Re: Response to Henning and Mitchell

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This response embraces all three pieces of correspondence received from paul
davidson today.

Friday 15/4/94

Dear Paul

thanks a lot for your conscientous replies. There is a lot in them
and today time is short for me. But I have certainly some points
to make in return. I was musing on the way to the  uni.  today  (I
live about 45 kms away in the countryside) what a great thing  the
internet is bringing people together  who  might  for  reasons  of
geography not normally talk. And I really appreciate the  talk  as
it helps me to galvanise and develop my own ideas. so here is more
talk.

I should say paul that you have a way of arguing - a  sort  of  ad
captandum (vulgus!) which avoids the  ad  verbum  of  my  own  and
others  retorts  or  suggestions.  your  interpretation   of   the
implications of some of my points is bizarre and maybe designed to
avoid the issue. So lets start in sequence of your reply.

1. yes, the profession we operate in is seriously astray - its has
opted for  quasi-sophistication  and  elegance  of  analysis  over
substance. Rebuilding the  profession  is  not  likely  to  be  an
iterative process. I guess in my mind i have a  lakatosian-kuhnian
view of intellectual development (with a fair bit of feyeraband to
boot i should add). Reform is likely to  require  revolution.  the
flat earthers (NCs, and the related jackasses -  by  the  way  the
jackass in  australian  context  is  a  beautiful  bird  called  a
kingfisher. it is a very pretty sight and i  would  not  think  it
apposite  to  refer  to  the  mates  of  the  NC  lot  using  this
nomenclature. In the colloquial i  might  have  another  word  for
them!!) being displaced by the round earthers (us - if we can ever
agree to a coalition!).

The basis for  this  revolution  in  paradigms  must  reflect  the
ability of the new order  to  EXPLAIN  what  happens  so  that  an
enlightened  understanding  of  the  mechanics  and  dynamics   of
capitalism (you call it entrepreneurial) is achieved.

Now that fat little C19 scribbler - scribbled a bit of stuff about
all of this. Read the TSV  and  see  the  precurser  of  effective
demand notions; of the multiplier (the fact that principle  trades
need only be effected for a general malaise to occur); of the role
of money in mediating time and money being a safe  (liquid)  haven
against the uncertainty of time; of the  effect  of  time  on  the
unity of purchase and sale (the unity being the SPECIAL  case  and
the disunity being the GENERAL model); of the role money plays  in
an  economy  which  must  make  real   resource   commitments   in
nominal  terms  ahead  of  the   certainty   of   real   knowledge
(realisation); of the need to control the work process to get some
grip on the real equivalents of these  nominal  amounts  ahead  of
time, and more and more and more.

There was a lot of  scribble.  Also  there  were  incredibly  rich
insights into the underlying mechanisms of the system we live. The
differentia specifica of capitalism.  NC  economics  is  built  on
a characterisation of capitalism as a system of  simple  commodity
exchange. The scribbling showed  so  clearly  the  flaws  in  that
approach before NC had even arrived  in  intellectual  terms.  the
scribbler's interchanges with ricardo over say is  the  foundation
on which keynes and kalecki (not necessarily in that order  or  as
independent scribblers) built the C20 literature.

it would be incredibly arrogant to ignore the scribbler's work. it
was surely the start of the sort of genus we all might claim  some
affinity to. Keynes never provided discussion  on  the  difference
between this system and  say  feudalism.  a  student  would  never
understand profit and crises fully without reading the scribbler's
work. They would have an idea - a good  idea  from  keynes  -  but
never a full grasp of the relationship  between  market  exchanges
and the more compelling social relations which underpin them.

this doesn't require that we have a political agenda  attached  to
it. it doesn't require that we feel bad  because  some  of  marx's
predictions were blatantly of the planet. after all the future  is
uncertain - n'est-ce pas?

2) You might have nothing against rich  capitalists  but  I  have.
This next argument about everyone being  inspired  to  pursue  the
wealth held by a  few  reminds  me  of  the  Reagon  and  Thatcher
rhetoric - the bootstraps or trickle down rubbish.  I  assume  you
mean that general standards will rise if we all try to  get  rich.
Certainly how we judge our societies and our own  progress  is  on
relative terms. Relatively, inequalities do  not  appear  to  have
fallen. Sure many are more wealthy but the Parade of Dwarfs  (From
Jan Pen's book "income distribution") is about  as  skewed  as  it
ever was.

relatedly, this concept of wealth is not one on which i would base
a futuristic paradigm  to  topple  the  prevailing  orthodoxy.  it
measures economic performance solely in material terms as measured
by GDP growth rates. Sweden long touted as  a  model  has  been  a
leading arms producer.  The  NICs  shoot  their  trade  unionists.
The japanese and others have fished out the southern  oceans.  the
world bank has indebted LDC to such an extent that they have  been
forced to rape their natural resources  to  dangerous  levels.  we
have a hole in the ozone over the poles which is  getting  bigger.
acid rain falls over europe.  nuclear  power  threatens  the  food
chain. agricultural systems based  on  animal  protein  production
have defoliated and desalinated vast tracts of the earth's land. I
could go on obviously. The point is that  you  might  say  we  are
better off as a result of Bretton Woods (BW) but at what  expense.
To what extent is the stability at the expense of the  environment
(no world, no society remember), and how much relied  on  cold  war
shenanigans (military expenditure, space research etc.)

