PKT message, Re: GT and microfoundations

In my opinion, disagreement regarding which form of competition Post Keynesians should assume is in many cases an inevitable and often not clear consequence of a diversity of questions being asked. It may also be a consequence of a disagreement regarding which strategy one should follow in building an alternative theory to the dominant one, when the latter is viewed as inadequate.

If I may repeat what I argued in my paper "Another look at wage and price flexibility as the solution to unemployment" (in Davidson and Kregel, eds., 1999), I would like to say that an attempt to provide a solid foundation for arguments against the view that wage and price flexibility could assure full employment has to deal with the institutions that characterize the form of competition. For this purpose, and regarding the goods market in particular, one can conceive a form of competition in which prices are flexible, especially in response to an excess of supply over demand. The presence of many atomistic firms or, more precisely, free entry, would be an ideal feature in this exercise. However, if uncertainty is admitted into the picture, then competition cannot be considered as perfect in the usual sense, which requires perfect knowledge on the part of producers, not to mention consumers (Chick, 1992; Elliott, 1992). Perhaps pure competition, in Chamberlain’s sense, is a better denomination (see Sardoni, 1992: 380; Dutt, 1992: 136). The firm faces uncertainty at least as to the market price. This is the notion of free competition compatible with Keynes’s General Theory.

The assumption of pure competition should be handled with special care, and for adequate purposes. It is crucially important to distinguish between two types of discussion. Keynes and some of his followers, particularly some Post Keynesians [Paul and others], can be seen as arguing that even if pure competition existed or could be established, flexible wages and prices may not ensure full employment. The assumption can be made for this purpose even if its unrealisticness is fully admitted. Even such an unrealistic assumption can be useful for policy discussions, since it can be used to contradict policy proposals to make wages and prices more flexible.

A second, different discussion concerns whether pure competition exists or can exist. The idea here can be to show that, regardless of whether flexible wages and prices ensure full employment, a purely competitive economy cannot exist or at least not for long. In capitalism, a market structure characterized by the exclusive presence of many small, equal firms tends to be endogenously destroyed. This can provide a second type of argument, which I also endorse, against flexible-wage-and-price policies.

To these points it could be added that a third discussion involves questions for which pure competition is not a useful assumption. Some questions regarding inflation, for example, could be better answered with a more realistic assumption of oligopolistic competition. Many questions regarding policy issues very often require more realistic assumptions, although, as I argued above, unrealistic assumptions may also be useful in the policy debate, especially in the negative role of showing that somebody else's policy proposal is not good.

Very often Post Keynesians disagree merely because they do not make explicit the questions they are concerned with. By saying that, I do not mean that there isn't also a more real disagreement, about, for example, the best way to present a Post Keynesian alternative to neoclassical economics. People like Paul are more sympathetic than others to the use of the marginalist apparatus, at least in part because they believe this procedure facilitates debate. Others favour a more realistic approach. Again, what people intend to do with their theories and applications matters a lot. I would like to suggest that letting this clear will certainly improve our debates.

Cheers,

David Dequech