The Levy Institute has now kindly published my dissertation on asset-pricing in working paper form. The dissertation-turned-working paper is an attempt by me to create a general theory of pricing similar to the general theory of output that was pioneered by John Maynard Keynes.
Although I do not believe this has been attempted before I do think that the importance of some sort of Keynesian theory of pricing has long been recognised. John Hicks, for example, in a letter to Nicholas Kaldor following the republication of the latter’s seminal Speculation and Economic Stability wrote,
“[Your paper on speculative price formation is] the culmination of the Keynesian revolution in theory. You [Kaldor] ought to have had more credit for it.”
I entirely agree with Hicks in this regard. Kaldor, as early as three years after the publication of the General Theory, recognised the importance of subjecting the price mechanism to ‘animal spirits’ as Keynes had done with investment. Doing this, as I argue toward the end of my paper, completes the Keynesian revolution in that sticky wages and prices need no longer be assumed in order to generate a below full employment equilibrium. This also, among other things, finally puts the natural rate of interest theory — which Keynes himself found so unlikely — to rest. In short: once pricing is, to some extent, determined by animal spirits, none of the arguments of modern New Keynesian economics hold water.
Kaldor never recieved much credit for his breakthrough, I think, because his theoretical framework was, while inspired, also slightly cumbersome. It was derived, as was the General Theory to some extent, by modifying an old-fashioned market equilibrium model. Kaldor was also particularly concerned with modifying Keynes’ liquidity trap argument in line with his new speculative theory which seems to have left Keynes somewhat cold. This was tied to the idea that interest rates across the economy were effectively set by animal spirits which, while it does directly overturn the natural rate of interest theory, nevertheless takes the focus away from what I think to be the key issue: pricing.
This is my focus. I am far more concerned with the pricing of assets rather than their yields and what ramifications these might supposedly have for borrowing and so forth. All of this, of course, can be derived from my theory but I have tried to make it far more general than that. What I have sought to do is to streamline, perfect and formalise Kaldor’s (and others’) insights in a manner that is consistent with the national accounting framework and inspired by the recent move toward Stock-Flow Consistent modelling in Post-Keynesian economics.
In this way we gain a flexible framework that, to my mind, all the other approaches — from Kaldor’s to an obscure paper by the Walrasian economists Beja and Goldman — have lacked. The focus of those who have tried this in the past has been too much on trying to construct little models that then generate pseudo-insights into pricing dynamics. I contend that such models are of secondary importance altogether and rather what is required is a more general framework that is robust and gives clear insights into the dynamics of pricing that actually matter in the real-world. Perhaps at some point these can be integrated into wider models, but for now the key is to get the foundations built so that the walls don’t fall down. This, in and of itself, has been and continues to be an enormous challenge.
My view of my paper itself has fluctuated wildly from noticing errors and oversights that I thought undermined the argument completely to thinking that I have basically solved the pricing problem. Such fluctuations in my opinion and mood accompanied me right up to the corrections of the last draft that I sent to Levy. After this draft had gone through the final editing process I noticed another enormous oversight and I considered pleading with Levy to make more changes. I have come to realise however that there are likely many more errors and oversights in the paper and if I keep going down this path it will never get published and I will continue to have to work alone without anyone else casting their eye over the framework to criticise it from the outside.
So, I have decided to add a new section to my blog where I develop the theory to the point where I hope it reaches toward something resembling perfection. The advantage of this is that I can air my thoughts and work through problems publicly and receive feedback from others. Even if I receive no feedback from others, however, I think this is a more productive and structured approach and will probably encourage me to work on the theory more often than I presently do.
Now, here is how I envisage this to work: I am taking the working paper published by Levy as a fairly solid base that is nevertheless by no means an end product. Whenever I think that I find flaws in the argument or, alternatively, if readers of the blog find flaws in the argument, I will address them in posts and link those posts in sequence below. This will keep these posts neatly together which will allow the development of the argument to be followed closely. I recall here a quote from Lacan in which he said that the strength of Freud’s writings were that he left everything ‘unearthed’, as it were, so that the reader could follow the development of the ideas. Needless to say, I very much so like the idea of such an approach.
Before I bring this rather drawn out introduction to an end, a note on my comments policy: Up until now I have been extremely lax on comments, deleting only what I thought to be spam. The posts on my paper, however, will have slightly different standards in that only constructive criticism is welcome (by that I also mean any criticism that unearths errors — constructive criticism need not be positive, it can also be negative). Sniping, nit-picking, obscure philosophical debates and anything that smells of crass one-upmanship will not be published. Constructive criticisms will, however, be taken wholly seriously. If they merit it they may even provoke new posts in response to which I will encourage readers to engage with in turn.
And on that note: let the experiment begin!