Is There Really No Labour Market in Keynesian Theory?

labour marke

It was recently said by James Galbraith that a model that includes a labour market is “anti-Keynesian”. This caused a little bit of fuss but I thought that it was a very good first approximation of what Keynes’ economics in the General Theory is all about.

We can give this a little more precision by examining what Keynes thought to be the orthodox theory he was attacking and what he thought his new theory to be. A good place to draw this argument from is Athanasios Asimakopulos’ seminal book Keynes’ General Theory and Accumulation. In this book Asimakopulos examines the lectures that Keynes undertook prior to the publication of the General Theory, draft chapters and other sources, to better understand what the ideas in the book were all about.

Asimakopulos draws on on draft chapter by Keynes to show how Keynes understood the orthodox theory. Asimakopulos writes,

With production conditions conducive to the existence of the competitive markets implicitly assumed by Keynes, the size and number of co-operative production units would be determined by the net marginal product of labour and the marginal disutility of labour. If the marginal product of labour was greater than its marginal disutility, then more labour would be employed in existing production units and/or new units would be established, until equality was obtained. In such an economy total output and employment, as well as the real-wage rate, would be determined in the labour market. All the employment, and thus output decisions, taken on the basis of conditions in the labour market, are then automatically validated in product markets by the payment of output shares to the factors of production. Keynes surmised that these special labour market conditions would also be fulfilled in an economy where production units are owned and operated by a class of entrepreneurs, as long as total expenditure is always sufficient to purchase, at expected prices, whatever total output is produced. He calls this second type of economy ‘a neutral entrepreneur economy, or a neutral economy for short.’ There is no explicit reference to a neutral economy in The General Theory, but it appears to underlie his view of classical theory. ‘The classical theory assumes, in other words, that the aggregate demand price (or proceeds) always accommodates itself to the aggregate supply price’. (pp19-20 — Emphasis Original)

Keynes’ conception of a ‘neutral economy’ is, of course, the familiar labour market of marginalist theory where the supply of labour is determined by the marginal disutility that workers associate with working and the demand for labour is determined by the marginal productivity of workers.

But Keynes saw his own theory as examining an entirely different system. Keynes did not believe that this ‘neutral economy’ was a good representative of the real world. Asimakopulos goes on to lay out Keynes’ own views clearly.

In contrast to the co-operative and neutral economies there is what ‘we will call a money-wage or entrepreneur economy‘. Here, production and employment decisions depend on the expectations of money proceeds relative to variable costs, and ‘it is in an entrepreneur economy that we actually live today’. It was this economy that provided the setting for the General Theory, and it is here that employment is determined by independent aggregate demand and supply functions for output, and not by conditions in the labour market. (p20)

Thus perhaps a better way of formulating Galbraith’s comment is to say that: any model in which the labour market is the key to determining the level of employment is an anti-Keynesian model. This is why models that assume wage and price rigidities are not true Keynesian models.

In his book Asimakopulos shows clearly that Keynes had ceased to focus on price changes after his Treatise on Money and turned to a wholly different conception of how the economy functioned that effectively ignored the labour market as a determinate of the level of employment. He also shows that Keynes got into a terrible muddle about all this because he was still working on effective marginalist microfoundations. But if you read the material it is clear that the argument Keynes was making was definitively that the labour market does not play a role in the determination of employment.

Update: I have just come across a fantastic quote in Asimakopulos’s book that shows beyond a shadow of a doubt that Keynes rejected the idea that the labour market determines the level of unemployment. In an early draft of the General Theory Keynes writes. “we may well discover empirically a correlation between employment and real wages. But this will occur, not because the one causes the other, but because they are both consequences of the same cause”. That cause, of course, is the level of effective demand.

About pilkingtonphil

Philip Pilkington is a London-based economist and member of the Political Economy Research Group (PERG) at Kingston University. You can follow him on Twitter at @pilkingtonphil.
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36 Responses to Is There Really No Labour Market in Keynesian Theory?

  1. sorry but there is a labor market explicit in the /General Thery.

    There is a whole chapter in the Generalo theory entitled The Employment Function which provides a description of the labor market. [I am sorry I am out of town on a trip and therefore do not have a copy of the GT with me so I cannot provide you with the chapter number.]

