Re: Keynesian contradiction

[Peter Skott <ecoskott@xxxxxxxxxxxxxx>]

On 3rd March Paul Davidson wrote:

>     I think Skott has over simplified my approach to what Keynes
>said ( e.g., Skott does not nail down the entrepreneurs' state of
>expectations) - but it is at least a respectable starting point for
>an useful dialogue so I will accept it as a first approximation to
>my view of Keynes.

Good. A respectable starting point is what I hoped for.

>     But the question first should be: Can the point of effective
>demand differ from a Marshallian short-run FLOW-SUPPLY PRICE
>equilibrium? Second, if actual demand differs from expected demand
>how do entrepreneurs react to disappointed expectations? (For
>example, what is the elasticity of expectations assumed? Is the
>unwanted inventory durable or non-durable? What is the carrying
>cost of unplanned inventory? How many periods (i.e., how much
>calendar time do entrepreneurs think) will have to pass before the
>existing redundancy of entrepreneurial inventory can be worked
>off?)

>Skott has Jim conflating the first and second questions of the
>previous paragraph.

    I'm sorry if unwittingly, in my interpretation of his position,
I had Jim Devine mixing up these two questions.
    The first question seems definitional or doctrinal, and the
second question in my view is the interesting one. As
Paul Davidson indicates it is also a complex question.
Nevertheless, he appears to suggest that convergence to short
run equilibrium is unproblematic:

>     But if demand does fall as employment declines, then won't
>this require a further reduction in employment that leads to
>additional declines in the quantity demanded until the point of
>effective demand is reached?

    Well, maybe. During the adjustment process towards short run equilibrium
this equilibrium itself will be shifting (both because it is a short
run equilibrium conditional on given stocks of capital and financial assets
and because the appearance of short run disequilibrium may itself
affect some of the equations defining the equilibrium position; an
unanticipated and unwanted increase in inventories, for instance, may
cause a downward shift in ex ante investment).
    It is therefore not at all clear that a short run
equilibrium will be reached. Furthermore, it is not obvious that
an assumption of short run equilirium and fulfilled
expectations  represents the best theoretical starting point for
an analysis of the dynamics of the system. In fact, there is a long
tradition of modelling cycles in terms of the actual position of the
system chasing a moving short run equilibrium. The tradition includes
Kaldor's 1940 model of the trade cycle which several people on the
network have referred to.

>In any case,
>the belief that the market price always equals a constant mark-up
>on unit costs can not be maintained if one throws out the notion
>that one is explaining a short-period equilibrium.]
>
>     In sum, if Skott's characterization of Devine's position is
>that he is at a minimum rejecting the usefulness of the notion of
>short-period equilibrium  while maintaining that market prices area
>constant mark-up over unit costs, then the resulting  analysis is
>"the most frightful muddles possible".

    Logically, a (near-) constant mark-up could well be consistent
with fluctuations around short run equilibrium. Consider, for
instance, the simple case of a firm with constant marginal cost and
and a constant-elasticity conjectured demand curve, and assume that
the firm produces a durable good with low carrying costs.
    Personally, I don't think that actual prices are nearly as inflexible
as Kaleckians seem to suggest. But this is another matter and one
which can hardly be decided theoretically.
    Secondly, I did _not_ in fact suggest that Jim Devine's argument
assumed a constant mark-up in short run disequilibrium. On the
contrary, I concluded that differences between Paul Davidson and Jim
Devine's positions

>only
>seem to arise if it's assumed that the actual real wage deviates
>from the mark-up determined real wage.

My interpretation of Jim Devine's position thus is not the one
criticized by Paul Davidson. My Devine-reconstruction may be
wrong as an interpretation of Devine's position, but I don't
think it is a "muddled" position. Essentially, what it comes
down to is that (i) we need to consider short run disequilibria
and (ii) in short run disequilibrium the firm is off its short
run supply curve. -- Needless to say, these two points don't
amount to a theory, and there is plenty of room for disagreement
about how to proceed.

Cheers,
Peter Skott
University of Aarhus
ecoskott@xxxxxxxxxxxxxx