The book I have mentioned above (Microfoundations of Evolutionary Economics) is composed of seven chapters in total. Here is the table of contents:

1. Microfoundations of Evolutionary Economics

2. A large economic system with minimally rational agents

3. The Basic Theory of Quantity Adjustment

4. Dynamic Properties of Quantity Adjustment Process under Demand Forecast Formed by a Moving Average of Past Demands

5. Extensions of Model Analysis of the Quantity Adjustment Process in Several Directions

6. Signi cance of Non-Linearity and Many Goods Models

- Feasibility of the (S; s) Inventory Control Policy in the Economy as a Whole

7. Exchange and Arbitrage - Price, Evaluation and the Principle of Exchange

The main part is how a large market system is adjusted by agents whose capabilities are limited in several aspects. Chapter 2 is a general introduction and in Chapter 4 (written by Masashi Morioka) gives a mathematical proof that the quantity adjustment process converges as long as it is not constrained by lack of inventories (stock-outs). When a firm faces lack of inventories or adopts (S, s)-adjustment policy, the total adjustment process becomes non-linear . This process cannot treated by mathematical methods. Chapter 6 (written by Kazuhisa Taniguchi) gives results that Taniguchi examined by computer simulation method.

Taniguchi-Morioka's results have a paramount importance, because this is the first time that a big market economy which may be as big as global economy and moved by agents with bounded rationality and myopic sight has some stability property. This can replace Arrow and Debreu model and thus a solution to the classical Adam Smith problem. Taniguchi-Morioka's results show that the total system can follow the slow movement of the final demand flow. With these results, we think Keynes's and Post Keynesians idea gained a theoretical foundation. Price adjustment and quantity adjustment can in principle be separated and analysed as such. Our book is not only a microfoundation of evolutionary economics but also of Post Keynesian economics.

In this formulation and research, fundamental uncertainty was not a good guiding post. What we had to do was to choose routine behavior (C-D transformation) that can be employed as a general rule and that is sufficient to prove by a single behavioral principle the total adjustment process of the whole economy.

The results we got is however a world of irretrievable past and the unknowable future. Methodological argument per se does not let economics proceed. What is needed is the challenge for a new theory making. As it is often said, it needs a theory to beat a theory. Methodology argument cannot replace theory making. I believe this is the main trouble for almost all heterodox economists who only argue methodology.

The missing foundation means those are rather ideas than justified science. X and Y generation is amazed by Piketty and quoting ideas about the income differences and macro-economic performance to justify their leftism. I feel there is nothing new there, those are the same lessons we learned from the Great Depression and was taught in 1990 in every high school. The state intervention worked way better after 2006 than 80 years before.

I feel a Great Degradation in the past few years :), populism and simplification does not allow to spread complex theories. Maybe this is the reason they do not even try.

Dear Robert,

theories and foundations are primarily for scholars who want to study their object. This does not means that a science or discipline like economics needs popularization. Provably you are discussing a point other than mine.

Dear Yoshinori,,

Good Question.

I think that at the hard core, post-Keynesians accept Marx's ideas. However, they work on protective belt items such as distributions, and factor-price frontiers. I think you are right about their craving for theories, or else why do they quibble so much about the definition of capital when they can use so many pragmatic ones. I must say that they are creative in their work, which attracks attention. I am particularly attracted to Sraffa, Robinson, Morishima, Harcourt, Nell, Davidson and similar works. But I do not think they are popular.

There are very few great thinkers like Baron Keynes; as a practicioner, he made good economic assessments after WW1 and WW2, in addition to his brilliant scientific models. Theoretical foundations and elaborations are always in need to being updated, but a methodical genius does not fall from heaven. Nowadays, too much academic conformity makes talent to search for comfort zones and to avoid painful mental progress. Our time is a period of cognitive stagnation, not only in economic thought.

What Stephen I. Ternyk talks about is a sad truth. I admit it. Even if we admit it, isn't it necessary to try something?

Good morning.

Keynesian school does not need a theory, at the difference of classical and neo-classical schools. It is a matter of ambition. Classical economists (from Smith to Marx) were also (or primarly)philosophers who looked at the big picture. Walras was also aiming at showing that economics was in harmony with the wider universe as described by Newton, ence his quest for a General Equilibrium. Keynes and his followers were mainly looking at policies (and short terms ones, remember that in the long term we are dead). Philosophers need foundations, politicians don’t.

Dear Lall,

I have read several times what you really want to say. You wrote

• I think you are right about their craving for theories, or else why do they quibble so much about the definition of capital when they can use so many pragmatic ones.

I found that there are two misunderstandings.

(1) Lall thinks that Post Keyensians are craving for theories.

You must be thinking that Post Keynesians are too much oriented to theory making. I am thinking that Post Keynesians need to explore their theoretical foundations. Their analysis is still quite superficial and stays at the phenomenological level. I mean they are not exploring the deep structure why and how those phenomena appear.

(2) Big names and current Post Keynsians

Lall listed big names of Post Keynesians: Sraffa, Robinson, Morishima, Harcourt, Nell, Davidson. I am not sure if Morishima thought himself a Post Keynesian. He must have situated him as a Keynesian, but Post Keynesian are no simple Keynesians. They are opposed to New Keynesians and many of them are now more influenced by Kalecki's ideas. I am talking of these actually working people and their economics.

Dear Hubert,

perhaps you are thinking like Dr Lall Ramrattan only those big names like Smith, Marx, Walras and Keynes. My question is not concerned with those big names. Post Keynesians are like New Keynesians are a bit intelligent researchers than common people, have a bit long training and carrier in economics. And yet, we have to hope those economists to develop economics further than Keynes had arrived. In particular, they are economists. They may be a bit philosopher, a bit concerned to politics in the sense they have a strong interest in policies, but they are economists.

Lavoie's book Post-Keynesian Economics (2014) contains 62 pages of references and counts about 13,000 articles. Even if we estimates that one third of them is the works of Post Keynesians, we have now more than 400 papers and books written by Post Keynesians. I do not know how many Post Keynesians are in the world. Although they are small minorities among economists in the academia, there are enormous number of Post Keynesians. I want to talk about those people.

Dear Yoshinori,

With regards to Morishima, I had in mind his (1958) “A Contribution to the Nonlinear Theory of the Trade Cycle”, Zeitschrift für Nationalökonomie, Vol. 18, No. 1–2, pp. 165–73. According to a recent two volumes Oxford Handbook: “The Oxford Handbook of Post-Keynesian Economics” OUP, 2013, Morishima’s contribution fits into the Post-Keynesian paradigm under “Encapsulating the Postkeynesian Precepts in Nonlinear, Endogenous, Nonstochastic Business Cycle Theories. (Vol. 1, pp. 424-425). The section also references two other readings:

1. Velupillai, K. Vela, (2008). Japanese Contributions to Nonlinear Cycle Theory in the 1950s. The Japanese Economic Review. Vol. 59, No. 1, March 2008.

2. Ichiura, Schinichi. (1954). “Towards a General Nonlinear Macrodynamic Theory of Economic Fluctuations,” In Kenneth K. Kurihara edited. Post Keynesian Economics. New Jersey: Rutgers University Press.

I do not think it useful to engage in a dispute over “exploring” or “craving” theories. I used the word in a non-technical sense.

Dear Lall,

I am not bothering with the difference between "exploring" and "craving." Let us use the word "develop" for the moment as a more neutral term.

You think it is not necessary to develop the theories any more. I am thinking that they lack theories which give foundations to their analyses. So, I am demanding that it is necessary to develop theories. Our stances are completely opposite. My question starts form this acknowledgement. You can argue against my opinion, but you should understand my opinion accurately.

As for classification of Morishima, there are many opinions. You may be right. The case is not much important. Although I was much influenced by his economics, Morishima's influence is not big among Post Keynesian economists.It is not astonishing that "Morishima" does not appear in the Name Index of Lavoie's book, which counts about 800 people. No paper appears in his References.

Gentlemen my opinion on this is somewhat informed by my gradual warming to the anarchistic theories of Paul Feyeraband. I think Post-Keynesians are well within their rights to define their discipline as they wish and if they wish to be more or less a-theoretical that is entirely up to them, and thus far they seem to be thriving relatively well. Whether that means the perspective will survive in the marketplace of ideas is another matter.

My perspective, as I outlined in my review of the excellent Oxford Handbook of Post-Keynesian Economics is that if the field wishes to grow to such a state that it presents a serious challenge to Neoclassical Economics, then it will need theoretical foundations. A good student can keep maybe five or six different paradigms in their mind, not five or six hundred. And as humans we are cognitively bound, so we require organising principles which reduce the amount of information we must remember and by which we may go "from one phenomenon to another" by applying those principles rather than having to remember situation specific principles as Richard Feynman said. That is what good theoretical foundations do - it reduces the amount of information we must know, and makes it much easier for us to apply paradigms to the data.

So my perspective is that I believe Post-Keynesian economics is welcome to do as it will, but I think the practitioners within the field ought to remember the fate of the German Historical School, which gradually faded into irrelevance because nobody could hold its perspective in mind for its simply being too large. While it was very popular for some time, eventually the youth who would carry it on needed organising principles in order to be able to apply its perspectives - which is, to an extent, what institutional economics did post-Veblen. And even that faded somewhat for the lack of a compelling theoretical foundation amongst other things.

I don't think they've yet succeeded. Godley and Lavoie have done some extremely valuable groundwork providing the accounting framework that is Stock-Flow Consistent Modelling. But there is work yet to be done elaborating a theory of the inter-sectional flows between various accounts within that framework. I might put it (very roughly) thusly: Godley and Lavoie are to Post-Keynesian economics to my mind as Colin Clark was to early macroeconomics. Colin Clark provided national accounting, but it was useful for little more than data organisation until he and others used Keynes' relaxed Marshallian theory to provide it with "animation".

Thank you for your comment, Brendan.

My question is directly inspired by his book review on

The Oxford Handbook of Post-Keynesian Economics, Volume 1: Theory and Origins, by Geoff Harcourt and Peter Kriesler (Oxford University Press, Oxford, 2013), pp. 640.

https://www.researchgate.net/publication/321691457_The_Oxford_Handbook_of_Post-Keynesian_Economics_Volume_1_Theory_and_Origins_by_Geoff_Harcourt_and_Peter_Kriesler_Oxford_University_Press_Oxford_2013_pp_640

The readers of this quation page are strongly recommended to read Brendan's book review and comments there. Those and this question page are complementary to each other.

Dear,

good question.

I agree with Prof. Stephen I. Ternyik.

