Answering Godot

[Paul Davidson <pdavidson@xxxxxxx>]

DOUG wrote::
"Paul, you have no idea what I write, do you? After reading a remark this
empty and arrogant, I'm about to regret having deleted the disparaging
comment I made about Money & the Real World.

PAUL:
I am sorry Doug that I misunderstood you -- and that you don't think that
financial markets, from  ?a ruling class point of view" (your words)
operates in their favor and against the nonpropertied class.

And if you did not like "Money And The Real World", then please feel free
to explain why. After all it did sell almost 15,000 copies ... so someone
thought it was of some value".

DOUG: continued by quoting me as saying: Perhaps if Doug had
>pursued Barkley's query (especially given the 300 point drop in the Dow
>yesterday, the seminar discussion would have been more lively. I think so.

Then DOUG replied:
"I devoted lots of pages in the book to these themes, and I don't see why I
should have recycled those arguments for the sake of people who hadn't read
the book. I devoted quite a bit of attention to Keynes's analysis of
liquidity, like this passage from p. 155 of the GT...... "After the quote,
Doug continued:"The doctrine of liquidity assumes precisely that there is
no liquidity for
society as a whole - that is, that social arrangements should be stabilized
as much as possible, by the state whenever necessary, to assure that
markets continue to operate as smoothly as possible. Note that in Keynes's
classic definition of uncertainty, he mentioned the place of private wealth
holders in the system in 1970, along with things like copper prices.


I think I made it clear, both in the book and in the seminar, why "almost
all economies turned to using" stock markets - as an economy matures,
owners do not want to be tied to the fate of particular firms, and want to
participate in ownership as a whole. That ownership structure is
inseparable from liquidity."

PAUL:
Interesting point-- but I think most people who own equity shares in mutual
funds such as CREF for example (as many people on the pktnet) could not
even name the 10% of the firms they own stocks in".   Most people do not
want ownership ---what they want is liquidity, i.e., the ability to meet
contractual commitments when they come due.  And most CREF members want to
meet these (usually unknown today) contractual commitments when they retire
and are no longer members of the working class!!

DOUG:
"We differ on "uncertainty," for sure. I think you make entirely too much of
it, just like many Marxists do with "crisis." The words should both be used
carefully. And, I argue in the book that the bastard Keynesianism whose
debasement PKs lament made perfect sense from a ruling class point of view ."


PAUL:
Bastard Keynesians owe their paternity to P.A. Samuelson who thought he
understood the method of science because he taught at a technological
university -- and, as Colander and Landreth's book makes clear... PAS was
worried about McCarthyism!!

If you had said that the Bastard Keynesians tended to support the
entrepreneurial system, I would agree. So what?

You should remember that Keynes also thought that the entrepreneurial
system was the best economic system yet devised to resolve economic
problems. It had only two major faults
the failure to maintain full employment and its arbitrary and inequitable
distribution of income and wealth..The GT was written to cure the
entrepreneurial system of the first fault!

DOUG:
As Antonio Negri put it in his essay on Keynes:

"Investment risks must be eliminated, or reduced to the convention, and the
state must take on the function of guaranteeing the basic convention of
economics. The state has to defend the present from the future. And if the
only way to do this is to project the future from within the present, to
plan the future according to present expectations, then the state must
extend its intervention to take up the role of planner, and the economic
thus becomes incorporated in the juridical.... [The state] will not
guarantee the certainty of future events, but it will guarantee the
certainty of the convention.... In effect, the life of the system no longer
depends on the spirit of entrepreneurialism, but on liberation from the
fear of the future."

PAUL:
This is a bit strange to my mind.  Even though Keynes thought to cure
unemployment might require the "socialization of investment" he did not
mean it in the sense of government ownership of the means of production (as
he specifically notes in the GT)


DOUG:
Or, quoting myself on this (since you probably don't have a copy of the
book at hand, Paul):
 "The role of the state, then, is to stabilize
expectations - to guarantee there won't be depressions, and to guarantee
(insofar as anything can be guaranteed) the position of private
wealth-owners in the system.


PAUL:
Of course that is why Keynes spoke approvingly of the euthanasia of the
rentier, right?
What Keynes thought was important was the maintenance of an entrepreneurial
class. Do you Doug? Or do you think the comrades can do it all by themselves?


DOUG:
In these senses, bastard Keynesianism did the
trick - of, to paraphrase Claus Offe, regulating the system politically
without materially politicizing it. The establishment took what it needed
from Keynes and left the rest."

PAUL:
The problem was they -- including the Old Keynesians-- never took enough
from Keynes--- they thought unemployment was due to fixed money wages--
something that Keynes explicitly denied!!

In fact, after World War II, the US had very small deficits -- I do not
have the data here at home-- but I think if you look up the data about
government spending deficits for, say the first five years immediately
following WWII, you will be surprised not even follow Keynesian deficit
policies. The US prospered -- as did most of the free world -- not because
of any deliberate government expenditure policies -- but rather because of
the Marshall plan (so that the creditor nation took on the onus of getting
rid of this surplus) plus very low interest rates to keep interest rate
costs (of a national debt that exceeded the GNP) low.