and moreover you forget to mention the accompanying conditions  to
BW. Yes we all grew fast - steady growth with low  inflation.  But
the amount of trade barriers and domestic protection was high.  It
didn't hurt the bosses to pay the unions cosy wages because  their
margins were guaranteed by tariffs and the like. Now ask what  has
happened since the increased openness in the international economy
and the OPEC oil disaster. Obvious. Now the  system  struggles  to
provide the wages and the employment because the margins  are  hit
and are not protected. Now increasingly, employment is  casualised
and low paid in the service sector. There is a  declining  "middle
class" as public sectors cut back  under  rationalism  and  middle
management  is  rendered  useless.  The  primary   labour   market
conditions of the past - which were protected by cosy tariffs  and
rigid exchange controls etc are disappearing. We now have a  large
rump of working poor. (Read the findings  of  the  G7  meeting  in
Chicago the other day). And also the system is failing to  provide
enough jobs in total.

So I am not advocating a return to marxism or any other ism. but i
do ask how can a capitalist  economy  deliver  an  environmentally
sustainable growth path with full employment (employment liberally
defined), with primary labour market jobs, with  equitable  wages,
with normal profits, with freedom of governments to make their own
decisions in the 1990s. My belief (at the religous  level  in  the
spirit of joan robinson - economics being a branch of theology) is
that it cannot.

ERGODICITY (Mark III or IV?)

Paul here you try to evade the point by suggesting that i am  some
sort of austrian. i know you don't (could not) think that so  why
say it and then go to  lengths  to  show  you  know  a  bit  about
austrian economics and metaphysics.

When i said that the "future is probabilistic from  the  point  of
view of the system but  not  from  the  point  of  view  from  the
individual decision makers whose decisions drive the system" i was
making a point i was sure you would have to agree with,  given  my
reading of your work over the years.

it is an argument that IS NOT (to quote you) "exactly the argument
underlying the austrian emphasis on uncertainty with their view of
the market as an  optimal  solving  machine."  That  is  a  really
evasive way of trying to avoid the simple point.

the point is this - clear crisp and concise - the way you want  us
all  to  communicate  I  recall.  The  system  itself  has  to  be
probabilistic in the trivial sense that things  either  happen  or
they do not. there is some process generating the data we  observe
(with measurement error given). we do not know  the  specification
of it. therefore we cannot know the truth. even if we stumbled  on
it we would not what distinguishes truth  from  untruth.  but  the
fact remains that the data generating process  (which  can  change
and is not therefore immutable, natural,  gravitation,  spiritual,
nor necessarily or even likely OPTIMAL)  exists  and  has  unknown
probabilistic outcomes.

The  individuals  in  the  system  clearly   do   not   know   the
probabilities and for them the future is  a  world  of  confusion.
we  can  only  make  guesses.  guesses   are   not   probabilistic
predictions to the guesser, whereas in an ethereal sense they  are
clearly probabilistic because they will interact with the DGP with
some degree of concordance.

It is meagre invention to say that I implied, said,  suggested  or
whatever that (quote from  paul)  "while  Austrians  argue  --  as
Mitchell does at this point - humans do  not  have  the  computing
power to reliable (sic) 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."

Never did i say  that.  for  the  individual  the  future  is  not
probabilistic from the perspective of the individuals  -  READ  MY
WORDS AGAIN PLEASE.

Prior to that quote Paul infers that as I am clearly  an  austrian
(stooge) i believe and implied that (quote from paul) "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 runpath of the economy"

Haven't you really read or understood  what  I  have  been  saying
in the last weeks, paul? i have been at lengths to point  out  the
conditions under which activist policy  can  drive  us  towards  a
preferable state out of a range of available equilibria  (which i
see as temporary and not natural contrivances).  I  could  suggest
you read some of my articles throughout the journals on this  sort
of issue. When i introduce error correction into the  dynamics  of
the system it is in  the  context  of  the  target  of  the  error
correction being manipulated by aggregate policy.  While  I  might
have a marxian ideal of communism in my heart, i surely agree that
6 per cent unemployment is better than 10 and 3 is better still. I
also think a less concave lorenz curve   for  income  distribution
(even though it offends my communistic ideal)  is  better  than  a
more concave one.

so stick to what i have said not some  stray  case  which  has  no
relevance to what i have said.

Similarly (quote from paul) "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."   Wrong  and  astray  again.  Is   this
deliberate or not?

The point I was leading to in that section is  about  how  we  see
involuntary unemployment. You  say  that  "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  present  in  a
non-ergodic system that will move the system from this equilibrium
position. this need not be a steady state result."

