of the economic university just as the physical
law of gravity governs the movement of the heavenly bodies since the
moment of the BIg Bang. These "dynamic laws" are ergodic! They govern for
all times and all places in the universe. {Calling these laws "dynamic" may mer
ely mean that rates of change, or even rates of acceloration, rather than
levels are, in the long run, ergodic.}
     Azariadas (1981) in developing the sun spot theory pointed out that the "e
xtrinsic" uncertainty in sun spot models "disappears in the long run -- or in a
 stationary state or when enough contingent claims markets exist to cover all
possibilities".  In a nonergodic world, uncertainty never disappears even
in the long run!  So in your sun spot theory, if Azaridis is correct, in the
long run, the classical solution is possible.  So much for self-fulfilling
prophesies leading to long run underemployment equilibrium.  And its no use
then falling back on Keynes's "in the long run will all be dead" slogan.
     Finally, you should not that nonergodicity per se is NOT enough to
assure less than full employment equilibrium. In any economic system, that
was not what Keynes called an entrepreneurial system, i.r., a money-using,
market system, then full employment could still be the rule even in the face
of long run uncertainty. In what Keynes called "cooperative" economies, even
if the future is uncertain, unemployment need not be a problem. For example,
in a true "communal society, e.g., a kibbutz, the military, a monestary, the
Catholic church, Margaret Meade's South Sea Islanders, Robinson Cursoe and
Friday, etc. there neec never be involuntary unemployment. (For example,
even in peace time, the Pentagon finds work for all members of the armed forces
no matter what the size.  So we finally get down to fundamentals -- uncertainty
is necessary for involuntary unemployment equilibrium but it by itself
is not sufficient. It is the need for liquidity in the face of uncertainty
that is essential. Paul Davidson

Have a good day!