    This chapter does not have a diagram with downward sloping demand curve, etc — but it is there. And if you want to see in the typical more familiar equational form or geometric diagram just go to my textbook POST KEYNESIAN MACROECONOMIC THEORY and look in the chapter on the demand nd supply of labor.

    The classicist saw a downward sloping marginal productivity curve (due ti diminshing returns) and like Pavlov’s dogs they immediately salivated the reflex thought that if it is downward sloping it must be a demand curve — but it is not, as /i explain in my textbook.

    The trouble is no one reads the General Theory or even my textbook that translates Keynes’s General Theory into terminology that today’s economists and students sre more fmiliar with.

    Paul

  2. Funky says:

    Keynes approached the issue of money via liquidity preference and it does work … but it is not particular realistic so nowadays we should approach it via a ‘money as credit’ (Stiglitz and Greenwald have written a bunch of great articles plus one book on the topic about twenty years ago) angle. If you wanna start a company you do need e.g. a loan not just to finance capital but also to finance your production as production and consumption do not occur at the same moment. This is totally trivial but it has not entered any economic model I am familiar with except the above mentioned by Stiglitz and Greenwald.
    Asymmetric information and the ensuing incentive problems in credit markets are well-studied, well-known and quantitatively important (except for micro-credits there is no eBay for loans, i.e. these incentive problems are more severe in capital than in labour or output markets) so they are the natural key market failure that can explain why underemployment equilibria exist (we all know that they would not exist in a barter economy so we know that money is the source of the problem but how to interpret money, via the old liquidity preferences angle or the money as loans angle matters).

    “Here, production and employment decisions depend on the expectations of money proceeds relative to variable costs.”

    This line hints at what I wrote above but with more emphasis on expectations. I don’t think that focusing on expectations is fruitful as any kind of deviation from rational expectations has to rely on psychological insights … and while they are important there is no easy way to incorporate all the behavioural issues into a model. Knightian uncertainty is even worse as it basically says that the future is unknown so we cannot build any non-static economics model.

    • Well, Keynes disagreed. So you’d better either stop claiming to be the True Heir of Keynes or change your opinions to line up with his. Because I doubt, due to your mainstream training (sunk intellectual capital) that you will change your thinking its probably safer to just stop proclaiming yourself the True Heir.

      • Funky says:

        “stop proclaiming yourself the True Heir”

        I never claimed any such thing. Repeating a lie ad infinitum won’t make it true. But it is fun to see you trying and funny to see how dogmatic and braindead you are. It is even more funny to see people criticizing something they don’t understand (you obviously have never read any technical work of Stiglitz, cannot analyse asymmetric information problems and thus are basically economically illiterate).

      • Wow… you sure pwned me, Funky. Get off this comments section with your childish antics. As I said, this is not a play pen. If you want to act like you’re in the schoolyard please go elsewhere.

      • Funky says:

        “you sure pwned me”

        “If you want to act like you’re in the schoolyard”

        Not that you would recognize the involuntary self-irony but this speaks for itself and does not require any comment.

    • philippe101 says:

      “we all know that [underemployment equilibria] would not exist in a barter economy”

      I’m not sure why that should be the case… doesn’t it depend on the distribution of resources? Say for example one person owns all the land. Everyone else wants to work on the land, but they simply decide not to employ anyone…

      • Or, more simply, if someone hoards there will be unemployment. If all labour is exchanged for, say, wheat, and 1,000 units of wheat are produced a day of which 800 go to wages and 200 to “investment” and someone comes along and hoards, say, 300 units of wheat then you’re going to have all sorts of problems.

        Money only comes into it, as the MMTers note, when the state proclaims a monopoly on the unit that is used to pay wages. That is, fiat money.

        I think that Funky has deeply ingrained marginalist biases in his thinking. That is why he writes such obviously incorrect things. He equates “barter economy” with the marginalist model economy that is at the root of his thinking.

      • Now that I think about it, your land example is indeed a hoarding example.

