Re: GT and microfoundations (fwd)

[xxxxxx@xxxxxxxxxxxxxxxxx]

I can't fully catch up the discussions on empiricism, pragmatism and
different methodological tools or reasoning methods applied by mainstream
economists at the moment (due to phd work). Given my engagement in
"political economy" rather than pure economics, I want to say that I
agree with Paul Davidson's reply in this thread on the theoretical
shortcomings of monetary economists. One of them is "involuntary
unemployment", as he acknowledges, the possibility of which mainstream
crowd denies or does not admit in their theoretical postulates. Given
their idealistic beleif in the effectiveness of markets to deliver full
employment, mainstream economists assume, rather than explain,
"involuntary employment can not occur in the strict sense". Keynes
criticizes this assumption of the classical political economy and the
parodoxical logic in its postulates as follows (GT, p.16):

" Apparent unemployment must, therefore, be the result of
temporary loss of work of the "between" jobs type or of intermittent
demand for highly specialized resources or of the effect of a trade union
closed shop on the empolyment of free labor. Thus writers in the
classsical tradition; overlooking the special assumption underlying their
theory, have been driven inevitably to the conclusion, perfectly logical
in their assumptions, that apperent employment (apart from the admitted
exceptions)must be due at bottom to a refusal by the uemployed factors to
accept a reward which coresponds to their marginal productivity. A
classical economist may sympathize with labor  in refusing to accept a cut
in its money wage, and he will admit that it will not be wise to meet
conditions which are temporary, but SCIENTIFIC INTEGRITY FORCES HIM TO
DECLARE THAT THIS REFUSAL IS, NEVERTHLESS, AT THE BOTTOM OF THE TROUBLE"


Then, Keynes raises a more fundamental objection. The second postulate of
the classical economy, that is , "there is a tendency for the real
wage to come to equality with the marginal disutility of labor"
"seldom explains" the problem of actual employment.(GT, p.11). This
postulate PRESUMES that 1. "labor itself is in a position to decide
the real wage for which it works" and hence 2. "it is always open to labor
to reduce its real wage by accepting a reduction in its money wage"
(ibid., p.11). These sub-postulates are incongruent with the
social reality they aim to describe. thus, the classical economy also
fails the empirical and historical test due to internal loopholes in its
a priori logic  (GT, p.9)

"Moreover, the contention that the unemployment which charecterizes a
depression is due a refusal by labor to accept a reduction in money wages
is NOT CLEARLY SUPPORTED BY THE FACTS. it is not very plausable to assert
that unemployment in the US in 1932 was due either to labor obstinately
refusing to accept a reduction in money wages or to obstinately demandind
a real wage beyond what the productivity of the economic machine was
capable of furnishing. Wide variations are experienced in the volume of
employment without any apperant change either in the minimum real demands
of labor or in its productivity. Labour is nor more truculent in the
depression than in the boom--far from it. Nor is its prodcutivity less.
These facts from experience are a prime facie ground for questioning the
adequacy of the classical analysis"


I particulary agree with the notion that "involuntary unemployment" exists
in market economy "independently of monopoly or competition", and that, in
fact, this is a structural charecteristic peculiar to market economy.
This, I beleive, is open to further empirical investigation to falsify the
postulates of mainstream economics.


Xxxx Xxxxx Xxxxxx
Phd student
Political Science
SUNY/Albany
New York/Albany


>At 12:49 AM 02/05/2000 -0500, you wrote:
>>Paul,
>
>>So now you are saying it is better to be
>>precisely wrong than roughly right?


>>It is easy to write down theories that
>>are internally consistent (i.e., follow
>the rules of logic). Responding to the
>>real world is much harder.


>No what I am saying -- and clearly you do not understand -- is you better
>start by being  LOGICALLY CONSISTENT.  If not, of course, ex post you can
>explain anything and say that you are just being empiricially
>relevant.  You apparently don't care-- as long as one explains the
>past.  So when. the rain dance of a primitive tribe was followed, in a
>short period of time, by some rain -- you would say it was OK to have a
>theory of rain making by dancing -- even though it was not logically
>consistent with the theory of weather.

