Response to Henning and Mitchell

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

Dear Doug  and Bill: Bill mitchell divides his discussion into two
memos. The first one is primarily a discussion of economic
concepts. The second one is primarily a political screed. Let me
answer each in turn.
     Except for the last sentence, the second paragraph of the
first Williams posting is an excellent statement of the
neoclassical view of how to salvage their system and still permit
nonstationarities (NS). (Remember: NS is a SUFFICIENT, BUT NOT A
NECESSARY CONDITION for nonergodicity.) I urge all to read it. (The
last sentence represents Mitchell's belief that NS can arise from
nondeterministic sources.)
     In the next paragraph however, Mitchell says he "agrees
entirely with the argument that the future is probabilistic from
the point of view of the system but not from the point of view of
the individual decision makers". I am not sure who Mitchell
attributes this argument to -- but it is certainly not Keynes or
Davidson who would agree. In fact, this argument is exactly the
argument underlying the Austrian emphasis on uncertainty with their
view of the market as an optimal solving machine. The Austrians
believe that long run secular trend of  the external economic
reality is immutable (ergodic), i.e., the real secular trend is
determined by real forces beyond the control of humans. In such a
world, economics obeys natural laws just as the planetary movements
obey Newton's natural (ergodic) law of gravity -- and hence if we
"know" these natural laws humans can produce stochastic
probabilistic predictions of the future positions of all the
planetary bodies. Humans can not pass legislation (policy) to
overturn the law of gravity. Thus, Austrians argue that humans can
not produce policies that overturn the long-run path of the
economy.
     The only issue difference between orthodox neoclassical
economists and Austrians is that the former believe that humans
have sufficient computing power to calculate the probabilistic
future, while Austrian's argue -- as Mitchell does at this point -
- humans do not have the computing power to reliable estimate
probabilities for some aspects of the economic cosmos. These
aspects are the uncertainties while other aspects of the economic
universe are only risky because humans can calculate probabilities
for these latter variables.
     The discussion then degenerates into cases, as Mitchell
suggests in his earlier paragraph, where agents can obtain reliable
information regarding the future from  market signals and where
they cannot. If human beings can obtain this information, what does
it cost to process it? If people can not obtain or process this
information, does some inanimate thing -- a Turing machine -- exist
that can process the information for society?
     Austrian economics posits an immutable external reality that
works in the same way 19th-century physicists thought the physical
world works. In their emphasis on uncertainty, however, Austrians
differ from mainstream old and New Classical theorists. Austrians
believe that external reality is too complicated for any single
human being ever to process the information about it being sent out
by market signals. For each individual, NS knowledge about the
future is incompletable and perhaps even incompletable -- but why
it is incompletable is not ever explained. After all rational
expectations people assume incomplete knowledge about the future -
-- that is why it is probabilistic and not determinate.
     For Austrians it is the free market that mediates the myriad
random decisions and produces an evolutionary process where only
the fittest survive by making what are (in hindsight) the proper
decisions. The free market is the Turing machine Austrians rely
upon for coordinating plans and outcomes in a world of uncertainty,
a world where no individual can calculate the objective
probabilistic risks.
     Alan Turing, an English mathematician, is best known for
cracking the Germans' "Enigma" code during the Second World War.
As a mathematician, however, Turing is famous for discovering the
Turing machine, a hypothetical device for performing any
mathematical calculation that is amenable to the application of
rules. Turing demonstrated that if Nature obeys immutable rules,
then a Turing machine can, in the long run, always provide a
calculable future. Thus, if one assumes that economic processes
always conform to immutable mathematical laws or rules, whether
human intuition knows the laws or not, then the future is
conceptually predictable.
     Thus when Mitchell assumes that even though the "whole system
is NS, it can still exhibit stationarity..." implies his assumption
of a Turing machine with immutable probabilities. If Mitchell is
correct, and I believe he is not --  because exhibiting
stationarity is not a sufficient condition for exhibiting
ergodicity, i.e., stationary realizations can be nonergodic -- then
even though each individual decision maker does not know the
probabilities, the Turing machine of the market can calculate them.