      • Funky says:

        I agree that hoarding of goods is equal to the hoarding of money (which is the source of the problem, the velocity of money always drops in recessions). But as goods are rarely hoarded nowadays (second sector companies have far smaller inventories than some decades ago, instantaneous production is the thing) money hoarding is the problem.

        If you conduct Post Keynesian analysis and take a look at the balance sheets of companies, banks and households you see the liquidity is trapped there, private player are still deleverage and without the prospect of increasing demand (here is where fiscal policy enters the stage) they will not invest (it is not just increasing the capital stock , hiring new workers can also have an investment character as you have to train new workers and so on) one cent.

      • paul davidson says:

        Frank Hahn in an paper in a book entitled “THe Microfoundations of Macroeconomics” edited by Geoff Harcourt pointed out that Keynes had it right so ttat whenever Savings went into demanding things that can not be produced, this was a nonemployment inducing demand! So hoarding land is the same as hoarding liquid assets –for one of the essential properties of all liquid assets, according to Keynes, is that the elasticity of production equals zero!

        But if people hoard PRODUCIIBLE GOODS — EVEN IN A BARTER ECONOMY — THIS DOES NOT CREATE UNEMPLOYMENT BECAUSE THOSE LOOKING FOR WORK CAN ALWAYS PRODUCE MORE OF THE “HOARDED” GOODS!

      • Well, now you’ve changed your opinion Funky. You seem to do this rather often when you’re called out on something, but you never admit that you’re doing so; then you engage in ad hominem nonsense and call your opponent a liar or whatever. You would come across as far more thoughtful and mature if you said: “actually you guys are right, I hadn’t thought of that/seen that Keynes quote. Let me think through the implications of this for the way I think about the economy”.

      • Paul, that’s not correct. If the wheat is hoarded the economy will not be able to reproduce itself. The workers need wheat for consumption to live and they also require wheat to plant (i.e. as investment) so that the economy can reproduce in the next period. It’s a “Production of Wheat by Means of Wheat” economy.

      • Funky says:

        “Well, now you’ve changed your opinion Funky. You seem to do this rather often when you’re called out on something, but you never admit that you’re doing so; then you engage in ad hominem nonsense and call your opponent a liar or whatever.”
        When I am wrong I admit it. I don’t have adolescent maturity issues like you.
        Back to the issue, theoretically you are absolutely right but not empirically, nowadays companies keep fairly small inventories. So practically speaking good hoarding can be neglected and money hoarding is indeed the problem.
        This is after all the main point of comparing real economies with non-existing barter economies, to get at the source of the problem: why do underemployment equilibria exist?

      • You changed your opinion. You should be explicit about that. Otherwise you come across as stubborn.

        Regarding the empirical side of this argument, you need to keep a closer eye on developments in the financial markets. Start here.

        Now, feel free to change your opinion on the empirics and pretend you always thought that physical hoarding might be an important phenomenon in the markets. I’ll try to look the other way.😉

      • Funky says:

        It is not. Without going into whether natural resources count as goods (does it matter whether there is a stock of aluminium in the earth or in a warehouse), what matters are aggregates. And I guess that aggregate data on inventories would should that they are far smaller than a few decades ago. Sometimes it doesn’t hurt to know just a little bit of what is going on in the real world.

        But I don’t have any decent data right now so I cannot tell who of us is right. You on the other hand seem to think that a story about one warehouse verifies your argument. I guess you really did not take any statistic courses in university and studied literature or critical theory or whatever before you got into econ. Otherwise such confusion about elementary statistical stuff is hard to explain.

      • So, then you haven’t been following the stories in the financial press about commodities hoarding by big banks in various countries? You haven’t been following the fact that regulators are becoming increasingly concerned about the upward pressure this is putting on prices? You haven’t been following these front page stories at all?

        I think I’ll not listen to you as an expert on the financial markets. Also, it might be worth looking up the Keynesian theory of “user cost” before you go and start trying to figure out how financial markets work in the modern world. Keynes knew. Not sure you do.

        Back to the models though!

      • Funky says:

        If all you know about finance is from Keynes you have literally been asleep for 80 years. Future contracts on food or more complex derivative products do not imply hoarding. But they drive up food prices and are criminal. The only people who should be allowed to hedge themselves against food price fluctuations via futures are the producers themselves and not financial companies.