I feel as those the answers here miss the point. The neoclassical macroeconomic tradition of today does have a simple and easy to remember theoretical foundation - microfoundations that are based on representative agents maximizing utility subject to budget constraints.

This school of thought thus fits Brendan's criteria:

"That is what good theoretical foundations do - it reduces the amount of information we must know, and makes it much easier for us to apply paradigms to the data."

However these foundations can be shown to be wrong. The point of the stock-flow-consistent analysis of Lavoie and Godley is to remove the imposition of simple "common sense psychological rationalizations" and rather impose rigorous macro closure. By imposing the accounting closure you do far more than offer data organization, you actually do narrow down possible outcomes, and widen others, that help in forecasting and understanding of processes, especially in ecosystems that have positive feedback loops.

There is still a long way to go in developing the PK theory (such as building the microfoundations or accounting closures at the P2P or B2B world which agent based modelers are doing). The main point with the PK theory in comparison to the neoclassical alternative, is that it is better to be approximately right than exactly wrong.

If Leanne's estimate and judgment are what she has stated above, I have no many things to object. I put my question because I felt that there were two misunderstandings:

(1) Post Keynesians are mistaking that methodological arguments can replace theoretical foundations of their own economics.

(2) Many Post Keynesians are mistakenly thinking that there are no needs of theoretical foundations to make their analysis deeper than they are actually now.

Post Keynesian economics is mainly macroeconomics. It needs more detailed investigations on what is happening under the surface of macroscopic phenomena. Post Keynesian economics needs deeper analysis than the level of theorizing that many papers seem to be satisfied of. If there is a consensus on these points, I am happy to know that. The fact that there is "still a long way to go in developing the PK theory" is not itself very bad. We can expect the future progress if we correctly perceive our tasks.

Now my question is this:

What are necessary as theoretical foundations to Post Keynesian economics?

I tend to agree with Aleš, if the word ‘theory’ is understood in its scientific meaning.

I suspect that if a parallel has to be made between economics and another discipline, philosophy is perhaps an option.

Modern philosophers ( let say, after Kant) tried to build ‘systems’ and to do that, they needed some kind of theory (starting with defining abstract concept and giving them obscure names, especially for someone not fluent in German). Ancient philosophers were not interested in building systems but more in finding practical ways of being happier in life. They looked for wisdom and didn’t need to refer to complex systems (Unless they embarked in devising a religion, and in this case they also needed to define arcane concepts).

Classics and neo-classics look more like post-kantian philosophers to me, while PK economists may be of the second type (including some quasi-religious people in a few PK quarters, which look often like sectarian clubs, including a deep reverence to some dead founding prophet who was supposed to have been illuminated by the ‘Truth’).

Wisepeople are often more usefull on a practical basis than philosophers, while religious people can be dangerous. Same apply in economics.

PS. As far as prediction is concerned, I beg to disagree in part with Ales. A theory is not a tool for prediction, at least directly. Models, which may or not be based on theories, are the tool for predictions (a prediction is not a forecast, it is just the output of a simulation).And models need to be updated from time to time to follow the evolution of the economy. The latter, I agree, cannot be predicted by a model (here, you need collecting and analysing forecasts made by ‘knowledgeable‘ human experts, but this is another story and another business for consultants).

For me, Post-Keynesians are Keynesians who do not accept the New Keynesian model, which is of New Classical type with the exception that (real) wages are downwards-non-flexible (instead of adjusting to marginal productivity of labour). PK refers to the General Theory, which, I think, is much better theoretical base than the NK model (which I would label as anti-Keynesian). That does not mean that the GT should be seen as a bible (which some PK seem to do - like some Marxians with Kapital), because that would hinder theoretical progress.

I don't get the question. What do we mean by theoretical foundation? Is it microfoundation? There are several settled theoretical concepts in post-Keynesian econ. I think the Lavoie book is a masterful contribution. If I were to critique post-Keynesian economics, I would say the school does not have a good conception of developing country institutions, although some progress was made with the models of BOB constrained growth. I prefer to think of electric economics, but I often rely on the smart wisdom of the Post Keynesians. For example, external validity over internal consistency is more important for understanding the macro economy. Hence, I agree with PKs that macroeconomics does not require microfoundation.

In terms of pricing, I think PKs have it right that price is determined by markup instead of pure competition, which is relevant under some restricted market conditions. The latter opens up the possibility of studying how social institutions and networks determine price. PKs have a good theoretical understanding of financial crises, although they seem to miss some important aspects of developing countries. Both of these fit into the general concept of limited rationality of PK economics, which rejects the notion that we correct our mistakes quickly so that the E(errors) = 0 at all times. There are inherent biases in human society and these are pretty much recognized by PKs.

Effective demand is also very important as PKs emphasize. The effect of distribution on growth and cycles is insightful, compared with neo-classical or endogenous growth. However, post-Keynesian econ is limited when it comes to economic development and underdevelopment.

Endogenous money is a useful idea, but PKs again miss some understanding of how it works outside of United Kingdom and United States. A lot more can be done in post-Keynesian exchange rate theories. In a PK world it's mainly flexible exchange rates. But there is an equal number of countries with managed or fixed rate and UIP don't matter.

There are more...

I agree with Hubert's one sentence in his PS:

A theory is not a tool for prediction, at least directly.

Naturally, the next question would be what the theory is. To answer this question is difficult for two reasons:

(1) Each person imagines different things by the term "theory."

(2) Theory must be in fact understood that it has several layers to distinguish.

The second point is more important. The layer required as theory differs according to current phase of a science or a discipline. We may say that PK is a theory at the phenomenological plain and is not investigating the deeper structure of economic processes that Post Keynesians are observing and describing.

The biggest trouble is that many PK economists are satisfied by their phenomenological observations and are not conscious that it is possible to do deeper analyses. This stops the development of PK economics.

Tarron picked up the question of markup pricing. Markup pricing is widely observed in the modern economy. Are you all satisfied with that? Fred Lee made a good research on the pricing practice of firms. However, he did not made clear why they prefer markup pricing to other pricing policies. Kalecki thought the markup rate represent a monopoly degree of the product market. That idea may be good but in many cases this assertion is simply repeated as if it is a definition. There are no explanations or analyses how the strength of monopolistic/oligopolistic competitions is reflected or related to the markup rate.

Dear Aleš Kralj,

you wrote that " Except for few simple rules in economics like supply/demand or Solow residual, there are few economics discoveries that hold any water at all."

I understand what kind of image you have on economics. However, is it rightly express the status quo of economics and of Post Keynesian economics in particular?

Most of Post Keynesians, I believe, refuse to admit simple "law of demand and supply."

Even if there is no unanimity, many Post Keynesians, including Cambridge Keynesians and Sraffians, question the validity of Solow residual. They do not think that production functions like Cobb-Douglas and CES functions are well founded representation of productions. There are series of objections against this from Shaik (1974; Reprinted 1990) "The humbug production functions," Herbert A. Simon (1979) "On parsimonious explanations of production relations," and a series of papers of J.S.L. McCombie (1987, 1998, 2000-01, 2001) and Felipe and McCombie (2001, 2005, 2006, 2011-12, 2013). Note in particular that H. A. Simon is not a Post Keynesian but one of founders of management science. He contributed Simon (1979) to the Scandinavian Journal of Economics when he got his Nobel prize in economics.

The principal message of Solos residual may be right. I mean that what Solow discovered by his research may be right, i.e. the technical change is the far more important factor in economics development than the substitution factor which has been focus of neoclassical economics but the procedure Solow adopted is not a good one.

In fact, there are many theories in economics and sometimes very deep theories. I am saying that Post Keynesians have certain level of the theories and can have deeper theories if once they become aware of this necessity and possibility.

Dear Yoshinori Shiozawa,

What do you mean by "deeper theories"? Can you give an example. I think you do not mean the homo oeconomicus (often a reresentative agent) maximizing utility from consumption.

At the moment monetary policy, given the quantitative easing by the major global central banks since 2009, has more shades of monetarism than Keynesianism. What we are lacking is monetary policy targeted to sections of an economy that need the money in a manner similar to fiscal policy which engages in tax expenditures and government spending to boost specific economic activity. Policy makers have been averse to making industrial policy using targeted expansion of money supply to particular sections of the economy instead leaving that job to fiscal policy. It would be better for monetary policy to take up the job of fiscal policy during crises and that would be truly post-Keynesian.

Dear Osmar Antonio Bonzanini,

Five persons (including me) recommended Stephen I. Ternyik's post. You are one of them. I do not know why he attracted the support from the biggest number of people. Would you explain yourself?

Stephen I. Ternyik wrote:

(1) Theoretical foundations and elaborations are always in need to being updated, but a methodical genius does not fall from heaven.

(2) Our time is a period of cognitive stagnation, not only in economic thought.

The two points may be true but it does not imply that we should abandon our efforts to develop economics further. If our period is the one of cognitive stagnation (as well as economic one), we need more strongly to increase our efforts to find theoretical foundations and elaborations.

What I am proposing here is to stimulate our internal arguments. So, don't be too cynical to think that nothing is possible now. We do not know when a breakthrough arrives, but when we abandon our efforts, it will not come forever.

Dear Yoshinori Shiozawa,

I recommend it because that is my perception. From the scenarios I know, including from my own country, the current stagnation does not allow us to be more optimistic about the proposed one. greetings!

Dear Anton Rainer,

I have given two examples of deeper explanations in my answer that starts "I agree with Hubert's one sentence in his PS: A theory is not a tool for prediction, at least directly."

You have written in the first post that Keynes's General Theory should not be seen as bible. I agree with you. If you know a proposition Keynes claimed but that you believe is false, you want to give an explanation why it is not correct or why we should think otherwise. If you succeed in proving your contention, you find a deeper theory.

If you like, I have many such examples. Each one needs a long explanation. I present only one which is easier to explain. It is Keynes's theory of investment.

Keynes thought that "the rate of investment will be pushed to the point on the investment demand-schedule where the marginal efficiency of capital in general is equal to the market rate of interest." (GT, Chap. 11, II)

There are ambiguities in Keynes's definition of investment and marginal efficiency. As a typical situation, his "investment" means an investment on capital equipment. In other parts, he talks about investors who buy shares (stocks) of a company (e.g. Chap.12). He is talking of totally different decision making by the single word “investment” but he does not clearly distinguish these two investment concepts. This above formula may be true for an investment for securities but it is not correct as a formulation of capital asset investment.

Let us confine ourselves to the decision making of firm's managers when they decide to invest to build a new production capacity of a product. In this case, is it an interest rate (and its relation to marginal efficiency of capital) that is crucial in their decision making?