>Finally I wonder why you are so anxious to avoid the obvious -- namely
>that
>in an economy that is market oriented, people use nominal contracts to
>organize production and exchange activities (ubiquitously) -- and it is
>only in such economies -- independent of the degree of monopoly  or
>competition, that involuntary unemployment is a persistent
>phenomena.  Moreover the use of such nominal contacts would violate the
>most universal of all the axioms underlying all the pragmatic "most"
>economists' theories  that you cite -- namely that demand functions are
>linear and homogeneous of degree zero.  But how can they be if people in
>the model "know" that money is not neutral?


>>Many mainstream economists are quite
>>pragmatic and realistic, and they should
>>not be denigrated for eschewing rigorous
>>theory in favor of empirical explorations.


>Yes and so are primitive people who  believe in witchdoctors ,
raindances,
etc.  So were 17th century   "scientists" who espoused empirical
explanation of combustion -- i.e., that things burnt only to the extent
they contained "phlogisten".
  Empirical evidence was that if you weighed a log and a stone and
then  threw them into a fire, the remaining ashes of the log weighed less
than the original log while the stone weighed the same.  Therefore the loss
in weight of the log was do to the
'phlogisten" ' that came out of the log in the form of light and
heat.  Since the stone did not lose any weight, it did not contain any
phlogisten.  This theory was not logically consistent with other things
that we now know as explaining oxidation -- but what the heck phlogisten
beleivers were only being "pragmatic and realistic".

>>While it is true that data interpretation is
>>always theory laden, it is unfair to treat,
>>for example, applied monetary economists
>>as believing in the Lucas (1973 JET) model,
>>when their writings make it clear that they
>>do not. (Indeed, I would argue that even Lucas
>>does not claim that his model is descriptive.)


>What can applied monetary theorists tell us about the lack of inflation
in
the US in the 1990s  and the inflation in East Asia, less inflation
in  Brazil, etc -- that is consistent across all cases =-- or should we
have a different explanation  for each historical episode -- ??


>>What were the PK policy predictions in the
>>face of the growing budget surplus?
>>(The answer is in the archives of this list!)


>PK should not have said anything -- except only if the private sector
shows
a lack of effective demand then one solution is for government to spend
more  --with or without a deficit.   The existence o a deficit per se -- or
lack of one -- is not relevant.  Unfortunately, Alan, apparently your
pragmatism and realism does not let you understand what a logically
consistent analysis of the principle of effective demand means -- unlike
mainstream economists -- there is not two separate models -- one a demand
constrained model and the second a supply constrained model!

>Of course this massive predictive failure
>>can be rationalized in retrospect,
>>especially by stressing the impracticality
>>of prediction (even though we all
>>must predict all the time, and policy cannot
>>be made without prediction).


>Speak for yourself Alan -- not for WE!


>>But back to the point I raised: how do PKs
>>differ from the mainstream on the neutrality
>>of money. I believe you largely dodged this
>>by mischaracterizing the mainstream.
>>For example, I claim you simply misread Friedman.
>>When he says that in the long run money does
>>not matter he means just what one can deduce
>>from his entire body of writings:


>I did not interpret Friedman ,  I QUOTED him -- there is a difference
>Alan!!

>>Just to be clear, these are not rhetorical questions.
>>I want to understand where you stand on this.
>>In my view there is overwhelming empirical
>>evidence bearing on this, which I have cited before
>>on this list. (And, just to be clear, I have never
>>argued that evidence supports the monetarist
>>*causal* story.)
>
>>Taking a bit more difficult issue . . .
>>Do you deny that there are many circumstances
>>in which a one-time, modest, change (endog
>>or exog) in the level of the money supply has no
>important (i.e., policy relevant) effects on consumption
>>and production decisions after a few years?
>>If you do not deny this, how does that square with
>>your insistence that money is never neutral?


>I stopped beating my wife a long time ago Alan --).

>>If you do deny it,
>>i. where can I find this conclusion
>>as a logical deduction from the models you have
>>laid out in your publications, and
>>ii. how do you square your view with the real
>>world evidence?


>May be you ought to read what I wrote and stop interpreting it??



Paul
Paul Davidson
Holly Chair of Excellence in Political Economy
Editor, JOURNAL OF POST KEYNESIAN ECONOMICS [JPKE]
Economics Department -- 523 SMC
University of Tennessee
Knoxville, Tennessee 37996-0550
email: Pdavidson@xxxxxxx;   phone: (865)974-4221;    fax: (865) 974-4601
http://econ.bus.utk.edu/Davidson.html