      • But we’re not talking about futures prices, Funky. I think you’re out of your depth again.

      • Funky says:

        If financial players buy commodities they buy most of the times futures or design derivative products. This has driven up food prices and caused hunger and death. As usual you ignore empirics and the morel imperative of every good economist, no matter of which school: to prevent or at least argue for the prevention of suffering.

        Now apparently some financial players also own some warehouses and literally stock commodities. I doubt that even in the case of metals (they certainly don’t stockpile food) this is quantitatively significant, their job is after all finance and not logistics. But you can surprise me, prove me wrong and show some numbers.

      • pontus says:

        As for hoarding of goods, this is what inventories look like:

        http://research.stlouisfed.org/fred2/graph/?g=AwX

        Only two data points, but procyclical then. It’s hard to argue that there is hoarding of goods in general.

      • Inventories are not hoarding. That is why regulators are not concerned with them. Hoarding of goods is holding goods back from the market to increase the market price. OPEC, for example, hoard oil when they want to increase the oil price.

      • Pontus says:

        In national accounting, any good that is produced and not sold is counted as inventory. OPEC is not producing oil and storing it, they are just not producing. The same goes for any monopolist that is trying to raise prices by withholding supply. That’s not hoarding.

      • You could say that they are hoarding it in the ground. It is the intention of the action that is important, not the process (otherwise we would rename ‘liquidity preference’ to something like ‘money-inventory accumulation’ which is obviously silly). OPEC cutting production is functionally more similar to the copper hoarding in Chinese warehouses and car parks than it is to simple monopoly dynamics (I don’t think that the monopoly approach is a good one anyway because it rests on marginalist ideas; it being a supposed ‘deviation’ from a competitive model which I find deeply misleading).

        Yes, I am aware of the definitions of the national accounts. But the framework of the national accounts was not set up to deal with asset-price speculation. This is what most of my own work is on which is why I’m pretty plugged into these issues which are increasingly rearing their head in the real world (see here and here) and are not properly dealt with even in Post-Keynesian economics (although its a lot better than the mainstream in this regard which is completely vapid!). This is, by the way, how you actually move to construct novel economic theories: turn away from the blackboard and, in the spirit of Keynes, look at the real world.

        Anyway, whatever you say, it is clear that hoarding in a non-monetary economy can lead to below full employment outcomes. That is what Funky was denying and he was simply wrong.

      • paul davidson says:

        the rate at which a natural resource is taken out of the ground is covered by Keynes’s “user cost” concept.

        I used this user cost concept in an article I published in the AMERICAN ECNOMIC REVIEW in 1963 on the economic problems of the domestic oil industry

      • Pontus says:

        Phil, your limited knowledge of economics is sometimes shocking.

        If a good is hoarded, there is still demand for it (if I buy wheat but don’t eat it, I still bought it). And if it is a produced good, it is still produced. In the OPEC case, not producing oil means not utilising the labour force. This contrasts with hoarding of oil, in which the labour force is used. Guess which one will lead to underemployment?

        The funny thing is that mainstream theory would support these two observations. Monopolies would indeed lead to underemployment because of withheld supply, but consumers hoarding goods would not because of unaffected demand.

      • Of course you could probably construct a multi-good model where one commodity has a lower price elasticity of demand to capture this. But the point stands that the mainstream models are misleading in this regard as is shown, well, by the fact you were misled.

        Update: Actually now that I think about it, this wouldn’t work either. The timelessness of the marginalist models together with their bizarre conception of ‘capital’ circumvents any way of modelling such processes properly. Let’s just hope there are no more confusing oil shocks for our marginalist brothers and sisters (but then they’d probably just blame the money supply again… morons…).

  3. paul davidson says:

    Funky

    you really have no reading knowledge of the literature -otherwise you would know that the literature on endogenous money and MMT all insist that loans create money and not vica versa — and do a better job than Stiglitz and Greenwald on this.

    also asymmetric information implies that there is existing today correct knowledge about future payouts [till the end of the universe?] of any decision made today. Only some decision makers are too dumb to know how to analyze today’s data to get an actuarial certain picture of the future!