I do not think so. Suppose that the demand for the product is slowly growing, for example at most 5 % per year and at each new investment the firm increases its capacity by 5 %. Suppose further that, at present, the demand and the production is roughly at the level of 85 % of the capacity. Do managers decide to invest to build a new capacity or do they wait for a year to see they can get enough demand? In this consideration, the interest rate is not important (or a factor of the second importance). This fact was confirmed by the Oxford Economists Research Group in late 19630. Thus, conceptual examination and empirical study both denies Keynes's formulation is wrong and false.

Keynes did a superficial consideration on the nature of capacity investment. Most probably he was under the influence of the so-called Wicksell connection. If we examine more concretely than Keynes how the decision is made with respect to capacity investment, we can know that (1) Keynes's formulation was wrong and (2) a new theory of investment comes out.

This is an example that a deeper level of inquiry is made. At the same time, it gives an example how a deeper theory is obtained and how it is better than the original theory.

Post Keynesian economics needs this kind of deeper inquiry in many other points. The first step of this inquiry is to acknowledge that PK theory is a superficial macroeconomics which lacks theoretical foundations. This can be a good research program for PK economics.

Dear Chandrashekar Tamirisa and Osmar Antonio Bonzanini

I am afraid that you are identifying (or confusing) economic theory and economics policies. It is a bad old custom which is inherited without reasonable reflections.

Osmar talks about economic stagnation of his country (i.e. Brazil) but he talks nothing about economics. If the economy is in a desperate state, it may be a good chance for economics, just as Arben J Salihu had suggested.

Theories do not necessarily produce a good policy, but to search and expect to find a good policy without a good theory would not produce a good result.

Theory leads to policy and policy to better theory. Currently there is no monetary theory linking money supply with private investment except the IS-LM model or substituting C+G+I (assuming a closed economy) for Y in the quantity theory of money. To make industrial policy with monetary policy, “I“ has to be broken down into its components corresponding to private investment in the various sections of the economy.

Dear @ Yoshinori Shiozawa,

Thank you for your interactions. However, in the current scenario, with politicians in power, there is no chance of a new theory having political support and implementation. Understand your perception, but unfortunately, this is our scenario and can only change if none of the current "political leaders" is re-elected next November. Greetings!

Just a (long) parenthesis.

I read with interest Ales' post. He states that "if there are to be theoretical foundations to the Post-Keynesian time, they have to be searched in the core of the free competition which has changed".

I'd like to relate the changes in competition and the search to profit to another recent change in the capitalist economy. At the difference of what Ales mention, this change is actually weakening the PK's relevance.

In the "old good days" of PK pioneers, the owners of the firms were the capitalists, and the dichotomy between workers and capitalists was (almost) complete. Capitalists being also entrepreneurs with children, they tended to have a long term perspective.

Today, pension funds (id est, the workers) are the main owners of large firms. And they demand high short term returns (dividends) in order to pay their pensions to the retired workers. As Ales, I have also some direct exposure to the issue, as I was member of a pension fund board (but our appetite was moderate: a 3.5% real return, while US pension funds may demand 8% to 9% real to equilibrate their cash-flows).

Two consequences:

-One is the short-termism of today's large firms, preferring to use cash to buy back stocks rather than investing in the future.

-The second is that the PK models based on the distinction between workers and capitalists for capturing the value-added is now obsolete: the fight is between yesterday's workers and today's ones.

The disappearance of a true capitalist class may also explain the stagnation of the innovation process. But we are now far from the epistemological discussion started by Yoshinori and I apologise if I created a distraction.

_____________________________

PS. By the way, I beg to disagree with the opinion (several authors mentioned it) that neo-classics are restricted to perfect market and that PK improved by considering monopolistic competition and mark-up pricing. This would be considering neo-classic economists as pretty stupid people, and they aren't.

Perfect competition is NC standard paradigm (their canonical model), build on 3 key concepts, or conditions: optimizing rationality, equilibrium and market efficiency.

It is obviously a caricature, and as far as I know, nobody pretended that it represented the actual working of a market. Indeed, many NC researchers have extended the standard theory by relaxing some of these conditions. Being an old guy, I studied them as a post-graduate student, but I suspect that it is part and parcel of today's course on microeconomics 1.2

The issue of optimizing rationality itself does no mean that agents maximize their utility; it may be that they only optimize their decision process due to uncertainty on future outcome. Optimizing rationality is therefore a limit case, but anything below this limit can also (must?) be analysed in terms of the neo-classic school (I do not know how the PK may approach the issue differently than neo-classic marginalists, so I leave open the alternative of a PK approach).

Similarly, equilibrium may not be unique if there are market restrictions (the so-called disequilibrium theory). But again, this is perfectly covered by the NC tool box.

The big practical issue of deviating from the paradigm case is that deviationism works well in theory (as long as you know your mathematics), but not in practice: multiple outcomes (because of bounded rationality) and multiple equilibria are devilish to model and to calibrate (believe me: I almost lost my first professional job by trying to estimate price elasticity for markets that were switching from being supplied to being demand constrained: it took me a lot of time, too much in the eyes of my boss who would have been satisfied by the standard text-book result based on equilibrium of supply and demand). But perhaps it is easier today using Monte-Carlo type of computer simulations: thousands of possible multiple outcomes could be simulated and their probability of occurrence could be calculated.

Insightful comments from dear colleagues. Thanks to colleagues for the education.

Both the questions and the answers on this site get more retarded and misguided in this site every day.

@Chandrashekar Tamirisa

I support your opinion that IS-LM analysis should be replaced by another. As far as I observe, Post Keynesians are in the same opinion but they have not succeeded to find a good theory in this regard.

You wrote:

• To make industrial policy with monetary policy, “I“ has to be broken down into its components corresponding to private investment in the various sections of the economy.

I totally agree on this point too. As I have cited in my top explanation to my present question, Marc Lavoie's book Post-Keynesian Economics (2014) is a thick book of 650 pages. In the Subject Index which counts only four and half pages (Lavoie it seems follows a very bad French tradition: No index and a brief table of contents at the end of the book), the item "investment as a function of" contains 6 sub-items. I have checked all of them, but there is no detailed study or descriptions on how firms decide their investment.

Keynes and old Keynesians of IS-LM thought that investment is a function of interest rate. In his argument, Keynes was confusing investment to securities and real investment to capacity building and others. From the time of Oxford Economists' Research Group in late 1930's, it was well known that interest rate has no importance when top mangers of firms want to decide whether it is time to invest or not. But Keynes and other Cambridge economists ignored the information. It is a bit astonishing that Post Keynesians (including Kaleckians) have only a very rough theory of investment. This is one of reasons why I claim that PK economics needs theoretical foundations.

Lavoie's chapter 3 is "The theory of firm" which counts 59 pages but it contains no arguments on investment. This is also a big astonishment. Michał Kalecki has no theory of investment except economy-wide aggregate arguments. In the macro level, it seems he is thinking that investment will be executed as long as money fund permits it. Hyman Minski developed two-price-level theory but this is also an argument concerning two big fields of economy. There is no theory of investment that is based on the examinations of the state of the firms.

In my opinion, the investment is determined mainly by the gap between the current flow of demand for the product and the capacity of the firm to produce. If it is expected from the past trend that demand will exceed the capacity for a sufficient period of time, the firm decides to invest and the banks or stock market will respond to afford enough money for the investment. As the situation differs from firm to firm and industry to industry, it is necessary to examine industry by industry. Chandrashekar has a good reason to claim it is necessary to decompose I into different sections of the economy.

@Alejandro González

By your post half day ago, I only understand that you are very much frustrated in my question and the discussions in this Q&A page. Would you explain a bit more concretely why you are so frustrated?

"In my opinion, the investment is determined mainly by the gap between the current flow of demand for the product and the capacity of the firm to produce. If it is expected from the past trend that demand will exceed the capacity for a sufficient period of time, the firm decides to invest and the banks or stock market will respond to afford enough money for the investment. "

1- Lavoie makes asimilar argument: See his writings on normal capacity utilization- desired capacity ulization.

I do not agree with it but I would like to ask what is your difference?

2- I agree with Minsky: Investment is a financial decision.

So what about if financial assets promise higher profits than capital assets despite demand for goods increases?

I suggest my paper on it:

Research A Minskyan criticism on the Shareholder Pressure Approach of...

@ Ilhan Dögüs

I have made a quick read on your paper. Your criticism of Shareholder Pressure Approach has a reason.

You have written in the Conclusion that

• if there were strong and stable demand which would stimulate real investment ..., then NFCs with a lower margin of safety would engage in production rather than financial transactions.

I agree with you.

When I wrote

• If it is expected from the past trend that demand will exceed the capacity for a sufficient period of time, the firm decides to invest and the banks or stock market will respond to afford enough money for the investment,

it meant two points:

(1) investment in capacity building (your "real asset investment") is determined by the demand for the firm's product and

(2) if the demand is tight and the bank admit it, the investment will not be restricted by financial constraint.

The point that I cannot agree with is your point 2:

• 2- I agree with Minsky: Investment is a financial decision.

If this is an objection to Shareholder Pressure Approach, you may be right. As a general statement, this is misleading. Do you call all profit seeking activity and decision making financial?

Our common understanding above can be simply explained by saying that NFC invest to the possibility that may produce the biggest profit. There is no need to cite Minsky. What we should ask is the (normal) order of profitability of various kinds of investment that are available for them.

In a normal situation, if there is firm demand for product that may exceed the production capacity, then to invest to the capacity building is most profitable and the firms invest in capacity building. This means that firms are fixing markup rate sufficiently high so that the production above the normal rate of operation will produce a rate of profit higher than other financial investment (in the meaning that investment will go to buying securities and other financial asset ). But actually, that possibility is limited in volume, because demand is not increasing sufficiently rapid in such a way that this investment for growth exceeds the profit flow. Then firms are obliged to choose the second best investment.

When I say that Post Keynesian economics lacks sufficient theoretical basis, I mean that it lacks (1) this kind of detailed or concrete examination of the firms level behavior, and (2) the examination of the link between these behaviors and the total process of the economy.

I did not know well how Marc Lavoie is explaining on normal and desired capacity utilization. I have only Lavoie's Post-Keynesian Economics (2014).

Would you point pages of the relevant part?

Dear Yoshinori Shiozawa ,

Thank you for your reply.

I suggest following paper on target (desired) and normal rate of capacity utilisation:

Hein, E., M. Lavoie, and T. van Treeck. 2012. “Harrodian Instability and the ‘Normal Rate’ of Capacity Utilization in Kaleckian Models of Distribution and Growth— A Survey.” Metroeconomica 63(1): 139–169.

