Re: Keynesian contradiction

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

FROM:  Paul Davidson
"      Economics Department
"      523 Stokely Management Center  (615) 974-4221
In his latest response, Peter Skott raises some important queries -- but I am n
not sure whether these are indefense of his characterization of Devine's
position or explaining Skott's own views. I shall assume the latter in what
follows.
    Skott dismisses the "first question" as merely "definitional or doctrinal"
and therefore unimportant. NO! It is essential to everything that follows.
Unless we agree on the definitions of basic concepts the argument degenerates
into semantic obfuscation. And this is especially true regarding the
definition of effective demand and its association with some specific
hypothesis regarding entreprenurial motivation to hire workers. (This
semantic confusion is displayed in the last paragrapgh of Skott's latest
response where he claims "we need to conider short run disequilibria...
(where) the firm is off its short run supply curve".)
      But that is exactly the reason why I raised the "first question".
Marshall defined the short-run flow supply price as that price which is just ne
cessary to induce the entrepreneur to make the effort necessary to produce
any given supply quantity. Hiring must imply production flows, and production
flows involve entrepreneurs making a short-run Marshallian flow-supply
decision. Assume entrepreneurs "produce to market" rather than "produce to
contract", as textbooks normally assume, despite contrary real world facts. Mos
t firms produce to contract (i.e., only when they have orders) except retail in
a nonintegrated vertical industrial structure. And even at the retail level
many firms in the real world produce only to contract (e.g., custom made
products, most personal services, etc.). Then firms come to market with
their final output already in inventory. If realized demand does not equal
actual demand, what is the entreprenurial response? This is the question
I deal with at some length in my earlier positing -- a question involving
user costs and inventory, etc.  But in any case, there is a SPOT (Marshallian)
market price which will either be in "normal backwardation" with the FORWARD
(flow supply) price if entrepreneurial expectations are being met, or the Spot
price will be less than the FORWARD price (contango) if expectations
were greater than realized demand (and therefore current production flow is
redundant relative to  market demand (and entrepreneurs make losses if they
they sell at market clearing spot prices).
        Alternatively, in market demand exceeds the expectations of entrepr
eneurs who are "producing to market", then
 the spot (Marshallian) market price is greater than the "normal backwardation"
SPOT (relative to) Forward price and entrepreneurs can make windfall profits
if they sell current production at the market clearing price. (All of these
backwardation and contango cases  as well as the implications of whether
entrepreneurs "produce to (in anticipation of) market" as is implicitly
assumed in most textbooks, or "produce to contract" (i.e., produce only when
entrepreneurs have contractual orders) are spelled out in my POST KEYNESIAN
MACROECONOMIC THEORY (also in MONEY AND THE REAL WORLD and earlier were
in a less developed state in Keynes's TRATISE ON MONEY and Chapter 17 of THE
GENERAL THEORY and Kaldor's 1939 "Speculation and Economic Activity".
     Thus, if one is going to be logically consistent with the definitions of
short-run supply (as dictated by Marshall), hiring by firms can never be off
their short run supply curve GIVEN THE STATE OF ENTREPRENURIAL EXPECTATIONS.
In other words,  if the spot price shifts from its normal backwardation
position (relative to the forward  or Marshallian flow-supply price), then
depending how entrepreneurs interprete this "surprise" to their expectations,
they may move up or down their flow-supply curve and change their hiring
(and output) decision as the previous expected short-run equilibrium turns
out to be in error. Firms do NOT move off their short-run flow supply curve!
Otherwise how are we to decide what their hiring decision is for alternative

expected market prices? If the supply curve does not really represent entrepren
eurial production and hiring decisions for every alternative possible market
price (as Skott's last paragraph implies when he claims that entrepreneurs
can be off their "short run supply curve") then their is no organizing concept
for explaining what motivates entrepreneurs to  a specific volume of workers to
 produce a specific flow of output. Hiring decision are indeed not only
in disequilibrium -- but in chaos since firms can then be anywhere in the
price-quantity quadrant and therefore  hiring any quantity of workers to prod-
uce any quantity of output. There are no specified relationships between
expected market demand (for firms that produce to market) and the hiring
of firms!
     It  follows that it is a logical muddle to suggest that a "constant mark-
up could well be consistent with fluctuations AROUND short run equilbrium".
    If Skott is talking about the spot (Marshallian) market price then of
course as suggested above, the spot price can vary relative to the flow-supply
(short-run) price by any magnitude. If firms have a constant marginal cost
and constant elasticity of demand, as Skott suggests is possible, then the
flow supply price (for profit maximizers) will always be a constant mark-up
but the spot price can still change relative to this price. When Skott talks
about "actual prices" I believe he means the SPOT Prices -- but I am not
sure. If he would only talk in terms of these well-defined Marshallian concepts
much of the apparent differences between Keynes, Kalecki, Skott, the Kalecians,

Post Keynesians, etc. can be cleared up.
       What is important for hiring decisions (and changes in hiring decisions)
is the relationship between the SPOT price and the Forward price. (In Marshall'
s terms the relationship between the market price and the short-run supply pric
e. In normal backwardation the market price is such relative to the short-run
flow supply price that entrepreneurs have no reason to change their current
hiring decision. In the absence of normal backwardation, firms receive a marke
t signal such that if their elasticity of expectations is not zero, they
will revise their output and hiring decisions (as in Marshall's example when th
e market price differed significantly from the short-run supply price) and
entrepreneurs will choose another point ON their short-run supply curve when
deciding how to change their worker hiring decision.
      Finally, let me indicate that I disagree with Skott when he claims that
"differences between Paul Davidson and Jim Devine's positons only seem to
arise if it is assumed that the actual real wage deviates from the mark-up dete
rmined real wage". The differences between myself, Devine, or Skott for that
matter are quite different and much more substantial.

Have a good day!____Paul Davidson
))))_ fax # (615) 974-1686