Lets be sensible

[Paul Davidson <pdavidson@xxxxxxx>]

At 11:20 AM 3/22/01 -0500, you wrote:
Paul writes:
>
> That is just nonsense, there is nothing wrong with the entrepreneurial
> system once we get the international payments system fixed!.

This is mistaken.  It also is not Keynes (as merely reading "Economic
Possibilities for Our Grandchildren" will show and as is demonstrated by
innumerable other texts including the two I recently posted in response to
Basil's claim re the "efficiency" of private investment).

You get to this conclusion in part by assuming that agents are "sensible",
an assumption you also continue to attribute to Keynes.


No the term sensible is my term not Keynes.  What Keynes indicated in a
letter to Joan Robinson (CWK) is that you must not confuse uncertainty with
instability; thinks can be uncertain but still display stability over time.


I recently pointed to your treatment of the relation between age and the
propensity to saves as indicative of the difference between your approach in
terms of the "sensible" agent and Keynes's.  Independent of its relation to
Keynes's view of saving, your argument seems to me to be inconsistent with
the idea of "true uncertainty".


Seems inconsistent to you -- but not to me!.  Older people know they are
going to die -- and if they "know" mortality tables can calulate the
probability of life for each of the followingg next year, two years,
etc.  This leads to the classical  solution of the life cycle hypothesis --
where one spends the last of one's wealth just before drawing their last
breath.  Thereboy spending their income plus  portion of their wealth

y

"As a matter of logic, rational expectations are not irrational in an
ergodic world.  Rational expectations are irrational only when agents "know"
that the system is not ergodic.  Under nonergodic economic conditions,
therefore, it is sensible for decision makers to make choices that would be
seen as "irrational" in an immutable system.  For example, to orthodox
theorists, the fact that income recipients may decide never? not even in the
long run?to spend some the savings from income on any current products of
industry may seem "irrational" in that this behavior conflicts with the
orthodox life-cycle hypothesis.


  Analyzing a sample
of over 9000 households, investigators from the Poverty Institute at the
University of Wisconsin found that "the elderly spend less than the
nonelderly at the same level of income and the very oldest of the elderly
have the lowest average propensity to consume" [Danziger et al, 1982-83, p.
224].  Instead of spending as rational utility maximizers would in an
immutable reality world, these investigators found that the elderly who
"face a complex problem of uncertainty about their health, life expectancy,
and ability to maintain independent households ...  respond by reducing
their consumption" [Danziger et all, 1982-3, p.  226].  In so doing, these
"irrational" households are attempting to permanently increase their
liquidity." (Davidson, "Reality and Economic Theory")



Here increased saving and liquidity preference are treated as "sensible"
responses to the increasing "true uncertainty" of illness and death as we
age.  In what sense does it become "more" true as we age that "we simply do
not know" that eventually we will become terminally ill and die?



Yet the empirical evidence is that people over 65 (adjusted for income
level) tend to have a lower marginal propensity to consume then people at
the same income level who are in younger cohorts!     Empirical evidence
shows, therefore  classical irrational income recipients -- but it is
sensible in the sense of the possibility of chronic illnesses needing
assistance -- and the desire of old people to remain independent.

It is sensible for the elderly to think there is a possibility of a chronic
disabling disease -- (even if the probabilities are small for even aged
cohorts)---while younger people still believe themselves immortal and
always healthy and cannot see the possibility of such a disabling situation
occurring to them.  [ Otherwise how do you explain the consumption of
tobacco, alcohol, and drugs among younger cohorts who think that it is
"certain" they are as immmortal (and immoral) as the Classical GODS.]

. In a world of uncertainty,  even Medicare will not pay the significant
costs of such disabling chronic diseases-- and the cost of such long-term
medical insurance (if you can even get it) is exceedingly high -- and is a
form of savings -- just as a contribution to a pension fund would be..

If you have ever been in a nurding home where mosyt of the patients are
Medicaid recipients-- you will see the sensibility of such views about the
future.

There is in fact an entire literature about such behavior -- known as
"Catastrophe Insurance" developed by H.  Kunraether et al -- where younger
cohorts even if they are educated to the probabilities of a catastrophic
outcome (defined as a low probability of occurring but a tremendous cost
inflicted if it occurs), tend to "underinsure" themselves for such
catastrophe's/.  What I am saying is that as people age they may tend to
over  (self) insure themselves against such catastrophes. -- and that may
be "sensible" behavior.



Keynes explicitly points to irrational psychological factors to explain
liquidity preference increasing with age.  He does this in his review of
Wells's The World of William Clissold.


actual behavior is irrational in the classical sense as I have indicated
above -- and as the Catastrophe insurance literature demonstrates
empirically.  Thus the need for government rules involving subsidizing
flood insurance for people in a flood plan -- or lenders requiring mortgage
insurance from young households.



There he makes the following point about the psychological basis of business
motivation.

"Why do practical men find it more amusing to make money than to join the
open conspiracy?  I suggest that it is much the same reason as that which
makes them find it more amusing to play bridge on Sundays than to go to
church.  They lack altogether the kind of motive, the possession of which,
if they had it, could be expressed by saying that they had a creed.  They
have no creed, these potential open conspirators, no creed whatever.  That
is why, unless they have the luck to be scientists or artists, they fall
back on the grand substitute motive, the perfect ersatz, the anodyne for
those who, in fact, want nothing at all - money.  Clissold charges the
enthusiasts of labour that they have 'feelings in the place of ideas'.  But
he does not deny that they have feelings.  Has not, perhaps, poor Mr. Cook
something which Clissold lacks?  Clissold and his brother Dickon, the
advertising expert, flutter about the world seeking for something to which
they can attach their abundant libido.  But they have not found it.  They
would so like to be apostles.  But they cannot.  They remain business men."
(IX, p. 320)


The idea is not to slavishly follow Keynes in the exposition that he used
in the early part of the 2w0th century -- but to interpret him in light of
what we  have learned in the 20th century.  For example, Keynes never used
the term non-ergodic" when applied to econometric studies-- but he did use
the idea when attacking Tinbergen's Method in his famous essay. when he
said that economic date "are not homogeneous" over time.  This implies that
Keynes was arguing that economic time series are non-stationary (although
Keynes never used that exact terminiology to my knowledge) and since
nonstationarity is a sufficient (but not a necessary) condition for
nonergodicity, I interpret Keynes's emphasis on uncertainty as compatible
with my labelling of uncertainty as a nonergodic environment

.  IMHO, The trouble with you Ted is that  you see the words that Keynes
wrote but cannot interpret them in light of what we have learned since he
wrote them. You apparently do not  undertand that wise chinese proverb
that  last century's philosophy becomes this century's common sense.


paul