I argue that Classical Economics was itself always misunderstood, and that Adam Smith was not an adherent of a totally free market. Smith favored caps on the interest rate, tariffs to protect local industry, and publicly-funded institutions. Advocates for a completely regulation-free free market misinterpreted Smith to claim a theory of Classical Economics that one of the allegedly original Classic Economists would have never supported.

Logically lack of regulation leads to problems as does excessive regulation. Those who adopt either side will inevitably be wrong as both are wrong extremes. Socialism and Anarchic Capitalism are both evil sides of the same coin and the proper balance is a government with some regulation, minimal regulation, to prevent abuse, but only enough to keep those in the private sector from harming small business, consumers, and the economy itself.

Caps on the interest rate are needed to stop extortion (which if used would have prevented the downfall of America's housing industry). Restrictions on international trade with countries whose minimum wages are too low are needed to protect democratic economies and working conditions worldwide, as otherwise trade will flow to communist countries like China who allow the mistreatment of workers through low minimum wages.

Nonetheless, some regulations in America have become too bureaucratic and excessive, and our tax code needs simplification. For example, requiring a company list the depreciated value of all equipment is a regulation nightmare that should never have occurred. We would be well served to simply rewrite the tax code with its complexity and toss out almost everything including many tax breaks, and simply ask enough of business to know what their earnings are and how many American workers they are hiring (for purposes of giving tax breaks to those who hire more in proportion to company earnings). That would not only allow business to prosper through reduced regulation but eliminate many loopholes that exist.

At any rate, the bottom line is that there are two separate extremes and BOTH are causing problems. America is actually experiencing difficulties caused by lack of appropriate market regulations and an excess of inappropriate regulations, to put it bluntly. Any economic style must not criticize one while idolizing the other.

Would I be widely off the mark if I simplified the Keynesian approach to the government injecting extra money into the economy?

If that was a correct simplification, where does the money come from? Borrowing from (preferably) extrernal investors, and ending up piling on extra debt burden, or does the money come thru monetary expansion, such as QE?

And if it is QE, how do you prevent it from creating asset bubbles, inflation, currency devaluation, all of which are conducive to growth, but with the price tag of a correction further down the road?

Etienne,

thank you for your comment. Keynes means many things. For you, it may be economic policy. I know very well that the present trend for the return to Keynes is mainly motivated by the policy implication of his economics. But, is it possible to deduce or find relevant and good policies if the theory itself is wrong? We may think of a good policy which is inspired by a wrong theory. Keynes himself talked about a good dental practitioner without solid scientific foundation. I don’t deny the possibility of this kind of policies. I have to admit many of economic policies and policy mixes are of this kind. In this case, “Plan Do See” will be our methodology.

I am thinking in a bit different way. Some should think about theories and its validity. I am asking if the Keynes’s economics is reliable as a theory as a whole. If it is not, what is necessary to reconstruct his economics on a sounder basis?

First and foremost we need to do a new reading about Keynes' Aggregate Demand theory for our days, such exercise most consider the new financial environment; where QE with nearly zero rates can´t be enough to move the economy from the recession path, regardless the liquidity injection we have seen a slow and weak recovery. So we can not just put more money in financial institutions hands, because under the circumstances result of 2008 crisis, not only financial institutions or industrial enterprises turn to default position but the households did it too, ergo with households and companies saving in order to pay their debts, nobody will ask for any more borrows so the money from QE will remain stagnant in the financial system and demand constrained,causing pressures that could create speculative bubbles with no sound recovery. In conclusion we need to boost aggregate demand, but such policy most go from the income side, with no fear about a crowding out or inflationary pressure at this point, because extra income at the beginning will be use in the deleverage process.

Yoshinori,

I share your desire “to deduce or find relevant and good policies.” Too often discussions and analyses are unproductive, polarized and fruitless, in my view, because we approach issues with immalleable or ill-founded mindsets.

If we can step back, question our assumptions, agree on shared objectives and consider alternatives, we are likely to come up with better policy. In macroeconomics -- with our global mess and contentious, conflicting viewpoints about what is wrong and what to do about it -- we especially need to improve our understanding and practices.