Regarding your point " demand is not increasing sufficiently rapid in such a way that this investment for growth exceeds the profit flow. Then firms are obliged to choose the second best investment":

It is the case where inequality is high due to high level of market concentration (higher markup) in which demand for goods is depressed and also the inflow into financial markets driven by savings of high-income earners is too high.

I would suggest another paper of mine:

Working Paper Wage Dispersion and Pension Funds: Financialisation of Non-F...

bests,

illhan

Dear Yoshinori Shiozawa ,

You are right, that in GT used different definiitions of investment in Chapters 11 and 12. The problem is that in English – and unfortunately increasingly in German, too - the term is used for different things (buying/installing new physical capital, purchase of already existing physical capital, purchase of enterprises or shares, and even deposits). An example: Many (most?) economistis consider foreign direct investment as an investment, although there is no change in real (physical) capital. Nevertheless, one can read Chap.12 without connection to real investment, because the stock market can and often do influence the expectations concerning real investment.

One problem in GT is the unfortunate term „marginal efficiency of capital“ (MEC), because it overemphazises the role of technology (in the sense of production function, which Keynes does not) and it means a smooth rate from existing capital to potential investemnt projects. In fact, a marginal rate for already existing capital is irrelevant. It cannot even be calculated, therefore in practice simple profit rates are calculated. Instead of „MEC“, I would better call the rate which is calculated in Chap.11 „(expected) return on investment“ (IRR) without the word „marginal“, because investment projects are, in general, rather big and cannot be divided into smaller parts („an additional $ of investment“) and there is no list of potential projects in National economies ordered according to their return, from which firms can choose independent of their field of activity (industry).

Nevertheless, I think, Keynes is right that the decision to invest is dependent on the comparison of the prospective return and the interest rate (plus a risk premium). Your example with the 85% of capacity production does not speak against it. If the demand for the product of a firm is too low for capacity, the return on investment would likely be negative and the investment would not take place. But if a potential project allows to employ less workers and therefore reduce wage cost, it could nevertheless be carried out. For the replacement of a broken machine one could also use IRR, but this would often be a useless exercise, if a non-replacement meant a total or far-going stop of production.

As IRR is so different for firms, projects, (economic) situations etc. it is difficult to develop a theory for a whole economy. In IS-LM models, MEC was taken as given and therefore the role oft he interest rate was heavily overstated. In contrast to that, Keynes stresses (Chap.11 and 22) that it ist he MEC which is by far more relevant. What I miss in GT, is that the profit rate (for already existing capital) and IRR (MEC) can go in different directions. For example, a (wide-spread) reduction of wages (advocated by neoclassical economists as a remedy) would of course increase the profit rate (as long as demand and capacity utilization is not too strongly reduced), but reduce IRR (with the exception of investment goods that could considerably reduce cost for inputs).

By the way: When speaking about „marginal“, Keynes should have dismissed the first postulate of the classical econonics, too, because nobody has ever observed a „marginal product of labour“.

In my humbly submission, I concur with the assertion that PK economics need rigorous theoretical foundation to grow smoothly. Even though it is observed that most Keynesian school of thought dominate mainstream economic theoretical practice, yet not that friendly, unlike neoclassical.

I am of the opinion that, during the early days when most of the economic theoretical constructions began to spring out, the philosophical concept of money and it vital ingredient in driving national economy, was not deeply understood. For re-instance, the behaviourial relation between the “issuer” of the money and the “user” and the psychological complexes that were intertwined, hence it ripple effects in the entire economic growth, lacked a clear understanding for measurement.

As a result, it narrowed the scope of variables in analysis hence affected the quality of theoretical constructions. Which I believe the PK pioneers could begin forging their inquiry into the accurate role of money in modern economy, the dynamics of investment and it effects towards economic growths as one of their major components of theoretical foundation, as they aspire to.

Comment on Aleš Kralj's second post (around February 20)

I recommended your post, because it includes good information about how the leading engineers or industry innovators are thinking. Innovation is a very important factor of economic growth and the subject that Post Keynesian economics has not yet fully developed. For example, Marc Lavoie in his book Post Keynesian Economics (2014) mentions "innovation" about 25 times in the text but there is no independent section or subsections in his thick book of about 580 pages (excluding references).

One of reasons why PK economics cannot treat innovation is that it lacks a good theory of price. At least majority of PK economists are thinking that they are opposed to the neoclassical theory of value but they have no alternative to base their analysis. Because of this fact, they cannot treat technical change. For example, it is necessary for producers to know whether a new production technique is better than the old one that produces the same product. The criterion for this is the unit costs required by two production techniques. No price theory implies that we are deprived of framework to analyze the technical change.

To tell the truth, I have a minority opinion, because I think the price theory that we can base our analysis exists already. See my paper:

The Revival of Classical Theory of Values (This paper is published as a chapter in a book.)

https://www.researchgate.net/publication/269393496_The_Revival_of_Classical_Theory_of_Values

(to continue)

Comment on Aleš Kralj's second post (continued and the end)

You have also mentioned on the globalization. To argue and analyze globalization (its causes, its movement and the mode of emergence of new phenomena) needs a theory too. However, in traditional PK economics, there is no proper theory of trade. In a common PK books, like Marc Lavoie (2014), international trade is not analyzed as an independent subject. For example, Lavoie (2014) agues Open-economy macroeconomics in his chapter 7 (pp.456-540). Topics treated there are balance of payment, foreign exchange rates, institutions and policies. Argument on international trade proper counts only two pages (pp.507-509) which are a comment on comparative and absolute advantage. However, in these ten years, there was a big development in the theory of international trade. A new theory of international values has been constructed which treats input trade and choice of techniques in a general framework of M-countries and N-commodities. Neoclassical economics could not provide such a theory, because four generations of neoclassical trade theories exclude by assumption trade of intermediate products. One of conspicuous phenomena of the new globalization is the emergence of global supply chains. This means that neoclassical theories of trade have no capability to analyze the new phenomena in the globalization.

In the end, let me add one point. Aleš Kralj may have a confusion. The Post Keynesian economics is not an economics in general that came after Keynes. It seems you are talking about economics in the time of Keynes and after him. It is a total misunderstanding.

PK is a strand of economics which came out at the time of anti-Keynes revolution in economic theory around 1970's. There occurred a clear divide among Keynesians on their research program and strategy. One group accepted the micro-foundation program and became New Keynesians. An eminent representative is Gregory Mankiw who wrote among others The Small Menu Cost and Large Business Cycle: A Macroeconomic Model of Monopoly (1985). Another group refused microfoundation research program and became Post Keynesian economists. Among them we may count Paul Davidson, Jan Kregel, Lance Taylor and others. Some includes Sraffians among PK economcis and some others claim that Sraffians should be excluded from PK economists. Their major inspiration other than Keynes is Joan Robinson, Nicholas Kaldor, Luigi Pasinetti, Michal Kalecki, and Hyman Minsky if we exclude Sraffa in this list.

@Anton Rainer

I strongly support your theoretical stance vis-à-vis "marginal" concepts. As all economists know, marginalism was introduced at the time of the neoclassical revolution (except some earlier exceptions). It was one of main tools that lead ecoｎomics to a wrong orientation. Your reject of marginal efficiency of capital (or investment) and marginal product of labor is a good sign. Lavoie (2014) is ambiguous on this point. While he agrees to use marginalism as an alternative name of neoclassical economics (p.5) and uses the expression like "the neoclassical theory based on marginal productivity" (p.30), his attitude on "marginal" concepts and marginalism is not clear. In his arguments on methodology he does not make any claim against marginalism.

As for my example of a firm with 85% of its production capacity, you are right to argue that "if a potential project allows to employ less workers and therefore reduce wage cost, it could nevertheless be carried out." I have not elucidated all of my assumptions. I assumed that production technique is invariant. When there is a technical change, your scenario gives one possibility.

(On this point, social custom or pressure may induce different decision making. For example, Japanese managers and firm owners do not simply adopt the new production technique, because they have to lay off their workers if the demand for the product remains constant. If it is not possible to increase the demand of the product, they will try to seek some new demand for other products and try to transfer their workforce to those lines where they can expect demand increase.)

You can use your concept "IIR" or „(expected) return on investment" if you can use it coherently and usefully. However, I prefer to make decision making on investment on a more objective quantity than a quite subjective estimation. It does not give an operational theory. You can say anything when you have made a wrong prediction. Have you remarked that my example is told by quantities which can be observed by managers and are in principle observable by economists.

As you pout it,

• As IRR is so different for firms, projects, (economic) situations etc. it is difficult to develop a theory for a whole economy.

Demand for product is more easy to connect firm-level quantity and the economy-level quantity. If the prices are fixed, we can say total demand is divided into demands for products.

@Ilhan Dögüs

I have given a quick look on the paper Heine, Lavoie, and Treeck 2012 that you have indicated in your post 6 days ago. (If I say more exactly, I have read Heine's working paper.)

It was for me disappointing and encouraging at the same time. It was disappointing, because you are thinking that Heine and others' arguments and my point of discussion are of similar level. It was encouraging because my thesis that Post Keynesian economics lacks theoretical base was confirmed by this concrete example. In the following I use an abbreviation HLT instead of Heine, Lavoie, and Treeck.

Let's see how HLT formulate "investment function." It is written

　　　　gi = γ + γu (u - un)　　　γ>0, γn >0. 　　　　　 (3)

Here, gi is the investment expressed by the growth rate. As γ and γn are constants, this simply means that investment is a linear function of the rate of utilization. Another important function is

　　　　Δu = μ (gi - gs)　　　　　　μ>0.　　　　　　　　　　　(6)

Here μ is an constant and g^s is the saving expressed by the growth rate.

Functions (3) and (6) are those of the basic model and they are refined to a bit different forms like (3A), (3B), (3C) and γ is treated as variable in equation (10), etc. However, the basic logic remains the same.

Now, what is the reason that the economy as a whole behaves like (3)? I argued that the firm will not invest to increase its production capacity if the rate of utilization is 85% of the capacity (or under) when the average growth rate is around 5 %. Does equation (3) represents an aggregated behavior of firms? We know nothing about how the utilization rate is distributed among firms. What can we say if we suppose some distribution of utilization rates? I don't know. HLT give no explanation on it. Then, what is the reason that they believe that the aggregate investment is expressed by (3) or its variants? Even if we assume that they are thinking a representative firm, we cannot get a linear function for investment, because there is a kink in my story.