    When Joe Stiglitz is asked why these fools who have the wrong end of asymmetric data are not wiped out (and go the way of the dinosaurs) in a survival of the fittest market economy, his only answer is — well P.T. Barnum had it right , namely “there is a sucker born every minute”.

    But you would think Darwinism evolution would wipe ot the sucker genes in a Darwin free market.. Unless you think there is a divine developer who has designed the economic world forever.

    If the system is nonergodic — as Keynes implicitly claimed when he criticized Mr. Tinbergen’s method for using nonhomogenous economic data, then there can not be any Asymmetric information because true information about the uncertain future does not exist today in a nonergodic world. So therefore Stiglitz can not be a “Keynesian” — new or old!

    By the way Chapter 20 n the GT is “The Employment Function” where Keynes lays out the working of demad for labor in a money using market economy.

    how many people reaing this blog have read chapter 20 besides me? No one ?

    • Funky says:

      I know the endogenous money literature but don’t care much about it. You on the other hand clearly don’t know the asymmetric information literature.
      Suppose you make 20 bucks an hour and you could hire a cleaning worker for 15 bucks an hour. You do not do it because you cannot supervise the cleaning guy perfectly, he could steal some of your property if he cleans while you are not at home or he could just do a bad job. This is why you do not hire him although a mutually beneficial trade would exist absent asymmetric information. Nobody dies (the resulting unemployment could lead to immense suffering but it would be the better informed party, the cleaning worker, and not the worse informed part who would suffer), we are doing economics and not biology.
      his has nothing to do with Darwinism, ergodicity or in general the far future, it is not just a problem in capital or labour markets (which feature transactions that occur over a period) but also on spot markets (if time has any effect it is not as you claim a negative but a positive one).

      Stiglitz and Greenwald used this important tool to build Keynesian (if Keynesian means that the model features a short-run underemployment equilibrium) models during the nineties. As these models feature incentive problems in financial markets they are far more actual than your ramblings about ergodicity.
      You cannot do any science if all you do all day long is crying that the future is unknowable (of course philosophically speaking you are right, the future is open but we are not doing philosophy but science so we simply have to try to predict the future to the best of our abilities, with imperfect tools and mechanisms). If you really believed in this nonsense you’d have to discard all climate science and claim that these scientists are all morons, the future is uncertain so they should stop predicting that the likelihood that temperatures rise a few degrees. Obviously such an attitude is unscientific, anti-enlightenment and reactionary

      • paul davidson says:

        I think that you are suggesting I would not hire the cleaning guy because I can not supervise everything he does — and he may just take y money and not only not work but steal from me.

        If that is the case behind asymmetric information then you do not understand the importance of money contracts and the role of criminal law in a money using private property economic system. If I hire a cleaning person and he accepts ,then there is a legal contract and if the cleaning person does not do what he said he would do, I do not have to pay him. Moreover if he steals from me I can call the police authorities and he will be jailed. He is not involuntarily unemployed in jail–!!

        But clearly you have not read Stigliz on financial markets. ( for example see, J. Stiglitz “Using Tax Policy to Curb Short Term Trading”, JOURNAL OF FINANCIALl SERVICES, 1989, pp. 101-113..) In this paper Stiglitz states that observed volatile asset prices moving away from fundamentally determined values are attributed primarIly to the existence of ” noise traders”, i.e., the speculators who mistakenly believe they know how the stock market works and therefore do not have to acquire the correct information regarding future outcomes from the fundamentals (Stiglitz, p. 105) Rational traders (who possess the correct information about market value and fundamentals) who feed on these foolish noise traders and ultimately return the market to its fundamental value.