To your point about identifying “what is necessary to reconstruct his economics on a sounder basis,” I would offer the following suggestions about macroeconomic foundations:

1. Is elevating aggregate demand the right primary objective? Churn does not necessarily correlate with improved quality of life, and probably is stronger associated with consumption and depletion of resources. Maybe aggregate demand is, in fact, a poor foundational premise and a discussion may bubble up better alternatives.

2. Productivity is highly associated with improvement of well-being, yet how does any existing macroeconomic control help improve it? This may well be a better cornerstone.

3. The assumption of - and indeed dependence on - growth to improve well-being may be counter productive. Growth at what cost?, by whom?, and with what consequences? -- these are key questions, especially with the inevitable constraint of our finite resources.

4. We all know the limitations of GDP for measuring well-being, but we accept it anyway. Maybe addressing the first 3 points will help us derive a better metric.

5. By framing discussions around the policy of Keynes, we jump headlong into that intellectual and political tug-of-war. Maybe a more constructive question would be - “What is necessary to put macroeconomics on a sounder basis.”

Tom

Enrique,

thank you for your comment. I totally agree with you. This is some additional information about Japan.

Do you know "abenomics"? New Prime Minister Abe launched a triplet of economic policies consisting of monetary policy, fiscal policy, and economic growth strategies. Its monetary policy is a type of inflation targeting. He nominated three governors of the Bank of Japan (a president and two vice presidents) and the Diet recently approved this. The criterion of this nomination is if the nominees are the persons who really work for the realization of inflation target fixed at 2% annual rate.

Note this is not an ordinary inflation targeting, for the purpose of this policy is to raise inflation rate which have bee under 1% for a long time. BOJ had adopted quantitative easing policy for many years but in vain. Many politicians and economists think that the policy was not pursued strongly enough.

We don't know yet what will happen in the near future. So far, the stock market and the exchange market are appreciating this policy and the Yen/Dollar rate went down and Nikkei index went up. At any rate, this will be a precious (but too risky) monetary experiment. We should observe the progress carefully.

My opinion on abenomics is very different from proponents and opponents either. We should say that monetary situation or price level is very stable. We should not blame the actual monetary situation. What we should do is to increase effective demand by other methods than monetary policy. Emphasis on inflation rate is missing the target. So does any other monetary policy. After long time quantitative easing banks accumulate enormous amount of money balance in the BOJ accounts. Even if they have excess money, they cannot use it, because there are only few borrowers. Private enterprises also accumulate a big amount of money balance but they don't invest in Japan. This is a reasonable judgment for the Japanese economy is stagnating for more than 20 years. Quantitative easing does not help increasing effective demand.

Then we should question this. Why do many economists, claiming to be Keynesians (old or new, post- or neo-), support quantitative easing and other monetary policy with an intention of increasing aggregate demand? There must be something wrong in the so-called "Keynesian theories."

Tom,

your answer is full of deep suggestions. I really appreciate it. I agree with you that most policy discussions are unproductive. If we focus on policy effectiveness, they may become vivid and we are prone to mistake them as something productive but in reality they are sterile. In particular, when two policy orientations are based on different theories, it is impossible to come to an agreement without discussing the theoretical basis. This is why I prefer to discuss theories instead of policies.

You have mentioned ill-founded mindsets. There are many things which determine our mindset. At the most deep level, it is the theory (economics in our case) which guides us, orients us, and even determines our thinking. Keynes once wrote (in the last chapter of the General Theory) that "the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else." For a long time, our mind has been controlled by trends of theories which are usually called New Classical Macroeconomics, New Keynesian Economics, Post Keynesian Economics, New Neoclassical Synthesis and others. It is, in my understanding, time to change our economics from the basis and reconstruct it on a new basis. In search of this new economics I think Keynes gives some hints. I don't think Keynes is always right. On the contrary he is full of contradictions and wrong formulations and badly defined concepts. It is necessary to escape from wrong tradition, including Keynes himself.

Keynes's long struggle to escape from classical paradigm is famous. If we want to be really loyal to the Keynes's spirit, what we should do is not to read his texts scrupulously but to struggle hard to escape even from his ready made theory itself. In this sense, I agree with you on your 5th point: a more constructive question would be - "What is necessary to put macroeconomics on a sounder basis. “ Yes, you are right. We should even go further. The right question must be "What is necessary to put economics on a sounder basis.” It is not the macroeconomics alone but the economic science as a whole which is questioned now.