The next problem is (6). The rate of utilization u is "adjusted" by the difference of gi and gs, or the investment minus the saving. This is also grossly rough reasoning. What is most serious is that HLT are ignoring the principle of effective demand. Firms produce as much as demand is expressed for their products. There is no direct relation between (6) and the principle of effective demand. Instead, it is a simple rejection of the principle.

This short overview of their "investment function" shows how rough their logic is. Can we believe that economy as a whole behave like the models they have described? There is no big difference with those neoclassical economists who play with their toy models. It is possible that those neoclassical economists are better in their reasoning because they are obliged to think of microfoundations of their models.

HLT's paper reveals with what kind of logic Kaleckyan models are constructed. As I have put it, this is encouraging, because my thesis has been proved. PK economics lacks theoretical foundation. It needs it. If PK economists became aware that they should care much more about theoretical foundations when they start their model building, PK economics will be improved much.

Dear Yosinori,

First a remark to your answer to Aleš Kral. PK are not against microfoundation in general, but against the new classical (NC) one (society as a set of individual utility or profit maximizing machines – representative agents or firms). NK accept this model, which is, in fact, anti-Keynesian, because this means a reintroduction of the second classical postulate which Keynes rejects in Ch. 2 of the General Theory. The difference between NK and NC is only, that NC take wages as marginal productivity of labour (where demand and supply of labour is equal), whereas for NK see reasons why wages are higher and therefore too high to avoid non-voluntary unemployment. The simple NC and NK need no theory for investment, because total production is fixed by the supply of labour (which comes out from the maximum utility of the agents or the labour demand, if the wage level is too high). The difference between production and consumption is either exported (or less imports) or invested. In a closed-economy-model or with export-import functions the (implicit) investment function is very simple and merely a reverse of the usual GDP definition. With this trick, these models do not even need Say’s law as the older Classical ones.

Concerning your answer to my last contribution, I want to stress that applying a concept of IRR (or similar concepts) does not mean that objective (observable) quantities play no role. I think that (observed) effective demand and current capacity utilization are the main variables for real investors’ expectations. But IRR allows narratives for “representative” firms, from which one could deduct possible effects of economic policy measures and, hopefully, a tendency of future investment. But it cannot lead to a perfect forecast of aggregate investment and cannot deliver proofs (of nonsense?) like the (numerical) NC or NK models.

I have read the major part of chapter 8 of L. E. King's book (2012) The Microfoundations Delusion: Metaphor and Dogma in the History of Macroeconomics. King classifies PK economists’ reactions into four and describes major opinions of the first three categories.

I avoid using the word microfoundations in this Q&A because it may invite a misinterpretation. This is one of the mains reasons why I prefer to say theoretical foundations. Theoretical foundations include examination how individual actions (person or firm) contribute to the total economic process. Theoretical foundations comprise other inquiries like interactions between agents, conditions of individual behaviors by the total processes, and others..

The most serious problem is the notion of "representative agent" (either individual or firm). PK economists, including Laovie (at least Lavoie thinks it characteristic of neoclassical economics. See Lavoie 2014 p.35 and p.52.), oppose or accuse that NK economists are constructing their analysis focusing on representative agents. However, I doubt whether PK economics is free from representative agent logic.

In a weblog Real-World Economics Review blog, Lars Syll posted an article with the title The biggest trouble with modern macroeconomics (February 28, 2018). One of themes was the use of representative agent. Paul Davidson first commented on it, but he made no mention on representative agent. I posted a comment. In a part I wrote this:

• What the real-world economics can provide would be more important than simple criticism with no alternatives. I doubt if the real-world or heterodox economists are providing macroeconomics that is not implicitly based on representative agent assumption.

Then I mentioned my question (this question) in ResearchGate. Davidson posted this comment:

• You can find the foundation of Post Keynesian theory in my textbook entitled POST KEYNESIAN MACROECONOMIC THEORY. These foundations include: (1) the future is a nonergodic process, (2) money is a creation of the State where the civil law of contracts specifies that thing that will settle all contractual obligations (3) in a money using economy liquidity is essential. Money and all liquid assets have two essential properties namely their elasticities of production and substitution (with producibles) is zero or negligible., etc (March 1, 2018 at 2:12 pm Reply)

My reply was this:

• Your book is most famous and respected one among Post Keynesian economists. However, how about my point:
• ”I doubt if the real-world or heterodox economists are providing macroeconomics that is not implicitly based on representative agent assumption.”
• Lars Syll opposed to representative agent models. Your book does not treat formal models, but the narrative you use is implicitly assuming representative agents, isn’t it?

Two or three days passed but there is no response from Davidson.

One of gravest problem with PK economics is this: Many PK economists oppose to representative agent notion but they are not free from it in their model construction. Isn't it a contradiction? This also proves that PK economics lacks theoretical foundations. Because it has no foundations, PK economists are not aware that they are thinking in a contradictory way.

I see no problem to base a model on representative agents (plural!), and there are NC and NK models with agents with different utility functions. The problem is that their representative agents are not representative at sll. They hate working and love unemployment (=leisure). Their aim is maximal consumption over an extremely long time. They can solve mathematical problems which most economists cannot. They live seperated from each other, not as a part of a siciety. Some say that it is possible to include the utility of other persons, but I have never seen a promising example for that.

Also the representative firm is far from being representative. It has a well-behaved production function, whereas I think that Cobb-Douglas and CES-functions are highly unrealistic. NK take the structure as given, even if their representative firm has increasing or decreasing economies of scale. In fact, with increasing ES one should have big enterprises (in the one-good-case one firm), with decreasing ES many small firms. The representative firm maximises its profits (often zero) by continuously adjusting the production factors, although in reality no firm knows its maximum profits. It also does not know its marginal product of labour and of capital.

Dear Anton Rainer,

Representative agents with no theory of their interactions?

Economy is a system of many agents which comprise many millions of firms and billions of individuals. It is a network which extends globally and in which firms and people interact with each other. What kind of theory do you have to analyze these interactions? Simply having a good image of representative firms and individuals does not permit to construct a good economics.

You have criticized Cobb-Douglas and CES production functions. It's OK! I totally agree with you. But, how do you explain relations between input and output? A product of a firm is often input to the production of other products. (Remind that this is not a defense of neoclassical production functions. Criticism cannot be a substitute of a theory. I am asking you a your own theory of production.)

Dear Yoshimori,

I think, that the famous Lucas Critique had a destructive effect on economics. For most (academic) economists, models without a utility function (of consumption and leisure) seem to be non-valid.

I am advocating a return to the old-fashioned multiplier models (IS without LM) where GDP (=effective demand) is the sum of its components (private and public consumption, investment etc.), which themselves are explained by different variables. For consumption, I take Keynes' representative consumers (he did not call it so) where the (relative) propensity to consume is falling with income. It is, of course, possible to include other factors, like prices, working time etc. How to model investment should depend, whether the model is used for forecasts (if possible use survey data on investment plans or capacity use, otherwise relation to a GDP accelerator), estimation of economic policy measures (calculating the effect on IRR for projects with differnt life times and constant cash-flows and assume the effect on investment) or explanation of the past. I know that one can never get exact figures, neither for micro, nor for macro, for which I would try to get relation fro National Accounts. Concentrating on effective demand implicitly means that the economy runs below full capacity or that its capacity can be easily increased (which seems realistic most of the time). Therefore, I would explain employment via an employment function like in Keynes' GT.

If one wants to go into details (i.e. the relations between outputs of one sector as input in another sector of production), one can include IO analysis.

With this model, I cannot get as precise results as with a NC model with one representative agent and firm with (assumed) fixed coefficients. That may be disappointing, but that's life.

@Anton Rainer

You are not sincerely considering my point. You accuse neoclassical agents that they are too rational and self-minded to be admitted as a representative agent.

What you should think is this: Even if we assume not so rational and self-minded agents, the problem of aggregation of demand function is not solved at all.

Many Post Keynesians (including Marc Lavoie and Lars Syll if he is PK) cite SMD theorem (abbreviation of Sonnenschein-Mantel-Debreu theorem) in their arguments why neoclassical General Equilibrium theory à la Arrow and Debreu theoretically failed. Neoclassical people had to admit this theorem and this compelled them to concentrate on a representative agent models. The reason was that aggregate demand function can take any shape as long as it satisfies the Walras law (a rough expression).

Important point here is that rationality of the agents is not essential for SMD theorem. As Kirman and Koch (See the reference below) have shown the same SMD theorem holds when we simply assume that there exists a continuous monotonic and strictly convex preference relation. The rationality has no relevance (or at least no essential condition) for the SMD theorem to hold. The aggregate demand function has a high probability to be ill-behaved even if individual demand functions is well behaved and vice versa. This is the significance of SMD theorem.

If you admit this or not, your aggregate demand function has a big chance to have the same property as the case of neoclassical models. How can you claim that the aggregate demand function behaves as well as you suppose? There is no reason for such a claim.

In order to claim this is not the case, you have to have a theory which connects individual demands to that of aggregate demand function and prove that your demand function has a good reason to behave as you have supposed. This is one of theoretical foundations that PK economics must have.

Kirman, Alan (1989). “The intrinsic limits of modern economic theory: the emperor has no clothes.” Economic Journal 99, p.134..

Dear Yosinori,

I do not understand the difficulty with aggregate demand: For me it is simply the sum of indivieual demands. I think that is similar in other theories. The difference lies in the role of (effective) demand. For NC (neo and new) and NK demand is not important for production, whereas for Keynes it was the main variable driving economic development.

What concerns models like Arrow-Debreu: I attended a series of lectures (Lancaster: Mathematical Economics) many years ago, even some lectures of Professor Arrow himself. In the beginning, we were very interested, but after some time we realised, that proofs of an equilibrium based on more or less realistic assumptions are rather senseless. What conclusion can one draw from a proof that there exists an equilibrium?

Dear Anton Rainer,

NK economists are in a sense wise, because they assume that prices do not change at least for a short time (menu cost and others). Then, they can argue an aggregated demand without worrying about the shape of the aggregated demand function.

PK's position is ambiguous. I read few explanations on this point. Do you think that prices are flexible just as Keynes thought? If you stand on this position, you should think about price theory and you cannot escape from aggregation problem of demand function, because SMD theorem applies. If you do not think that prices are not flexible, you should explain why they are inflexible. I hope you are not a PK economist with no other reasons than NK people give.