DOUG: continuing by quoting Paul-->So I cast around for another word -- and
chose "sensible" which the
>dictionary defines "as acting  with or showing good sense".  And as I wrote
>in 1993, "Sensible expectations are not merely stabs in the dark ... as
>long as human beings know' that the state will enforce (and most people
>will obey) the civil law of contracts." Then the object of economic
>decisions is to maintain a positive health cash flow to survive -- just
>like the body must maintain a health blood flow to survive!  That's what
>makes liquidity important and the essence of understanding decision making
>in nonergodic circumstances  -- at least in a money-using, entrepreneurial
>economy. (But unimportant in a Robinson Crusoe economic system.)
>As I noted in my paper given at the Knoxville conference: New [and Old]
>Keynesians "are logically inconsistent in their theoretical model by
>assuming open trade in financial assets can be destabilizing, while open
>trade in goods and services are Pareto-efficient. (I guess consistency is a
>the hobgoblin of a small mind -- and no one ever accused these super
>Keynesians of having a small mind.).At least... Friedman, and Lucas are
>being logically consistent in [their]... views on open trade in goods and
>open trade in financial assets. Most Old and New Keynesians are not."

DOUGthen went on:
Trade in goods and even services have to contend with something like the
law of value, which acts as a center of gravity for prices.

PAUL:
A law of value? A center of gravity? I have no idea what these metaphysical
concepts means.  I suggest you might want to look at Townsend's excellent
article in the EJ (either 1937 or 1939-- again I do not have information
here at home but it is in the office) that generalizes the concept of
liquidity preference as a theory of pricing of all commodities.  Keynes
thought this article to be an excellent one as his correspondence with
Townsend indicates.

DOUG:
 Prices of
financial assets are constrained only by traders' expectations and their
available cash. Surely you could advocate different sets of rules for the
two markets.

PAUL:
See what I said about Townsend.  What you do not understand Doug is that in
the absence of organized equity markets, the existing of other markets such
as Land or even Old Masters (as Keynes argued and Hahn demonstrated) would
play the same role of providing a possible alternative to money as a store
of liquid value.
Tell me Doug is an OLD MASTER painting a good or a financial asset? And is
there some law of value and center of gravity that sets an Old Mastert
apart from the price of equities on Wall Street?  What is the difference
between Sothby's and the NYSE?
How about antique furniture?

DOUG:
Paul Davidson wrote:
>Just (!) create full employment and low interest rates and an
>entrepreneurial class --- and let the public sector have its head.  We
>witnessed in (communist) Eastern Europe how successful it is, when
>bureaucrats plan "productive" investment projects.
Paul, why do you even bother with the heterodox pose? Why not just shed the
outlaw stance and admit that you're as orthodox as the next guy? JPKE would
probably sell more subscriptions, and you'd get invited to more
conferences, too.

PAUL:
Do you m1ean by heterodox being against th entrepreneurial system? If so,
then I am not heterodox.  I believe Keynes had it right when he saw the
entrepreneurial system as the best system yet devised.  (Similar to whatt
Churchill said about democrcacy.). Nevertheless, it is true that the
entrepreneurial system still has two major faults-- both of which could be
cured without killing the patient.  I think you would prefer to kill the
entrepreneurial system --- and replace it by a system without any private
ownership of the means of production and centralized decisions about all
production and exchange activities -- despite the evidence that the various
Communist economic systems in Eastern Europe and other Socialist systems
(where no private property exists) e.g., nunneries, monasteries, kibbutz
and other cooperative settlements that do not promote prosperity-- and
often encourage either vows of poverty or a communal view that back to
nature is better!!



DOUG:
Paul Davidson wrote:
>You see how confusing it is if you try to set us irrational expectations
>as the code word for the opposite of "rational expectations".  It results
>in semantic obfuscation.
If I had the energy I'd think about deconstructing the rational/irrational
binary, and figuring out what the abject outside was. But I don't. The
point of the excess volatility literature isn't so much that expectations
governing behavior are irrational in your dictionary's sense - it's that
expectations systematically overreact to short-term stimuli, producing the
patterns of Shiller's famous chart of actual vs. warranted stock prices
(based on underlying dividends). America's caught high up on one of the
upwaves right now, and it's a pretty funny thing, don't you think?

PAUL:
So why am I not laughing?  Are you laughing?

DOUG:
Given the experimentally proven psychological propensity to overvalue new
pieces of information at the expense of old,

PAUL: What do you mean by information in an ergodic experiment vis-a-vis a
nonergodic stochastic system? Are you talking about statistically reliable
information regarding future events? Or are you talking about drawing
inferences from collected DATA?
I assume that you are talking about some psychological experiments that
were designed by the investigator to be , a controlled experiment where the
future outcomes are controlled by the experimental design (and in fact if
the investigator does not control the future outcome set then the results
of the experiment are either not reliable -- or can be interpreted as
reliable only if there is an "unproven" assumption that the future universe
of realizations are in a state of statistical control.) .as any text on
design of experiments would explain to you.