I will try to give my contribution to this discussion. I think that keynesian policies work provided that two conditions, among others, are met: a) money is actually increasing aggregate demand; b) aggregate supply is not constrained. the last years have seen both conditions not working. that's why increasing public debt in Europe has not had any positive effect on employment, rather the opposite. We need to think of keynesian policies that involve: a) a restructuring on public expenditure towards low income, high consumption classes; b) a dramatic spending review to eliminate any waste of public resources in favour of productive expenditure; c) expenditure should increase the factor endowment and the expenditure in R&D of the country to have any effect on growth.

Yoshinori,

As stated in your thoughtful response, I agree with you about the need for fundamental macroeconomic theory, rather than just policy discussions. The array of Keynesian and Neoclassically oriented theories you cited do indeed dominate our view of economics today. Basic to them are 1) assumptions about what are the key variables to track (e.g., usually those activities and transactions with an accounting path), 2) how they relate to one another (e.g., linear/non-linear, constrained optimization, production functions), and 3) ranges of values in which these relationships hold true (e.g., estimates, ratios, levels, time frames for reliable projections).

All would be well and good if these theories provide useful guidance now and for our future. Yet, how well are mainstream economic theory and practice really serving us now? Witness the on-going financial crisis, severe depletion of resources and financial reserves, frequent counter-productive allocation of effort, and lack of unifying rationale. Yes, vast economic improvement has accompanied the reign of current theories, but perhaps it is time for a new paradigm and a re-specification of the underlying formal models. Consider the following broad context.

An economic paradigm that best advances a society’s agenda is the one that prevails. Mercantilism (16th – 18th centuries) rationalized national expansion and foreign trade. Then Classical/Neoclassical (18th century to present) informed the epoch of the massive Industrial Revolution. Micro- and macro- theory and tools have been instrumental in advancing the going agenda.

Microeconomic theory

Profit maximization shifts time value toward present, hence resources are valued for their immediate use rather than for future generations or higher uses (such as oil for its entropy wasting energy now; rather than some future structural molecular value); prices neglect many costs (externalities), hence consumption and resource usage is subsidized and exaggerated; corporate and private entitlements may lack accountability; etc.

Macroeconomic theory

Growth is seen as imperative though it is not possible indefinitely; globalization drives out “non-competitive” alternatives; metrics like GDP misrepresent well-being and ignore waste/depletion; central banks and policies strive to inflate aggregate demand regardless of need or sustainability; transfer of wealth between generations and other groups can be performed without willful participation; etc.

In the context of these and related issues, I am synthesizing an alternative economic paradigm to better address our needs going forward. The theoretical framework derives from natural sciences more than from micro- or macro-economics per se. More discussion of it is outside the scope of your question here, but that is what motivates me in my answers.

Yoshinori

The data about Japan seems to be quite interesting especially on regard about Richard's Koon work, where he adds to the understanding of the recent crisis, the subject of "balance sheets crisis", shaping this new phenomena on financial crisis, where QE isn't enough, because more money on the financial system is not equal to more liquid resources on productive investment or at least money for consumption, under a stagnation environment and highly indebted households and companies, as financial like industrial. The policy in order to leave this economic bump needs to target the households income and the productive investment, in order to push the offer and the demand out of the downward trend.

About the stagnation I'd like to point out the Harry Magdoff and Paul Sweezy's job, where they identify this trend on the highly developed capitalist economies,and is Japan the first one to show the effects of this phenomena, with the so called "Lost decade", experience which turns essential on the understanding of the actual crisis and the Financialization process.

Enrique,

you have written that "more money on the financial system is not equal to more liquid resources on productive investment or at least money for consumption." I think this distinction (between financial economy and the real economy) is very important. In Keynes and his followers seem not well aware of this distinction. This is one of the reasons why I doubt the very foundation of Keynes's theory. It is true that Keynes discovered something important but he could not formulate it properly. If this conjecture is right, it is necessary to reconstruct a new economics and base his idea on it.

You also pointed that Japan may be the first developed economy which experienced Lost Decade. I am not sure about this point, for we have seen what is called British Disease and even Dutch Disease. But if we admit that Japan's Lost Decades (for it continues more than 20 years) are typical phenomenon of a sufficiently developed economy, we have two questions to solve.

(1) Why does not the U.S. economy suffer (at least until now) the same type of phenomena?