Dear Yoshinori Shiozawa,

I think that Keynes did not deny flexible prices, but with much lower and slower flexibility than perfect market-economists, who assume that prices react instantaneously to equate supply and demand. Fortunately, only few prices are fixed by auctions. Many prices are fixed by contracts and most other prices seem to be constant at least for some months and price adjustments are mostly not „caused“ by changes of demand, but much more by production cost, which, in general, change not often. Another problem is, that it is not clear, how demand reacts to price changes. Static models suggest, that with a lower price demand would be higher (of course with some – perhaps considerable – exceptions). But price reductions could lead to the expectation that prices would continue to fall in the future, which would be bad for demand – especially for durable consumption goods and investment. On the other hand, with high demand price increases could even strengthen the boom, instead of reducing it.

Therefore, I think, one can assume that prices are mainly determined by the development of cost of past periods plus a profit margin depending on the „cyclical“ situation (fixed costs may have a counteracting effect to profit margin fluctuations, because unit costs would be lower in booms and vice versa) and will be rather constant for at least several months. Fixed costs may have a counteracting effect to profit margin fluctuations, because unit costs would be lower in booms and vice versa. This is different from NC models which also assume constant prices for a period, but where prices are determinded at the beginning of that period (simultanously with all other variables) on the labour market. NK have the same approach with the exception that – because of many reasons – wage deviates from marginal productivity of labour (mostly seen too high to avoid involuntary unemployment).

Dear Anton Rainer

I have different opinions on several points on your explanations but they are not important. The point I posed in this Q&A page is the necessity of theoretical foundations for PK economics. That PK has different stance from NK does not give a sufficient reason that PK is exempt from the needs of theoretical foundations. As our discussion made clear there are many points that we should investigate assumptions that PK make but there are few arguments on this orientation.

My basic and unchanging stance is that existing PK economics lacks theoretical foundations but PK economists are not aware of this fact. I have a feeling that many of PK economists are confusing the criticisms (against NK, neoclassical mainstream, etc.) and the theoretical foundations of their own system.

You have not understood at first what theoretical foundations mean. It is just a symptom that PK is most often unaware of these needs. PK arguments rely too much and too often on an intuitive judgment or on mere observations of stylized facts.

It is important to discover stylized facts. But those discoveries are only starting points. When they are found, we should investigate why this or that stylized fact is often observed. We should investigate the mechanism or the structure that produces such and such phenomena or stylized facts. NK economists are much more serious in these investigations, although they are relying on bad and wrong microfoundations.

We should reflect on why PK came to take this shallow research program. I will post my opinion on this question in the next “answer”.

J. E. King in his Microfoundations Delusions (2012) rejected all microfoundations thinking in this reasoning:

• I firmly believe that the critics of the microfoudantions dogma are correct, for all that they are in a small minority in today's economics profession. I object not just to RARE (or MIRA) microfoundations but also to claim that superior, non-RARE microfoundations have been, must be or should be provided for heterodox macroeconomic theory. I strongly advocate the relative autonomy of macroeconomic theory as a science of 'special science', ... . (King 2002, p.4)

Notes to the citation

RARE: a representative agent with rational expectations

MIRA: methodological individualism with rational expectations

Although I admit the "relative autonomy" of macroeconomic theory, we should remind that this autonomy is only relative. It does not exclude the need of theoretical foundations. It is natural to ask why this and that stylized facts occur. To understand what we observe more deeply, researches into these reasons are inevitable.

Without these investigations, stylized facts are simple empirical formula. We cannot know the range of validity of the formula. If the formula is dependent on some mechanism and that mechanism changes by a reason or other, empirical formula is no more valid. Therefore this kind of investigation is a most natural inquiry to make but the traditional attitude of majority of PK economists was negative, reluctant, or indifferent to these inquiries. The consequences are actual state of PK economics which lacks any deep understanding of what is really happening in the economy.

I want to ask all those followers of this page (we now count 32 persons) the following two questions:

(1) Why did this state or situation result? Were there any attempts to redress the situation?

(2) What kind of remedy is to be taken? Does someone have any proposal to improve the present state of PK economics?

Dear Yoshinori Shiozawa,

To your questions:

1) PK are rather different, maybe too different to unify them under one common model. They are economists who build on Keynes’ General Theory (not only). They were (at least partly) against the Neoclassical Synthesis and did not go into the New Classical trap laid out by the Lucas Critique (NK are cought). Although NCS and NK economists are not Keynesian (for me NK are even anti-Keynesians), they occupied this name. The microfoundation of the NC and NK is a warning, that such a simple common micromodel would lead to very “narrow” economics. Another problem is, that models (theories) may different according to which purpose they should serve.

2) PK need no remedy, which does not mean that one should not further develop microeconomic elements in GT or other Keynesian works.

Nevertheless, I wish you good luck in developing a PK microtheory and hope to hear from you, if you have found one.

Anton Rainer's answer 1) and 2) are typical ones for many PK economists. They are only united against NC and NK. They have no unified basis that supports their macroscopic models. They claim they are right only because their models are intuitively correct for them. It is not a scientific attitude of inquiry, but an expression of their credos. Although their system is in such a fragile unhealthy state, they believe there is no problem. All these facts reveal how it is difficult to remake PK into a deeper and theoretically progressive discipline.

Anton asked me if I have any proposals of theoretical foundations for PK economics. Of course, I have . I am now writing a rather long chapter (chapter 2 of our Microfoundations of Evolutionary Economics). As the title tells, it is microfoundations for evolutionary economics, but it is also microfoundations for PK economics. I claim this because we can reconstruct the principles of effective demand from the firms' level.

As I have finished almost 3 quarters of the chapter, I hope I can upload the first draft in my contribution page soon.

The following is a comment I have added on a book Financialization and the Economy, 2017.

As a summery and evaluation of the impact and influence of financialization, this book may be a good book. Each chapter gives close examination on what is happening and tries to foresee the long term effects of the financialization. However, as far as I can guess by the table of contents and the introduction, this book lacks one important viewpoint: the driving force or mechanism that promotes or forces financialization. Measurement of the effects of financialization and finding a mechanism of financialization are quite different. Without lacking the true knowledge on the driving force of financialization, recommendations for economic reforms may be invalid.

Many of authors seem to be post Keynesians in a broad sense. I am a part of this strand and support their efforts but the lack of interest in the deeper structure of causation may be a common defect that plagues post Keynesian macroeconomics. We must change our mode of thinking. Simply observing apparent macro phenomena is not sufficient for construction a good economics.

See my question: Does Post Keynesian Economics need no theoretical foundations?

I have posted this question probably on 14th February, 2018. Since then, three months have passed and I am perplexed with low interest on the question. As there are about 30 post (without counting my own), I came to know many things. For example, I noticed that there are many people who do not distinguish Post Keynesian economics and Keynes's economics. It is astonishing because I believed that Post Keynesian economics is a well established name of some strand of economics thought. But it seems I was wrong.

There were a few answers which touch my point. Post Keynesian economics deny and oppose the concept of representative agent (firm or individual). I believe this is one of the most important attitudes on the methodology. If them, we should admit heterogeneity of agents. When heterogeneous agents meet in a market, we should ask how they interact and what kind of processes they produce as a result. I have searched in Post Keynesian books like Lavoie's Post-Keynesian Economics (except Sraffians), but I could not find no such analysis. I think this is the very evidence that (1) Post Keynesian economics lacks theoretical foundations and (2) it is not aware of the necessity of analyses that connect the macroeconomic process and heterogeneous agents.

If they do not ask how the heterogeneous agents interact with each other, how do Post Keynesians can claim that they are taking heterogeneity of agents in their considerations?

Please see my comments on

John Smithin's book review on Fred Moseley's Money and Totality

https://www.researchgate.net/publication/324423240_Money_and_totality_A_review_essay

John Smithin is one of most famous Post Keynesians, but it seems he is totally engaged in macro monetary questions and pays no interest on exchange value and functions of money as the medium of exchange. It seems he is always identifying medium of exchange and the barter economy. I realized it after a long discussion. This may also be a result of rejecting theoretical foundation questions.

Theoretical foundation of post-Keynesian economics is the principle of effective demand, a competitive market economy has no tendency towards full employment.

The post-Keynesian mainstream included economic growth and income distribution ( Robinson's Accumulation of Capital, 1956).

Martha,

please read the answers of this question page. They may be hidden as "previous answers" but PK is not the common name for all strands after Keynes. Post Keynesian economics has emerged in 1970 (or at least in 1980) as a part of reactions to (1) Rational Expectations and New Classical economics in 1970's and (2) the emergence of New Keynesian economics (as a part of the neoclassical mainstream) in 1980's. Joan Robinson was influential in enhancing PK and Kaleckian strand in particular, but she is the person before the PK (and NK).

Okey, Yoshinori,

The term "post-Keynesian" was first used to refer to a distinct school of economic thought by Eichner and Kregel (1975),

An Essay on Post-Keynesian Theory: A New Paradigm in Economics

Alfred S. Eichner and J. A. Kregel Journal of Economic Literature Vol. 13, No. 4 (Dec., 1975), pp. 1293-1314.

All currents of economic thought have theoretical foundations, as is known in the case of the Post-Keynesian School, its foundation is effective demand, based on The General Theory of Employment, Interest and Money.

Likewise, the Poskeynesian school considers other variables such as: the fundamental uncertainty, which has important implications in the concept of individual expectations and the distributive conflict between social classes with an unequal marginal propensity to consume.

Martha,

I am asking whether Post Keynesian Economics needs their theoretical foundations or not. As I ask this question, I am not thinking that PK economics (e.g. American fundamentalist Post Keynesian economics, Kaleckian economics, Institutional Keynesian economics, Minskian economics, and others) have their theoretical foundations in a sufficient way.

For example, you raised the notion of effective demand. As a very primitive discussion, let us examine if the notion of "effective demand" is well defined by Keynes himself. He defined "effective demand" in Chapter 3 of his General Theory as follows:

• Let Z be the aggregate supply price of the output from employing N men, the relationship between Z and N being written Z = φ(N), which can be called the aggregate supply function. Similarly, let D be the proceeds which entrepreneurs expect to receive from the employment of N men, the relationship between D and N being written D = f(N), which can be called the aggregate demand function.
• Now if for a given value of N the expected proceeds are greater than the aggregate supply price, i.e. if D is greater than Z, there will be an incentive to entrepreneurs to increase employment beyond N and, if necessary, to raise costs by competing with one another for the factors of production, up to the value of N for which Z has become equal to D. Thus the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function; for it is at this point that the entrepreneurs' expectation of profits will be maximised. The value of D at the point of the aggregate demand function, where it is intersected by the aggregate supply function, will be called the effective demand. Since this is the substance of the General Theory of Employment, which it will be our object to expound, the succeeding chapters will be largely occupied with examining the various factors upon which these two functions depend. (Emphasis added by me)

This is practically all the explanation of effective demand in the Chapter entitled The Principle of Effective Demand.