        The “mistaken belief of all speculators” that they can do better than the market by ignoring the fundamentals is Stiglitz’s (p. 106) explanation of horrendous speculative activity that we observe in our world. Stiglitz’s analysis requires a stream of new short-term traders (as the rational traders eat up the earlier fools) . These new traders “are betting that they can do better than the market…based on the mistaken belief that (all!) speculators can do better than the average” (p.106).
        But this creates a strange logical inconsistency for Stiglitz. On page 102 Stiglitz accepts the argument that the imposition of a transaction tax in any product market will distort the Pareto-efficient price structure. But, Stiglitz arguers that a similar transaction tax in financial markets does not have such a devastating deleterious effect but rather “such a tax may be beneficial” (p.102) since short trader speculator foolish noise traders interfere with the efficient capital allocation function of financial markets. The transaction tax, therefore, by making it more costly for fools (as well as all other mortals) to engage in short run financial market activity therefore improves the efficiency of financial markets.

        Stiglitz tries to explain how there are always new noise traders to replace those who are eaten by rational traders for centuries by appealing to authority –P.T. Barnum (p.106) whose dictum “there’s a sucker born every minute” — although Stiglitz misquotes it as “There is a fool born every moment”. In other words, even in the long run, society produces fools who irrationally believe they can beat the market!

      • Yes, I’ve never understood the assumption of the “foolish” noise-trader either. It seems entirely arbitrary.

        If one group can “fool” themselves then why make the assumption of perfect rationality in the first place?

        The whole argument is entirely arbitrary. It is the argument of someone who doesn’t want to admit that the markets are non-ergodic and basically follow trends because… well, I don’t know… why not make this argument? It is so obviously true. Why the need to keep the rational traders in a pen away from the noise traders? Why the assumption of idiots? Why not just say that no one is entirely sure which path to take and they are all copying each other, as Soros, Davidson and even Shiller claim?

        I think its because the likes of Funky want to engage in pseudo-science and call themselves scientists. Ridiculous.

  4. Funky says:

    “I think that you are suggesting I would not hire the cleaning guy because I can not supervise everything he does — and he may just take y money and not only not work but steal from me.

    If that is the case behind asymmetric information then you do not understand the importance of money contracts and the role of criminal law in a money using private property economic system. If I hire a cleaning person and he accepts ,then there is a legal contract and if the cleaning person does not do what he said he would do, I do not have to pay him. Moreover if he steals from me I can call the police authorities and he will be jailed. He is not involuntarily unemployed in jail–!!”

    Yep. you clearly don’t understand asymmetric information. Usually only Chicago morons try to claim that asymmetric information does not cause any incentive problems because of complete contracts. As in politics extremists on both sides have often a lot in common.

    Complete contracts do not exist, you cannot put every contingency in a contract. If you had ever worked in the real world you would know this and if you had ever cleaned your bathroom you would also know that it is impossible to supervise even the most simple tasks (it is quite easy to make a bathroom appear polished without having properly cleaned it).

    But if you really think that the world is so perfect, why don’t you just give me the keys to your home? You claim after that you can prove easily that I stole something from you so no need to worry about it.😀
    We all know that this is nonsense, you’d need a camera system to actually prove that somebody who was in your home stole from you. And, this is the point of Shapiro&Stiglitz, such supervision is not costless.

    So companies can either install supervision systems (not just technical, hierarchy also is about supervision), they can pay above market wages like in Shapiro&Stiglitz to create incentives for employees to work hard or they can pay above market wages in order to increase moral (psychological and sociological reasons elaborated in many Akerlof papers).

    Same with capital markets. In your Chicago fairy world complete contracts solve all the incentive problems but in the real world there is no eBay for loans, there are financial intermediaries. Creditors extract information from debtor in order to check that the likelihood that they pay back the loan is high enough. And for simple economics of scale reasons this job is not done by everybody but done by companies which specialize in this: banks.

    About the Stiglitz paper, I am indeed not familiar with it. It seems to rely, uncharacteristic for Stiglitz, on irrationality. But I don’t see the problem with the papers there are many of phenomenoms which you can only explain via irrationality. Take the financial crisis, it was a Ponzi scheme in which banks and (temporary) house owners could profit from the rising house prices as long as they did not play the game too long … and those who jumped off the train too late made losses. Now either you assume that everybody gambled rationally and knew that the unknown variable was the moment in which house prices start to decline which implies that many people with little wealth have extremely low risk aversion … or you assume that the losers were simply dumb.
    I don’t see your problem, neither Stiglitz nor me ever claimed that rational expectations is a reasonable assumption. Stiglitz just showed in many of his classical papers that you do not even have to relax the rationality assumption to make Arrow Debreu collapse, relaxing the perfect information assumption suffices.