(2) What will be the theory which explains lost decade phenomena for some of developed countries while in some period of time they exhibited a vivid economic growth?

A key to the first question may be the Financialization. The second question seems much harder but it is necessary to explain these different phases with a consistent theory.

Re: GDP and other Aggregate Concepts

Tom,

You have posed too many points to discuss and I cannot catch up with you. Let me comment point by point. In this posting, I want to discuss GDP and other aggregate concepts in Keynesian tradition.

(1) GDP as Policy tool

GDP is often used as an objective to be pursued. As you have pointed several times, it induces economists to think of policies only in terms of aggregate numbers. Keynes talked (in Chap. 10 VI of the General Theory) of the usefulness of digging out money filled bottles. It is of course wasteful except it increases the aggregate demand. The GDP increase thus obtained may help increasing employment but it is sure we can find out a better solution to increase employment and decrease the waste at the same time. For example, we can invest in the same amount of money to the research which aims to reduce energy consumption.

(2) Misleading objective

If we don’t speak of environmental questions, the GDP concept is misleading. Now Japan is suffering of long stagnation with increased unemployment and non-regular employment (cheap contractual employment with precarious status). In order to cope with this situation, policy which merely pursues increase of GDP is not effective, as we have experienced by the Lost Two Decades. Classical Keynesian policies were pursued during 1990’s with poor outcome.

What is necessary, in my opinion, is to increase the weight of services, such as medical services and care services. We may include in this list the graduate level education which is very poor in Japan as a consequence of several historical reasons. These are the needs for which we can surely hope effectual demands. But this demand shift (from manufactured goods to human well-being services) is not easy to be achieved by a spontaneous adjustment based on market mechanism. A kind of prime-pumping is necessary in order to develop well-being services even if those services will be well managed by a market mechanism in the future.

When Naoto Kan was prime minister, he used to say a “strong economy, strong public finances and strong social security system.” It is sure he intended to build up a strong social welfare system by achieving a strong economy. However, he did not mention explicitly that the strong social system enables a strong economy. Traditional macroeconomic policy is too rigidly confined to the manipulation of such variables like interest rate, money supply, public spending and tax cutting.

As you mentioned in the second posting, macroeconomic theories are usually confined in a small rage of variables. Traditional economists discuss how these variables are related but rarely question if these variables are relevant to the problem we face at. They rarely ask if the set of variables is sufficient one to do a suitable analysis.

(3) Premises of aggregation

In the time of Hicks and Morishima, most of the economists were aware of the question how to justify the analysis based on aggregate variables. In the simplest expression, the stability of the price system is assumed. This explains why the New Keynesians adheres so obstinately to the rigidity assumption of prices and more specifically of wage rates. The Micro Foundation research program assumed the general equilibrium theory (GET) and hence spontaneous adjustment of demand and supply for all commodities (goods and services). It was inevitable that this research program led to the New Classical Macroeconomics, for all that New Keynesians could do was to find some kind of incompleteness for some markets.

In order to reconstruct Keynes’s ideas, for example the idea of effective demand, it is necessary to base them on a different microeconomic theory other than the GET. Even the use of partial equilibrium theory (PET) is not justified. In some case, PET is more realistic than GET. This was why Marshall preferred to use PET rather than employing GET. But, I have to signal that Marshallian economics was the very basis of Keynes’s economics and the way of thinking from which he struggled to escape for a long time. Naturally, this contradictory relationship between Keynes and Marshall produced most of the confusions and internal contradictions of Keynes’s economics and later New Keynesian and Post Keynesian economics.

(4) New price theory

Now is it necessary to construct the new microeconomics from scratch? I don’t think so. If we reflect that the history of economic doctrines is divided into two major schools, the first alternative to neoclassical economics is the classical economics.

Of course, the classical economics is an amalgam of many different doctrines and full of contradictions. Even the classical economists were aware of this internal theory opposition. Ricardo contrasted his value theory with that of demand and supply theory. The demand and supply theory firmly nested in the classical economics developed to neoclassical theory under the name of marginal utility theory. The marginalist revolution was nothing than the return to once rejected demand and supply theory.