Do you think that this definition of effective demand? If the employment is determined at the point where two curves D = f(N) and Z = φ(N), how can we say that it is the effective demand that determines the employment?

There are many other points that Post Keynesian economics assumes but lack a plausible justification for it.

Its important to point out that Poskeynesian Economics is a Heterodox School in Macroeconomics.

This stream of economic thought: in addition to effective demand,

Consider the following assumptions:

1) Price flexibility has harmful effects on the economy, since it acts as a destabilizing factor. The flexibility of real wages will reduce effective demand by decreasing the purchasing power of workers.

2) The post-Keynesian concept of uncertainty is radical uncertainty. The future is unpredictable. One can not even know probabilistically, since both the probabilities to be assigned and the set of possible states are unknown.

Martha,

if you agree that PK economics needs theoretical foundations, the next step we have to consider is to build such foundations.

I know very well those arguments that you pointed (price flexibility and radical uncertainty). If you admit the these are important starting points, you must present your theory on how each economics agent (household or firm) behave in such circumstances, how they are interacting, and finally how those actions are aggregated to a macroeconomic equaiton. Many Post Keynesian economists emphasize the importance of uncertainty, the difference from risk, etc.. but when they talk about their own model or theory, they often forget it and write down macroeconomic equations by insight or something like that. They are not really sincerely thinking the basis of their arguments.

Martha, I think the two assumptions you brought are too radical and therefore not realistic. Prices are and should be flexible – but, of course, should not fluctuate too much. There is no problem, if prices increase by, say 2-5% p.a. on average, if the increase of wages is somewhat above. A fall of prices would increase real wages, but would not increase the purchasing power of workers in total because of the reduced employment. The second point is almost nihilistic and I do not see, how one could build an economic theory on it.

Yoshinori, Keynes’ formulation you cited is, in fact, rather unlucky. I see effective demand independent of supply as demand that is backed by financial means (mainly disposable income for private consumption, for investment also credits). I assume that supply (production) is rather elastic, i.e. it is seldom the limiting factor and increases of demand will have limited price effects. This means that a good economic development is mainly due to suffient effective demand.

Dear Anton Rainer

Are you thinking yourself a part of Post Keynesians? I suppose you are, because this question page is to re-adjust Post Keynesian research program to a more correct and productive way. If you are not, the following sentences have no meaning for you.

If you see Keynes's formulation (in Chapter 3 of The General Theory)

"unlucky", how do you define "effective demand"?

The New Keynesians have thrown away the concept of "effective demand". You can confirm it if you see the index of New Keynesians textbook . You can find no head "effective demand". But, for the Post Keynesians, the principle of effective demand is one of the most important principles. If the concept of "effective demand" is not well defined, it is a serious theory problem for PK economics. This is the question at the core of the whole theoretical structure for Post Keynesian economics.

Dear Yoshinori Shiozawa,

I do not know if I am a Post-Keynesian, I am not an academic economist and would rather describe myself as an old-fashioned Keynesian with Marxist inclusions. New Classical and New Keynesian models (they differ only about the stickiness of wages) are nonsense. Apart from the irrational assumptions, they suffer from internal inconsistency (see my article “(Non-)Bubbles, Rational Expectations and Perfect Foresight” published in 2000, I think, possible for the micro version, too). I think that the definition of Effective Demand I gave you yesterday is not so bad. Of course, by income I do not mean permanent income in the sense of perfectly foreseen incomes far into the future, but current (and partly past, but with a short lag) income. Of course, there may be many factors influencing private consumption demand. One (which is, in general, overlooked) is working-time. It is, of course, possible to consume during work, but most consumption takes place during leisure. Therefore, reducing working time would increase consumption, but only if there is enough income. How the reduction takes place (reduction of daily/weekly hours or longer holidays) could influence the structure of the additional consumption.

Without going into the Keynesian history after Keynes in detail, I think the wrong way began already with Hicks IS-LM concept. On the IS side, an exogenous Marginal Efficiency of Capital (an unlucky name and concept of Keynes’ GT) was assumed, making investment only dependent on the interest rate. It is true that Keynes’ money demand is better than the Neoclassical pure Quantity Theory, but I think that the concept of money demand and supply is, at least, problematic. Later on, the IS-LM-Keynesians added a labour market quadrant, thereby reintroducing the Neoclassical labour market equilibrium, where full-employment is prevented only because employees resist a wage-reduction. Instead, it would have been better to pick-out the weaknesses of the GT (for example: relicts of Neoclassical marginalism) and to try to improve these points. Obviously, that is what you want to do, but maybe that developing a whole theory including all these points is too ambitioned. And the danger of a micro foundation is that social relations are underexposed.

Yoshinori:

I only mentioned 2 theoretical foundations of the Post Keynesian Economy (it has many), in the case of effective demand drives the economy in the short as well as in the long-run. , they recognize that there are no mechanisms to guarantee full employment.

Another of the theoretical foundations of the Poskeynesian school is that they reject the different versions of the classical economy for the analysis of the capitalist economy.

"PKE studies a wide array of economic fields ranging from short-run macroeconomics (unemployment, economic output and inflation), long-run macroeconomics (growth and distribution), monetary economics, finance and the international monetary system to microeconomic approaches to the theory of the firm, theory of consumption, exchange rate theory, financialisation, and much more".

Post-Keynesian Economics, Authors: Adam Aboobaker, Karsten Köhler, Franz Prante und Ruben Tarne | 18th of December 2016 Patron and academic review: Prof. Dr. Eckhard Hein

Anton

Assumptions something is true or will happen, all theorical Models work with them.

Martha,

thank you for your explanations. They may be useful for some of readers of this page. I know all those claims, and after knowing all I am saying that Post Keynesian economics lacks theoretical foundations.

I asked you a question: how each economics agent (household or firm) behave in such circumstances (i.e. uncertain situation). You did not answered. It is natural because it requires a long reflection. I have asked this question many years ago and reflected on it many years (mainly in 1980's). An answer is explained in my paper:

Microfoundations of Evolutionary Economics

https://www.researchgate.net/publication/301766363_Microfoundations_of_Evolutionary_Economics

N.B. This is a draft version of Chapter 1 of a book with the same title (Microfoundations of Evolutionary Economics) that will be published next year (2018) from Springer as a co-authored book with two of my colleagues.

It may not be a perfect answer. But, to answer this kind of questions requires a long and deep reflections. My point is that many of Post Keynesians have reflected on a very shallow level and are thinking that their investigations were sufficient. The main reason of this shallowness is a reflection of their refusal of microfoundations. This is the main point of my question of this page.

I have got an interesting paper on our question:

Giuseppe Fontana and Bill Gerrard 2006 The future of Post Keynesian economics

Banca Nazionale del Lavoro Quarterly Review; Rome 59(236): 49-80.

You can obtain a PDF copy from PSL Quaterly Review

https://www.rspi.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9863/9745

This is a kind of "must" for our argument. It gives a short history of economic thought after 1936 (post Keynes period), gives an overview on various strands of Post Keynesian economics and argues the possible future of Post Keynesian economics as of 2006.

Their diagnosis is not optimistic. After introducing Frederic Lee's argument that Post Keyensian economics is dying (Lee fears that there will be no Post Keynesian economics in 2020), Fontana and Gerrard give a prognosis that are two possible alternative scenarios (p.69). The first: no significant engagement within mainstream economics. The second scenario is that Post Keyensian actively prusue constructive engagement within mainstream economics.

The first scenario may seem "attractive for those who view Post Keynsian economics as an alternative discipline that seeks to supplant mainstream economics." (This is the scenario of my own.) But, Fontana and Gerrard point that this scenario is likely to keep Post Keynesians "remain marginalized within the economics profession".

The second scenario, that Fontana and Gerrard recommend, is a way, as they admit, that "Post Keynesian economics may tend to fade way as a recognized school of thought separate form mainstream Keynesianism." (p.73)

It is evident that the second scenario is not what I am aiming for. Although Fontana and Gerrard know well the history of Post Keynesian economics and sympathetic to Post Keynesian economics in general, their understanding of Post Keynesian economics is something that is a bit different from mainstream economics in methodology and has no essential difference in their core economic theories. My opinion is totally different. Post Keynesian economics should be reorganized on the firm theoretical basis of classical theory of value, which is totally different from Marshallian theory. Keynes called "classical theory" without making any difference between Ricardo and Marshall, but he was completely wrong. Of course, the classical theory of value should be reorganized as a theory of the 21st century. For this point, see my paper:

https://www.researchgate.net/publication/269393496_The_Revival_of_Classical_Theory_of_Values

This paper is already published in 2016 as Chapter 8 of a book The Rejuvenation of Political Economy. There are many minor textual changes, but the readers can grasp the main points of my contention.

Final remark:

By some unknown reason, the above Giuseppe Fontana and Bill Gerrard's paper does not appear in their Contribution page, although they are RG members and listed many of their researches.

Yoshinori:

Thanks, I will check lectures that you recommend

As previously mentioned, the Post-Keynesian economics takes up 3 Keynes theoretical foundations ::

1) Involuntary unemployment

2) The principle of effective demand

3) Effectiveness of the policy

Thus

According to Fontana and Gerrard (The future of Post Keynesian economics): there is point of view that considers Poskeynesian economics as mainstream of economic thought seeking to develop theorical insights(General Theory), page 54

Dear Martha Pantoja

" The future of Post Keynesian economics " is a very good overview on the state of Post Keynesian economics by the time of 2006 (more than 20 years ago). Distinction between The Romantic Age and The Age of Uncertainty was superb. I was much impressed by their observations. However, their prospectus of The Future of PK economics (Section 4) is too pessimistic. I am not against their proposal about taking more active engagements with the mainstream economics. It is often necessary. But, are they right to think that this engagement will gradually wipe out the differences between the (actual) mainstream and the PK economics? They are thinking that PK economics will be incorporated as a part of mainstream economics. This understanding is completely wrong. They must be thinking that PK economics has no fundamental theoretical differences. This is the serious point of why I ask the need of theoretical foundations. This is a proof that they are thinking PK economics has several differences of emphasis and policy orientations and has no deep theoretical contradiction between PK and NK (or the mainstream). If we know the fundamental differences in the very basic schemes of economic science, there is no fusion without the demise of the actual mainstream economics.

One more word on your three-point foundations. Except point (2), other two points are simply the subject-matter of PK economics. They are not theoretical foundations. Your misidentifcation shows that PK economics has no firm theoretical foundations.

