Dropping utilitiy maximization assumption

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

FROM:  Paul Davidson
"      Economics Department
"      523 Stokely Management Center  (615) 974-4221
Dear Steve Keen: Your neoclassical economist who wants to drop utility maximi-
zation is just going the wrong way.  There is nothing wrong with assuming
people are acting in their own self-interest (under the rules of the game).
In a nonergodic world of uncertainty and an entrepreneurial economy that
organizes production and exchange through the use of nominal forward contracts,
households will attempt to maximize by including LIQUID ASSETS in their
utility function. Firms will also have LIQUID ASSETS in their calculus.
    What households "know", in a nonergodic world, is that they are uncertain
as to what goods they will want at all future dates. Thus they will not
enter into forward contracts for delivery of all their lifetime consumption
goods at specific future dates throughout their lifetime -- even if such
forward contracts were made available to them by sellers. (For the same uncerta
inty reasons, sellers do not want to contract to sell all their potential
available output and/or services for their entire future lifetime.) Accordingly
households are likely to maintain their savings in liquid assets rather than
in settling forward contracts.
       Radner,( May 1970 AER, p. 451), on the other hand,
notes that classical theory requires that  whether a contract is for immediate
 delivery (a spot contract) or for delivery at a future date (a forward contrac
t) "payments for this purchase is to be made now [at the initial instant]".)
        In other words, in a classical world all future purchases are
contracted and paid for AT THE INITIAL INSTANT. Therefore there is no
need for liquidity holdings over time, money is neutral and you have to
rely on some ad hoc constraint to demonstrate underemeployment equilibria.
Accordingly, it is not utility maximization that the neo classicals must
jettison, but the idea that they can contract for all forward needs at the
initial instant. Of course in an ergodic world, complete foward transactions
at the initial instant is possible since every agent "knows"  (or acts "as if"
she knows) the relevant probabilities and can therefore contract for DELIVERY
for every day of her life. All this is treated in my chapter on "Money and
Uncertainty" in my Post Keynesian Macoeconomic Theory book.

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