(This argument then leads into Darwinian market processes, etc. See
my CRITICAL REVIEW article cited earlier.)
     In a nonergodic world, Keynes persistence of unemployment
equilibrium is not the result of stationarity in the technical
sense or ergodicity. It is merely the result of the fact that there
need not be any endogenous forces in a nonergodic system that will
move the system from this equilibrium position. This need not be
a steady-state result. Moreover, Mitchell's assumption that there
are steady state multiple equilibria does not assure that any of
the equilibria is a full employment equilibrium.
     Mitchell's comment that "our economy is in part error
correcting and hence there is some stationarity", indicates that
despite his Marxist screed in part II, he has not escaped the
classical trap of believing that the system (without any help?) is
"error correcting. Notice the semantics-- unemployment is an
"error" to be correct by the operation of a Turing machine in the
long-run or an impatient neoclassical (Old or New) Keynesian in the
short-run who can not wait for the market to solve the problem. For
Keynes (and myself) unemployment is not an error (in the sense that
the economy has temporarily strayed from the path of righteousness)
and therefore the system is at least partially error correcting.
(Does this mean the invisible hand merely needs some short-run help
from the visible policy hand?) My view is that their is nothing in
a laissez-faire system that assures any belief in "error
correction". For the laissez-faire entrepreneurial system,
unemployment is no more an error than full employment.
     When Mitchell wears his Marxist hat, on the other hand, he and
Doug Henning seem to suggest that the capital system believes full
employment is the error, and the industrial reserve army is the
error correction mechanism! Thus in his second message, Mitchell
(and Doug) imply that Marx is their Turing machine
     Finally what about class conflict in the existing system. The
statistics I cited earlier from 1947 to 1972 indicated that
capitalists did not need an industrial reserve army to get richer.
The problem occurred for an number of reasons -- but one that I
should mention is that Unions become dissatisfied with gaining on
the capitalists only as much as a larger after-tax share of the
incremental GNP. They began to want no only the entire growth in
GNP for labor but also an absolute reduction in the nonwage share.
In other words, with prosperity and full employment apparently
guaranteed by governmental policies, labor (and later landowner of
oil producing properties) wanted to exploit the capitalists,
rentiers, and even other workers domestically and around the
global. The union threat of wanting such a large increase in income
shares, led to planned recessions as the only way to reduce the
militant power of the unions. Clearly, a more civilized policy
would have been an Incomes Policy such as Weintraub's TIP!
     In other words, not only are rentiers and capitalists greedy -
- but in periods approaching full employment, strategically placed
workers and their leaders are just as greed (maybe more so if lead
by Marxists who tell they are being exploited.) That's why I said
rich people are just like poor people except they have money. A
civilized solution to the fight over income shares is a
democratically agreed upon incomes policy. (When Gene Smolensky and
I read a joint paper on "The Popular Appeal of 5 PerCent
Unemployment" in 1960 to a labor organized conference, explaining
the need for an incomes policy if political forces were not to be
nurtured which would make a high (for the times) unemployment
policy popular. WE were almost tarred and feathered by the
audiences as apologists for the capitalists! (I note with interest
that Doug and Bill tend to think of Keynes as an apologist.
     No Doug it does not take "Marxist revolutionaries" to get
"rentiers to ever agree to this compromise". A laissez-faire system
when it breaks down -- not only destroys real wages but real
profits and real interest as well. The experience of a Great
Depression was sufficient to encourage rentiers around the global
(outside of the Iron curtain) to enter into a Bretton Woods --
active Keynesian demand management system with enormous social
welfare schemes. They found they even enjoyed the fruits of such
a system until prosperity encouraged some workers and oil producers
to try to "exploit" everyone else. Then the reverted to the old
game rules which does keep workers in their place and makes the
world so impoverished that even the OPEC nations can't collect
their huge economic rents anymore.