I am not sure that PKs can develope a micro theory, which can compete with the simple-minded NC or NK model. This model is really ridiculous, but that is hidden behind mathematical expressions which normal people (and maybe many economists, too) do not understand. This seems to make it so attractive. The situattion reminds meat the fairy tail "The emperor's new clothes", but there is nobody who shouts "he has nothing on!"

Dear Anton Rainer

your are right. The parable of "naked emperor" is famous in economics. The most famous book is Steve Keen's Debunking Economics

(2001 Revised edition 2011 Spanish, French, and Chinese editions)

It was originally subtitled The Naked Emperor of the Social Sciences . In the extended edition the subtitle is changed to The Naked Emperor Dethroned?

However, I am uneasy with this parable. In the story of naked emperor that he was naked was a simple fact. In the case of economics, is it all clear as the naked emperor? To laugh away the mainstream economics is easy but criticizers should have theories better than the neoclassical theory, On this point, Post Keynesian economics is too weak. It lacks firm basis to its theory. This is the reason why I asked this question. Unfortunately, we have only a few Post Keynesian economists who recognize this fact and defect.

If Post-Keynesian economics has no foundations yet, why are so many people interested in it, or why is it believed to be a major alternative to other approaches? For me it is a reason not to read Lavoie's book, or at least, not immediately, because of more urgent priorities....

Hello Yoshinori:

You´re right, The Post Keynesian economy, has as its starting point the Keynesian thought, it is obvious, that is why it is called like that.

The important thing is to analyze the Post-Keynesian mainstream, what are its own contributions to economic thought? and mainly how to solve some of the problems that affect the world economy, such as low economic growth and subsequent unemployment?.

Because if something distinguishes Keynesian Theory is that it was able to land on the practical ground, with its proposals in the 1930s for the economy to come out of depression.

Dear Ludwig Van Den Hauwe

welcome to this question page. It seems you have a view that Post Keynesian economics is "prosperous" and PK economists count in numbers. You must be wrong. PK economics and economists represent a very small part of economics profession. Moreover, PK economics is in the edge of demise. This kind of opinion was expressed by several leading PK economists around 2000. In 1998, Frederic S. Lee was afraid that PK economics will be dead by 2020. King (2002) preached a will to be prepared to a situation of "continued survival of embattled minority" (p.259). Dunn (2008) talked about degeneracy of Post Keynesianism. This situation changed a bit by the Global Financial Crisis and the return of Minsky. But, the situation did not changed substantially, because there were no real theoretical development since then. PK economists are still fighting a fight of embattled minority.

I have passingly read your paper: Understanding Financial Instability: Minsky Versus the Austrians. I understand that you are more sympathetic to Austrians rather than Keynes and PK economists. That is all right. Many of opinions of Keynes and PK economists have no firm reason. They are contending many propositions with no firm theoretical basis. This fact proves again the necessity to get or construct theoretical foundations for their claims. Although Austrians and PK economists have different opinions on different points, Austrians and many (not all) PK economists are thinking that they must refuse equilibrium analysis,. I believe at this unique point, we have a common basis. If we re-start from this point, I believe we can make fruitful argument for the development of economics.

In his Book "Post-Keynesian Economics: New Foundations" , mention two important variables in the world economy: financial and uncertainty.

Good morning. I will not answer Yoshinori ‘s question, at least directly. I concur with him on the fact that there isn’t solid and well accepted theoretical foundations for PK economics. It has a cost in terms of research programmes.

New classical researchers can (and must, when they are young PhDs) insert their work into a well defined research track, with established protocols. Their papers must show that they bring something new to the NC construct, usually in terms of methodology or models. NC researchers are confined to work on minutiae and reading their papers is not easy. Because NC thinking is incremental, their bibliography is usually short and includes only recent papers (10 years seems to be the limit).

PKs cannot benefit from such a well defined research program. They gain in the freedom they have to tackle relevant policy issues and provide opinions (rather than demonstration), which is what make them attractive to the general reader. But PK school of thoughts is not incremental. Their research papers are usually based on stylised facts, leading to opinions about policy that are backed by a long list of previous PK economists. It is not frequent to find formal models and the econometrics is usually based on reduced forms, without a discussion on the micro model behind this reduced form. Their papers exhibit long bibliographies, going back to the 1930s and including historical geants like Keynes, Kaldor or Kaleski. And because PK school of thoughts isn’t incremental, it appears to me condemned to go into self-referencing circles.

So, back to Yoshinori’s question, my opinion is that PK economics has no other option than developing a clear and solid set of micro foundations if it wishes to break this ‘self-referrencing’ circle which encloses it. Or it will be relagated to be a club of pundits writing about politics in NY Time columns.

Dear Hubert

The important the Poskeynesian economics are their theoretical contributions to economic thought, but obviously they have to be different from what Keynes did.

Dear Marta, you are right. But I see very little theoretical contribution from those who are today classified as PK or ‘heterodox’. Don’t misinterpret me: when I made a living as a macroeconomist, I used extensively the models derived from the structuralism school.

But most of these models had be created in the immediate post-war period by practitioners who worked on reconstruction or on the development of new independent colonies (and a couple of important Brasilian economists, like Bacha). They looked for guidance in public policy making, and most of their models were based on stock-flow accounting, using national accounts, balance of paiements and fiscal/monetary data. No theory. Actually, they could not be classified, as today’s heterodox or PK, as leftist: many of them, especially in Europe, were quite conservative. They were engineers and administrators working on priority programs and looking for good tools.

Today, I am afraid the new generation of so- called heterodox economists is more involved in politics than in actual policy making (there is even a joke: what is the difference between an heterodox and a monetarist? The monetarist is an ex-heterodox who had to assume governmental responsibilities). And very few heterodox oriented economists are pushing the frontier of economic knowledge through a well structured line of economic thinking. One of them is back to Mexico, by the way. When professor at Notre Dame, Pr.Jaime Ross - now at UNAM- published a very good text book on heterodox economics; one of the few I’d recomend.

Dear Hubert,

are you referring to

Development Macroeconomics in Latin America and Mexico: Essays on Monetary, Exchange Rate, and Fiscal Policies 2015 Edition by Jaime Ros

or

Rethinking Economic Development, Growth, and Institutions 2013 by Jaime Ros?

Or have you any other book in mind? If it is such a good book, I want to read it.

Your estimate that "very few heterodox oriented economists are pushing the frontier of economic knowledge through a well structured line of economic thinking" is a very serious fact. I have a feeling that may of heterodox economists are more politics/policy-oriented than theory-oriented.

That is interesting conversation, I agree with Marta and about Hubert point, I would say, please look at some "mainstream" literature and particularly empirical papers, a lot of them are econometric jugglery and even more, those who use the so called theoretical often "DSGE" framework, embedded in some so called micro- theoretical foundation has very little to do with actually theory.

On a lighter note, I found Chomsky reasoning quite amusing, https://www.youtube.com/watch?v=EzvWVFAwPUU

The problem is that some of the currents of thought called Post, do not develop new relevant theoretical approaches and only repeat what their predecessors said.

Indeed, Edmar Bacha Brazilian economist who participated in the economic team that instituted the Real Plan (heterodox economic policy) to stop the hyperinflationary process of the 90s in Brazil.

By the way like Yoshinori, I don't found Jaime Ross'book on heterodox economics;

Dear muhammad ali Nasir

Your paper "A Quarter Century of Inflation Targeting & Exchange Rate Pass-through: Evidence from the First Three Movers" seems interesting. I will study it. I am also working on exchange rate problems as a part of my theory on international trade theory. Please read Section 6 of my paper:

The New Theory of International Values: An Overview.

(It is published as the first chapter of a book. You can find a draft in my Research page and the complete reference there.)

As for Noam Chomsky's comment on social sciences, I did not understand the deep meaning of it. As he himself said, he is not a social scientist. Perhaps he knows biology better than social sciences or any one of them. It is a bit too rude to ask Chomsky any opinion on social sciences even if he is a great linguist.

Dear Yoshiniori Shiozawa, economics is a social science and I think Noam Chomsky is entitled to his opinion.

Thanks for interest in my paper "A Quarter Century of Inflation Targeting & Exchange Rate Pass-through: Evidence from the First Three Movers" The basic idea is that some thought as the central banks started Inflation Targeting exchange rate pass through will diminish which is strange idea as once the currency got depreciated "somebody got to pick the bill".

Dear Martha

Martha Pantoja > The problem is that some of the currents of thought called Post, do not develop new relevant theoretical approaches and only repeat what their predecessors said.

Have you reflected, Martha, why does this deplorable state continue?

Dear Yoshinori:

I have been reading research on economics and the new contributions are very few

Best Regards

Martha,

You are describing a fact. I am asking the reason that has brought this situation.

muhammad ali Nasir

You put it:

"look at some "mainstream" literature and particularly empirical papers, a lot of them are econometric jugglery and even more, those who use the so called theoretical often "DSGE" framework, embedded in some so called micro- theoretical foundation has very little to do with actually theory." (post on 3 months ago)

Your observation is right, but the irrelevance of mainstream literature does not justify the fact that Post Keynesian economics remains as interpretative discipline of old books and papers. I am asking why Post Keynesian economics remains unproductive.

what is being productive in economics? will you gauge the productivity by the number of research outputs or papers ? if so they are going through the roof. If you want to have new theories then you need to focus on the question what really makes a theory and from where we get the theory.

Dear muhammad ali Nasir

Of course, mere number of papers cannot be a gauge of the productivity of a research agenda. A productive theory produces a large number of papers, but a large number of papers does not prove that a field of economics is productive. As you pointed it, an unproductive theory can produce a huge number of rubbishes.

I am asking how a research strand called Post Keynesian can be productive in the sense that it will provide theories that will help understanding our economy. For example, we are living in a changing world. We have to understand why global value chains are developing. Is Thirlwall Law sufficient for understanding rapidly changing and globalizing economy? Surely not! Then, what kind of international economics does Post Keynesian (PK) economics has?

Luigi L. Pasinetti tried to extend his theory of structural dynamics to international trade situation two times: Chapter 11 of Structural Change and Economic Growth (1981) and Chapter 9 of Structural Economic Dynamics (1993), but in my opinion he failed to construct any real theory of international trade.

Post Keynesians refused the neoclassical framework like Arrow and Debreu model. They were right in this refusal. However, it does not mean that PK economics must stay a theory that depend mainly on intuition and imagination. It must have a theoretical foundation or foundations. To search such foundations may serve to produce new theories which extend rough ideas of PK economics. So the search of theoretical foundations can server as productive research program that is lacking in the present PK economics/