Re: Fundamentals

["John M. Legge" <jlegge@xxxxxxxxxxxxxx>]

John V,

In the sense that every fundamental particle in the universe has a spin,
charge, position and velocity determinate to the level permitted by
Heisenberg the point of departure for any real process (and if you accept
the idea of a material brain, every imaginary one too) is determinate.

It would require, however, a computer of complexity of the order of N^N^N
(where N is the number of fundamental particles in the universe, not
forgetting photons) to make long term predictions of the trajectory of the
universe or any non-trivial subset of it.  The trajectory of the universe
and all non-trivial subsets of it is incalculable to any agent limited to
using a computer no bigger than the universe itself: "the universe is its
own best predictor".

Fundamentals, in the sense that you describe them, may exist but limitations
on our knowledge and our computing ability mean that any predictions that we
make should be expected to deviate from emerging reality at an exponential
rate (the Lyapunov exponent).  Since our knowledge of today's fundamentals
can be no better than approximate, our predictions will be subject to a
wider margin of error than our current knowledge is, and this error will
grow with time.

If you use the term "fundamental" in a less fundamental way, as I do, and
apply it to the problem of determining what a reasonable person might
reasonably pay for an income-generating asset, when not influenced by
speculative or beauty contest motives, the Dixit and Pindyck approach, or
any other approach based on uncertainty increasing with the time from now to
the expected event, produces a pragmatically acceptable result.

Such approaches also suggest a rational liquidity preference and offer
micro-level support to Keynes as distinct from Marshall and the finance
textbooks which suggest that investments with an infinitesimally positive
interest rate are to be preferred to holding cash.

Note to Steve K if you have got this far: the payback method of project
valuation is reasonably valid for investments where the opportunity is
available to all members of the relevant industry and the returns commence
without delay.  Such investments are typically associated with cost
reductions.  (Working through the required combination of diffusion and
uncertain investment models consistently suggests hurdle rates consistent
with approximately a three year payback.)  D&P style augmented NPV
calculations are needed when the investment phase itself will take a
significant amount of time, such as the development and testing of a new
product.

JML



> -----Original Message-----
> From: pkt-owner@xxxxxxxxxxxxxxxx [mailto:pkt-owner@xxxxxxxxxxxxxxxx]On
> Behalf Of John Vertegaal
> Sent: Tuesday, 27 March 2001 1:06 AM
> To: POST KEYNESIAN THOUGHT
> Subject: Re: Fundamentals
>
>
>
> John,
> I appreciate you going through the trouble and even though
> there are a few open questions, I basically have no quarrel
> with your exposition, except that it isn't "fundamental".
>
> For it to be fundamental you would have to show, from a set
> of empirically non-contradictory axioms, not only why a
> geometric random walk is equivalent to the comings and goings
> of our economy, but also and more importantly that any chosen
> point of departure is a _determinate_ one.
>   Just asserting it is, as you've done in the past about the
> latter, isn't good enough.
>
> As it stands, all you can claim is that: _given_ a certain
> set of circumstances, this is what rational managers in a
> microeconomic world would do.  I sympathize with that view
> and as far as it goes you're probably right.
>   But from that position you have no way to ascertain the
> _certainty_ of that set of circumstances with respect to what
> is going on in the macro world as a whole; and so it cannot
> serve as fundament to build a theory upon.
>   At least until it is either shown to be erroneous, or
> irrelevant to solving real economic problems; my logic, built
> on just a couple of very basic axioms, shows that the macro-
> economic world is indeterminate at any given time, thus there
> can be no micro fundamentals.
>
> John V
>