DOUG: is the problem that expectations are ergodic, or that they aren't
ergodic enough? That is, in overvaluing the most recent piece of info,
people discount longer-term
experience. In other words, maybe there's more continuity in experience
than most people realize.

PAUL:
If you know that there is a systematic "continuity" then the system must be
ergodic, And if you insist there is any uncertainty in a system that you
"know" has continuity, then this must  imply that you are presuming  an
epistemological concept of uncertainty that can always be reduced to a
system of probablistic risk. Even if the agents have a hard time
calculating the "true" objective probabilities , those who succeed in the
future (as seen when the future becomes the past) will be acting "as if"
they had what mainstream economics calls "rational expectations".

DOUG
Knowing that is one of the things that made Keynes such a brilliant
speculator, no?

PAUL:
Who says he was such a wonderful speculator.  He speculated against the
French franc much to early in the 1920s and was forced to borrow --(even
the small sums of 35 pounds from one aunt I am told) to prevent  his short
bear position from being sold out when the franc went the wrong way.
Luckily, he had enough wealthy friends, relatives, etc to hold the position
that in general paid of -- but there is plenty of evidence that he also
lost a lot in speculation.  I suspect that Warren Buffet or even George
Soros's record would be better even after correcting for inflation -- and
even these sparkling speculators have had some very bad days..


Doug;
paul davidson wrote:
>So I think Doug better rethink his position on the Tobin Tax.  [Even worse,
>as I pointed out in my seminar on the pktnet -- the empirical evidence is
>unanimous that an increase in  the transactions costs of financial markets,
>ceteris paribus, significantly increases variance -- the traditional
>measure of volatility.
I didn't make much of the Tobin tax - it's a nice way to throw sand in the
gears and raise a few dollars/EMUs/yen.

PAUL:
Sorry Doug I took Barkley's comment that you thought the Tobin tax was good
at face value and was responding to Barkley's characterization of your
position.
If you think the only thing "good" about the Tobin tax is that governments
see it as a cash cow, then we agree on this if nothing else!

DOUG:
 If you want to throw boulders, be
my guest. I don't think price volatility is the real problem with financial
markets - it's their social role as extractors of wealth and instruments of
control.

PAUL:
Interesting point.  Most people see the development of financial markets as
separating ownership from control --- and even you suggested above that the
"owners" didn't want to own and control any one firm!!
Doug, is your position that organized financial markets increase or
decrease controls by those who are buying and selling securities for
liquidity purposes?

DOUG:
 It'd be harder to be so cool to a Tobin tax if you were in Harare
rather than Tennessee, for all Tennessee's Third World characteristics.

PAUL:
But if you are in any LDC (even Harare) then you should want my IMCU plan
not the Tobin Tax as a full page article in THE GUARDIAN in 1997
specifically noted in supporting my IMCU proposal over the more orthodox
Tobin tax.

DOUG: quoting Paul--
>But Barkley -- Minsky was also very sympathetic to the Marxian position at
>one time---

then DOUG continues:
His parents met at a Karl Marx birthday dance, too. Stained from the first.

DOUG:
I blame unemployment on the need to maintain work discipline. Since there's
not much evidence of work indiscipline right now in the U.S., the bourgies
are content to keep U below 5%.

PAUL:
Of course that means you believe in NAIRU and the natural rate argument of
those "heterodox?" economists Milton Friedman and E. S. Phelps. I
don'tbelieve in any natural rate hypothesis and you should read my May
1998EJ article to see why. So if you believe in the Friedman-Phelpss
natural rate and I do not,  then who is more heterodox you or me?
 Certainly the great depression created more unemployment than was
necessary to keep worker in their place--- and in so doing destroyed an
awful lot of capitalists, comrade.

JOHN GELLES:
	I can picture a moderated forum.  Only Davidson.
	Galbraith, Henwood and Andresen are permitted
	to write:  That's two economists and two non-
	economists.
	

PAUL:
Dream on John. To have a forum we must have communicaation via a common
language -- but as you state later on in setting out the ground rules for
this forum, the rules will prevent the use of any crisp lexicon. You write:


JOHN:
"Forbidden are certain words :  Non-ergodic, ergodic,
	Marx, Lenin, and Stalin and all quoted authority on
	any subject.

	Galbraith may champion better pay from the middle
	on down.  Davidson lower rates of interest.

PAUL:

But Jamie is also for low interest rates -- therefore am I  redundant? Or
am I for something more than merely lower rates -- since in the Depression
or in Japan currently -- one percentinterest rates does not seem to do the
trick.


JOHN:
  Henwood
	will notice class consciousness.  Andresen will spot
	any dearth of feedback a heuristic application demands.

PAUL:
And who is aginst class consciousness?

Paul Davidson
Holly Chair of Excellence in Political Economy
Economics Department -- 523 SMC
University of Tennessee
Knoxville, Tennesseee 37996-0550
email: Pdavidson@xxxxxxx;   phone: (423)974-4221;    fax: (423) 974-1686