Re: Response to Gonzalo

[pdavidso@xxxxxxxxxxxxxxxxxx]

On Tue, 25 Apr 1995 Steve.Keen@xxxxxxxxxxx wrote:

> Implicit in Paul's statement that Keynes's theory is more general
> than the neoclassical because it has *less* axioms is the proposition
> that the "true" Keynesian general theory can be derived by using
> some but not all of the axioms that underpin neoclassical economics.
>
> Is this what you believe, Paul?

No, Steve. What I believe is that Keynes was logically correct when he
wrote that the classical theory was a "special case" not the general
case, where the characteristics of the special case has added axioms
(assumptions) regarding fundamental characteristics
"that happen not to be those of the economic society in which we live,
with the result that its teaching is misleading and disasterous if we
attempt to apply it to the facts of experience". (GT, p. 3; also see GT
p. 16).
Thus it is possible that the classical theory and any other special case
theory may share one (or more) axioms with the general theory.

    Keynes primary and fundamental axiom is that entreprenurial
production and hiring decisions relate short-term expectations "as to the
cost of output on various possible scales and expectations as to the sales
proceeds of this output" (GT p. 47) while investment decisions involved
long-term (exogeneous or animal spirit derived) expectations regarding
sales proceeds and costs (GT p. 47).

(As Davidson and Smolensky
demonstrate in AGGREGATE SUPPLY AND DEMAND ANALYSIS (1964) this
assumption is sufficient to encompasss both expected profit maximization and
sales maximization with a profit constraint entreprenurial behavior,
although Keynes used the classical profit maximization variant in the GT
and therefore in Ch. 2 accepted the classical "first postulate" as "the
obverse of the familar proposition that industry is normally working
subject to decreasing returns in the short period" p. 47.)

Employment, production and hiring actions involve nominal contractual
commitments so that in deciding on
"daily output, Keynes noted that "Daily here stands for the shortest
interval after which the firm is free to revise its decision as to how
much employment to offer. It is, so to speak, the minimum effective unit
of time"(GT p.47)

Classical and nonlinear theories share these axioms but add additional
ones and become special cases.
Paul D.