Well I recall that  paul  berated  jim  devine  for  twisting  the
language. if the cap fits!! lets stick to words and meanings  that
have emerged in our common educations. the NS of  the  system  can
still nest stationary outcomes. In the absence of exogenous forces
(like a government expansion a la keynes, kalecki et al), a  state
of involuntary unemployment is a steady state. If it is not,  then
why do we need government policy? i call a steady state  a  steady
state. it persists unless it is shocked. the  system  overall  can
easily be NS but still deliver proportional (stationary) relations
between variables. and if we persist in using technical words then
we must accept the consequences of their meanings. A  system  that
has no forces present to MOVE is steady. the  equilibrium  can  be
transitory and one of  many  but  is  persists  because  there  is
proportionalities in linear combinations within the system.

I thought this idea - that inv. un was a  equil.  rather  than  an
abberation - was keynes biggest offering to us  -  a  very  worthy
intellectual advance.

paul then says that "moreover, Mitchell's  assumption  that  there
are steady state multiple equilibira does not assure that  any  of
the equilibria is a full employment equilibria."

Of course it doesn't and i never said it  did.  indeed,  that  has
been my very point that the idea of a natural  long  run  position
where markets clear  is  rather  dreamlike.  NC  dreaming.  Within
limits the Government can choose the sustained  position  for  the
economy.

the next point is  really  worrying.  because  i  introduce  error
correction as part of the explanation of dynamics  I  have  (quote
from paul) "not escaped the classical trap of believing  that  the
system (without any help?) is error correcting". well well. listen
to  my  words   again.   The   direction   of   the   economy   is
state-dependent. where it is heading is dependent on where it  has
been. the policy settings and changes  can  thus  permanently  and
effectively influence the direction of the economy. But unless you
reject proportionality entirely and have some  chaotic  notion  of
the  economy  then  an  error  correction  process  operates.  its
strength, direction, target is not immutable, invariant to policy,
nor manna from heaven. The  economy  can  stick  into  a  Inv  un,
malaise and persist like that.

unemployment is  not  an  error  in  this  context  -  notice  the
semantics - it is an outcome of a system which  fails  to  deliver
enough effective demand. one must again understand the terminology
(error correcting dynamics) and use  them  appropriately.  it  can
persist and be a NORMAL OUTCOME of a capitalist system. The market
has NO PROPENSITY via COMPETITIVE FORCES  with  or  without  price
flexibility TO CHANGE THE OUTCOME TO HIGHER  (NATURAL)  LEVELS  OF
UNEMPLOYMENT.

MARXIST SCREED's

once we clear that up, the next part of  the  story  is  similarly
littered with problems. Yes capitalism requires  a  Reserve  army.
that is another of my religous beliefs.

Now i remind  people  to  read  the  works  of  susan  george,
gunder frank, magdoff, mandel, and far too many others to mention.
Paul says that "capitalists did not need a  reserve  army  to  get
richer" (47-72). Not maybe in the USA or OZ or UK  or  like.  They
certainly needed extensive trade  protection  to  employ  at  high
levels in the advanced countries. But they did need a RAU  in  the
underdeveloped  (terminology  here  is   controversial   i   know)
countries. The only way we in OZ were able  to  have  nice  tinned
Queensland pineapple at affordable  prices  was  because  the  tin
miners in Bolivia were being viciously exploited and the  peasants
suffering abominable unemployment and poverty and  army  slaughter
when they tried to form unions. the story  generalises  throughout
the poorer countries.

Paul writes then "Clearly, a more civilised policy would have been
an Incomes Policy such as Weintraub's TIP"  - civilised  in  terms
of keeping the workers in some sort of  niche  acceptable  to  the
owners of capital. I would call civilised giving rewards for  work
(and  help  for  incapacity  to  work)  rather  than  legitimising
rewards for ownership.

I should add that in practical terms I favour incomes policies and
that OZ is the leader in  effective  (controlling  class  struggle
over distribution) in that area of policy. But I do not call  them
civilised. Merely the best that can be  done  without  having  the
bosses getting the tanks out!!

in Paul's third letter  mainly  directed  at  Doug  but  including
myself it is mentioned that I attack the USA for being  gun  crazy
etc and fail to mention the Soviet union, china, cuba etc.  i  was
merely redressing the bias and  imbalance  that  had  entered  the
debate from paul's own hand when  he  talked  of  marxist-inspired
slaughter in eastern europe. i was merely pointing out the obvious
that the western entrepreneurial states don't do much  better  and
finally resort to the same when required.  The  USA  seems  to  be
particularly prone to such  "final"  responses  around  the  globe
interfering with sovereign states despite the rhetoric that it  is
the exemplar of freedom.

the essential point i make is this (cutting through all the  other
posturing on both sides) is that i  believe  full  employment  and
capitalism are somewhat at odds with each other. it  doesn't  mean
we can't try via government to intervene but in the same vein as bob
rowthorn says the trade unions cannot afford to be too successful,
equally the government cannot afford to try to much to impinge  on
the rate of profit.


i am tired after all of  that.  as  they  say  in  the  vernacular
"avagoodweekend"

kind regards
bill mitchell department of economics university of newcastle  nsw
australia
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