Ricardo’s value theory was developed by P. Sraffa in his small book of 1960, namely The Production of Commodities by means of Commodities. Parallel to the Keynes’ writing of the General Theory, a research wags going in Oxford. However, the Oxford Economic Research Group’s report (OERG report) was published after the publication of the General Theory. The report found two important empirical facts: (1) Investment decision are not responsive to the level of interest rate; (2) Business enterprises set prices of their products on what is later called full cost principle (See Frederic S. Lee’s 1981 paper “The Oxford Challenge to Marshallian Supply and Demand” in Oxford Economic Papers, NS, 33(3): 339-351 ).

OERG report raised a big controversy on the validity of the marginalist economic theory. Unfortunately, the controversy ended by a self-easing conclusion that the marginal theory was valid despite of the report and other report strengthening surveys.

I think Ricardo’s value theory can be the stating point of the new theory. Of course, there are several deficiencies in his original formulations. But they are remediable. The most important and often neglected fact is that Ricardo’s value theory means that price and volumes are separated. When a price of a commodity is set, it does not mean that its supply and demand is equal. In modern economy, most often firms set prices. This means that the firms are ready to sell their products at the predetermined prices as far as normal amounts of demands are expressed. At a fixed price, the demand for a commodity changes from time to time. The firm producing the commodity supplies as far as demand exists.

Separation of prices and quantities are the most important feature of the Ricardian economics. This is a very old conception of how economy works. But it is quite new (we may say a new paradigm) in the sense that most of the modern economic analyses are based on the assumption that prices and quantities are adjusted at the same time. Dominating concept of the GET enforced to think simultaneous adjustment of prices and quantities. We should escape from this habit of thinking. Keynes escaped halfway but could not arrive at the correct conception of the effective demand.

In the next posting, I want to discuss the principle of effective demand.

Francesco,

You have mentioned two conditions in order that Keynesian policy works. a) is financial and discussed by various people. b) is rather obvious. What is more important, it seems to me, will be the fact that the “aggregate demand” is constrained by some reasons we don’t know well. At least, in Japan, there exists sufficient supply capacity to the expectative demand increases but the demand does not increase even when the Bank of Japan has spread enormous money among the commercial banks.

This is the question of demand satiation. Evolutionary economists like Witt, Andersen, and Saviotti discussed some features of this question (See for example Witt 2001 Escaping Satiation, The Demand Side of Economic Growth). As Witt notes it, the leitmotif of Saviotti’s paper refers to Pasinetti’s idea of economic growth (Witt 2001 p.8).

Surely you know this story very well.

Theoretically the demand satiation problem is quite difficult to deal with. I would like to think about it but so far did not arrived to a good definition or a good formulation of it. If you know some works which treated demand satiation in the effective demand deficiency context, please let me know them.

You have excess capacity in the economy, with the excess capacity being in the manufacturing sector that is export oriented. Obviously the domestic economy in Japan cannot buy all that is produced by the highly productive manufacturing sector. That is why I have for a long time maintained that the B of Japan was sleeping on the job allowing the Yen to appreciate so much that profitability in the manufacturing sector is effectively eliminated. That is why Abe and Kuruda is correct trying to weaken the Yen.

Yoshinory,

aggregate demand is stagnant not because of demand satiation, which regards only the richest classes. First, I see a Pasinetti type of problem: money goes to those people whose propensity to consume is low (because of satiation). Income equality has dramatically reduced as a consequence of the financiarisation of the economy. Governments tend to consider any redistributive policy unbearable. the consequence is that consumption is continuously falling down and the powerty line is including an ever larger bench of people in Europe. Tax evasion is dramatically biased in favor of the highest incomes. Everything, from the market to public expenditure, seems to favour the same social groups with the highest incomes. This makes increasing the public debt an obstacle to, rather than a factor of growth.

Condition B is far from obvious. it was the main shortcoming of Keynes thought that supply adapts almost automatically to demand. In the name of this crazy idea, and other not less crazy, such as that economic policy must always fail, governments have given up pro-growth and industrial policy. We need to make a strong distinction between waste of public money and expenditure that is actually able to stimulate growth in supply. Yes, there is enormous supply capacity in old, traditional sectors, but not in new emerging sectors. Several constraints from the supply side prevent growth in environmental friendly sectors, in new technologies and so on. Innovation is lagging behind its potential.

We need more social equalit, less waste of public resources and a brave new industrial policy to stimulate R&D, investment in education and infrastructure. Perhaps I don't know the Japanese situation, but Europe needs this, at least the peripheral areas.

