Regards,
Gary M.
-----Original Message-----
From: paul davidson [SMTP:pdavidson@xxxxxxx]
Sent: Tuesday, February 08, 2000 3:48 PM
To: POST-KEYNESIAN THOUGHT
Subject: Re: GT and microfoundations
At 09:26 PM 02/07/2000 -0500, you wrote:
>Paul,
>
>You wrote (in part):
> >Marshall borrowed [took?] the notion of equilibrium from physics --
>which merely required a balance of vector forces. There is nothing
>about market clearing!<
>
>Per says:
>And what are the 'vector forces' that balance? The forces of demand and
>supply, I would say, implying that equality between demand and supply
>characterises a state of equilibrium.
NO! WHAT YOU ARE SAYING IS THAT IN EQUILIBRIUM THE QUANTITY DEMANDED EQUALS
THE QUANTITY SUPPLIED!
But what you are saying, Paul, is
>that there may be 'equilibrium' even though demand < supply, which rules
>out that the 'vector forces' are those of demand and supply. So what
>exactly are they?
You are conflating clearing with equilibrium. If you had read my 1998 EJ
piece (or Keynes's chapter 19) or the chapter on the demand and supply for
labor in my POST KEYNESIAN MACROECONOMIC THEORY, or my 1985 JPKE piece, you
would see that it is possible to have market demand and supply forces in
equilibrium without the quantity demanded equalling the quantity
supplied! I really can't spend time retyping a long analysis which has
beren published in nuimerous places already. If you think the analysis is
wrong why don't you write a comment to the EJ. I am sure there are many
orthodox types who would like to "prove" me wrong!
Marshall was just a much better microtheorist than Walras!
>Per wrote before:
> >>This device [the Walrasian auctioneer] was, of course, completely
>imaginary, and in my opinion a rather unconvincing 'as-if' type of story
>about how market prices are formed. But it does not invalidate the basic
>principle that market values (meaning equilibrium prices) are formed by
>demands and supplies of commodities, or their 'scarcity' as it is often
>called. Market prices, provided they are inflexible, may deviate from
>the equilibrium values,<<
NO. They may deviate from market clearing -- here is where Marshall was so
much better than Walras.
Marshall distinguished between market period prices (my spot price
analysis) and short run prices (my forward price analysis) and indicated
that whether there was any production flow in any time interval depended on
the market period (spot)price exceeding the short-run mimimum flow
supply price while the actual forward (short-run) price equalled (by
definition) the short-run flow supply price associated with that rate of
production flow.
in a production period this excess of spot over forward price is called
"backwardation". If the spot price is less than the forward price, there
is an existing redundancy and it is called "contango"
All of this was discussed by Keynes, by Kaldor in his article on
"Speculation and Economic Activity", and by myself in great length in MONEY
AND THE REAL WORLD and in a more condensed version in chapter 4 of POST
KEYNESAIN MACROECONONMIC THEORY.
Isuggest that you not rely on Brent Hansen (does this show your
Scandinavian parochialism?)
>Paul says:
> >This is true only in an exchange economy with a fixed inventory and
>for spot prices -- for prices that bring forth additional flows (or
>reduce production flows) it is the forward price or Marshall's short-run
>flow supply price that makes forward market values.<
>
>Per says:
>I was talking about Walras, not Marshall. I seriously doubt, however,
>that what you say accords with what Marshall had in mind. The
>Marshallian market dynamics, neatly characterised by Bent Hansen (Survey
>of General Equilibrium Systems) as the 'excess-price hypothesis', work
>their way from the market period (in which quantities are fixed and
>prices flexible) via the short period (in which the capital stock is
>fixed but output volumes variable) to the long period (in which neither
>is fixed).
The trouble with Bent Hansen is that Marshall and Keynes are not dealing
with a general equilibrium system -- for in the latter, equilibrium is
DEFINED as all markets clearing simoultaneously. Thus for Brent Hansen,
there can not, by definition, be involuntary unemployment
equilibrium!! Well if you start with axioms that assure there can not be
such an equilibrium you end up blaming labor for being unemployed because
of its truculence. But as I demonstrate in my EJ article and also in
1999JPKE article on "Keynes's principle of effective demand and the bedlam
of New Keynesians", if there is intially a lack of effective demand,
thenworkers can cut their wages until they are blue in the face without
increasing total hiring by profit-maximizing entrepreneurs.
>I have suggested to you before that the Walrasian 'excess-demand'
>hypothesis (as outlined by Hansen) might be a better tool for the
>analysis of the SERVICES that in fact make up the 'goods-and-services'
>of the GDP.
Since Hansen starts out wrong it is hard to think thathe could end up
right. Keynes used Marshall's spot vs foward prce (i.e., market period vs.
short-run) analysis to deal with labor service flows.
Keynes, of course, used the Marshallian toolkit, but with certain
>limitations. He invoked, at any rate up to chapter 18 of the GT, the
>provisional assumption of fixed money wages -- a "salaris paribus"
>assumption if you wish. The prices of output in Keynes are flexible in
>the Marshallian sense, so it is essentially the MARK-UP over wages which
>varies according to the Marshallian laws and are viewed as fully
>flexible.
Not at all. Interesting this is the same response Milton Friedman gave me
in our debate that appeared in the JPE in 1972 -- later published (1974)as
the book MILTON FRIEDMAN'S MONETARY FRAMEWORK A DEBATE WITH HIS CRITICS --
where Freidman corrected some errors made in his 1972 paper
. But Milton Friedman, at least, admitted in a footnote [p.32 of the
book] that his supposition of the relationship of money wages to prices as
employment varies was a simplification that he made -- and is not in
Keynes. Then Friedman states "I am indebted to an unpublished paper by Paul
Davidson for recognition that the earlier exposition on this point may have
been misleading".
>The fundamental source of the mark-up is clearly the scarcity
>of capital assets, meaning the intensity with which they are used (see
>GT chapter 16 in particular), which governs the level 'quasi-rents' or
>operating surplus as we would call it today.
On page 245 of the GT Keynes specifies that his GT is for any "degree of
competition" and there fore only in pure competition need the mark-up
reflect diminIshing returns scarcity.
>The money-wage level itself is a different story, which is developed in
>chapter 19 onwards. Keynes does not present a fully developed money-wage
>theory, and I suspect that one of the reasons behind this is his use of
>Marshallian tools which are ill-suited for all services, including those
>of labour.
Not at all -- Sidney Weintraub was developing the Marshallian labor market
of Keynes in the AER and EJ in the 1950s and early 1960s. As a student of
Weintraub, I adopted this framework in my writings.
paul
Paul Davidson
Holly Chair of Excellence in Political Economy
Editor, JOURNAL OF POST KEYNESIAN ECONOMICS
Economics Department, 523 SMC
University of Tennessee
Knoxville, Tennessee 37996-0550
phone: (865)974-4221
fax: (865) 974-4601
email: pdavidson@xxxxxxx
web page: http://econ.bus.utk.edu/Davidson.html