    • I hope everyone appreciates that Funky is outlining the cutting-edge of mainstream economics which basically consists in saying “we don’t know everything”.

      Profound research program you have going there guys!😀 I can’t believe you make kids pay to learn this stuff. Sheesh.

      Can I get a Nobel for relaxing the Rationality Assumption? I mean, why not? “People are not Rational”. There I said it. Profound, eh?

      How vacuous…

    • paul davidson says:

      funky:

      You obviously know how to clean bathroom toilets — and therefore I understand where you have probably gotten all this s**8 that you put down as your rebuttal arguments.

      your comment that relaxing the perfect information assumption suffices to break down the Arrow Debreu system — just shows how narrow you think.

      Samuelson stated that he did not understand the General Theory so he just assumed that rigidity of wages and/or prices was sufficient to explain Keynes’s theory of involuntary unemployment as the alternative to the Walrasian perfect competition case! Samuelson makes this claim even though 19th century classical economists recognized this rigidity broke the classical theory. So what was new about Keynes’s revolution, if Samuelson [ a teacher of Stiglitz] was correct in his interpretation of Keynes’s General Theory? Samuelson has obviously passed on to his student Stiglitz a poorly understood concept of what is a “Gereral Theory”.

      After all, even Keynes [p. 257 of the general Theory] noted and specifically stated his theory did not rely on laying the blame for unemployment on “this rigidity”.! Instead his analysis is based on the reason that the future is uncertain in the sense there is no way information about the future exists today for important decisions involving choosing the profitable investments projects, etc. Thus Keynes rejected the perfect information axiom of classical theory long before Stiglitz came along.
      .
      So Funky all Stiglitz s theory is that everyone does not have perfect information about the future?
      But asymmetric information assumes perfect information about the future exists today — but, as I quoted from Stiglitz’s published paper on financial markets, Stiglitz claims only rational traders know this information , while noise traders do not (thus the asymmetry). These noise traders will always lose out to the rational traders in Stiglitz’s model (again see my page citation of Stiglitz’s article where he claims this).. After several centuries of trading in financial markets where does Stiglitz continue to get these new noise traders to replace the ones eaten by the rational traders in Stiglitz’s model??? Only P.T. Barnum gives Stiglitz his answer! But Stiglitz should recognize only these same fools that Barnum hoodwinked will buy into Stiglitz’a asymmetric information model as a correct representation of the world of experience

      So Funky instead of dishing out your usual uneducated response to my informed citation from Stiglitz, why don’t you read the Stiglitz article I cite and tell me where I am wrong– as you obviously believe I am.

  5. Funky says:

    “So Funky all Stiglitz s theory is that everyone does not have perfect information about the future?”

    As I say the entire time, you do not understand asymmetric information. Asymmetric information means that somebody knows more than somebody else at a fixed point in time. It has nothing to do with information about the future. Gee, normally undergraduates learn to distinguish cross-sectional and time series data, And from a non-native speaker of English to a professor (if you really are Paul Davidson) I gotta say that your language skills really suck.

    In general I don’t understand why some heterodox morons always go after their allies (and not free market radical and neoclassicals). Guys like Krugman, Stiglitz or Yellen are after all center-left mainstream economists that are anything but defenders of classical heterodoxy and agree with you guys on all practical matters. I say e.g. that part of my understanding of what is going on the the moment is due to Minsky and Koo.
    This just shows that unlike Yellen, Stiglitz and Krugman you do not really care about improving the life of millions, for you this is just an intellectual game intertwined with a tribal fight.

    About your moronic questions concerning Stiglitz’ paper (How about you read more than just paper on asy. information in order to understand what it is about? And if you really don’t get it or have problems with the maths, try the nobel prize lectures, they are non-technical.), you build some pseudo-Darwinian nonsense around Stiglitz’ model and assume that irrational people will die out and then ask why they have not died out. Last time people in this very country I am living in spouted out such nonsense about intelligence passing perfectly down genetic lines was the thirties …

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