In Italy, we also need an in-depth reform of the financial sector and corporate governance rule to take advantage, before it is too late, of the Euro and not pay only the cost. The strong currency was a good opportunities to attract cheap capital for our firms, but our firms have a strongly concentrated capital and are therefore not attractive for foreign investors seeking outlets for their financial investment in Europe.

Wonderful discus since the sion!! Keynes served for a while but we have sought no new answers to what causes boom-bust. what causes the cycle and who pays for it when assets return to the rightful owners. and who is left holding the bag? Is there a more durable and sustainable approach in a steady state economy? do we need to keep owning cars since that commodity is s central to everything?

Why continue to live in such a faultily constructed world that keeps taking us to the brink? A game of chicken? How can we embed the economy in the society (Polanyi) and not leave it so exposed and unprotected? how many more centuries do we have left? I deserve a big fat bonus and other rewards for delivering the goods.

mahadeo bissoon

Yoshinori,

Your question, plus ensuing discussion by you and others, offers lots of good insights. I wish I had more time to pore over the materials. There are many gems, like the work of Sraffa, which I found useful years ago. And, for example, Clint's current works look very interesting.

Here are some quick responses to your 3 points.

1) GDP as policy tool -- Yes, and as I see it, assessing the productivity of actions [(output - waste)/inputs] is a better metric and policy tool than aggregate demand.

2) Misleading objective -- Yes, and that strong social system eludes easy measure. For example, building of jails and buying car theft alarms add more to GDP than reciprocal support of elders with young family members.

3) Premises of aggregation -- Agreed, not much to add.

4) New price theory -- Price, the device that determines who gets and does what, animates our society. Without adequately elaborating on the broader context, I will make this comment in passing. The more fully and accurately the price of any item reflects all its associated costs, the better will be the resource allocation for the society in aggregate. Policies promoting that transparency objective help assure money is spent in proportion to size of problems and needs.

When Central Banks distort the risk-adjusted price of bonds through their actions and policies, they interfere with price discovery and the web of associated purchase and saving decisions throughout the society. This leads to wealth distribution by an unelected committee, with debatable added stability or avoidance of bubbles.

While looking forward to your next posting and others', I'm sorry I can't keep pace in responding to your points. Fundamental differences require more elaboration than are suitably addressed in this context. I will be glad to follow-up offline.

Clint,

I have read Mathew Forstater's paper, one of your papers (Towards a Pure State Theory of Money), and a post at your blog site on March 21, 2013, "Why lately I write more on sane economics (MMT, MCT) than good urbanism & the social sciences."

Your blog post was interesting. I understand why you came to worry about the present state of economics. I am also very skeptic to the postmodern trend in social sciences or social thought. But trouble with economics is much more complicated. The mainstream neoclassical economics is not postmodern at all. Neoclassical economists believe firmly in what they think positive science methodology. Their theory framework, as you have pointed it, is the equilibrium concept. It is far from reality, but their tool is highly mathematical and their reasoning is based on statistical tests. Neoclassical economists believe that they are an authentic heir to the modern classical physics.

As for the Mathew Forstater's paper and your paper, I was not very much impressed by the arguments. One point I learned from Lerner was the efficiency argument in support of full employment.

Expositions developed by Forstater are based on two premises.

Lesson 1: Full employment and price stability are fundamental macroeconomic goals, and their attainment is the responsibility of the state.

Lesson 2: The state has the ability to promote full employment and price stability and should use its powers to do so.

As for Lesson 1, most economists in the Keynes's tradition do not deny the "goodness" of full employment. Many of them may agree that full employment and price stability attainment is the responsibility of the state. Those economists must believe that the state is capable to achieve it. I doubt if the state can do it. In the Forstater's exposition, he says this is possible because money is the creature of the sate (Lesson 3). But this very question is not explained at all. The core of this question is the compatibility of the money spending policy in various forms with the sustainability of price stability. The expositions are full wishful thinking and I could not understand how you can confirm that the economy works as you (Lerner, Forstater, and you) explain.

Finally, I believe there is no "real Keynes." There are many Keynes'es interpreted and developed from various point of view. Lerner's theory is one of them.

P.S. Please note that I have posted next question which was answered by nobody and still remains open: Non-equilibrium Monetary theory (in Financial Analysis domain).

Francesco,

I have to be brief.

In the Japan's lost two decades case, I can point out two major observations. First, the household saving ratio decreased from rather high 15 % (not exact figure) to near to 0 % due to the aging of the population. Second, the internal reserves of firms increased much during the first half of the 2000 decade. In these periods Government’s spending policy and BOJ's Quantitative Easing policies were pursued. The result is evident. Firms have only two alternatives: to invest oversea production capacity building or to invest in financial market. The second movement was multiplied by the so-called "Yen carry trade" (an operation to borrow Yen in Japan and invest it in New York or London markets). This is pointed out as one of the causes of Lehman shock and consecutive financial crisis.

It is true that Japan may build up new productive capacities in new industrial fields: medical services, care services, information service industries and so on. But so far, we have few successful new ventures and few new entries from older industries. IN this way we cannot expect that they can train whole economy upwards. In this sense, demand creation is much more urgent and necessary than the capacity building.

Clint,

thank you for precious information. Modern Money Mechanics website seems interesting. I will check it later. As for Steve Keen, I am an ardent reader of his book "Debunking Economics."

Lok Sang,

thank you for your post concerning Japan's trade questions. Your description vis-à-vis Japanese current economic situation is right as a short term palliative treatment. But you should know Yen depreciation policy (if it is a result of any policy) is a begger-thy-neighbour policy and we cannot depend on it for a longer term. More important problem for Japan is to make its economy to grow sustainably (even at a moderate rate), for it suffers from very low growth rate for these 20 years (average 1 % per year). We do not need high growth rate any more but in order to switch from production oriented economy to service and well-being oriented economy it is necessary to attain growth rate perhaps around 3 %. What is necessary is internal demand creation. Those who are pleased with Yen depreciation are forgetting what is more important. They are still dreaming those days when Japan developed by a massive growing export. While export and import are indispensable, trade oriented growth policy is outdated for Japan.

I have read one your papers "The effect of Trade on Wage Inequality: The Hong Kong Case." Have you published it in one of journals? If yes, please let me know the reference.

Your paper is concerned how the wage inequality within a country or an economy moves by the impact of international trade. Have you ever considered why there are tremendous wage differential between countries. This is the question seldom asked in economics but I think it is theoretically more important than wage differential within a country.

One of the reasons which explain the state of art now is Heckscher-Ohlin-Samuelson trade theory (HOS theory). Typical formulation of HOS theory supposes that two trading countries have the same production function. As a result of this assumption, Factor Price Equalization theorem holds (when factor proportions are in a suitable range). This implies that wages of the two nations are equal. It is ridiculous to depend on HOS theory when we want to consider processing trade or triangle trade, for the wage discrepancy between trading nations is the very basis of outsourcing and others. Please look at my paper "A New Construction of Ricardian Trade Theory."　

https://www.jstage.jst.go.jp/article/eier/3/2/3_2_141/_article

Re: The Principle of Effective Demand

Among the many Keynes's insights, the principle of effective demand will be one on the most important discoveries. But there are many questionable points in Keynes's formulation and definition. These must be causes of later-day confusions in attempts to make a coherent theory in the Keynes's framework. First I examine the definition of Keynes himself and later I will give some (possibly new) interpretation of the concept of effective demand.

(1) Keynes's Definition

Keynes defined the effective demand as follows:

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.

General Theory, Chap.3 The Principle of Effective Demand.

A variant of this definition is given as follows:

[The] effective demand is simply the aggregate income (or proceeds) which the entrepreneurs expect to receive, inclusive of the incomes which they will hand on to the other factors of production, from the amount of current employment which they decide to give.

General Theory, Chap.6 The Definition of Income, Saving and Investment

This definition is peculiar. If "effective demand" is defined in this way, we can equally define "effective supply" as the point of intersection of the aggregate demand function and the aggregate supply function. Then, if it is the effective demand which determines the amount of employment, we can also say that it is the effective supply which determines the amount of employment. Keynes's vision on how economy works lies in the essential asymmetry between supply and demand. But, this definition is deprived from its very definition this asymmetry.

The concept of "effective demand" has vanished in the macroeconomics textbooks published in North America. What they discuss in stead is "aggregate demand". If the aggregate demand and the effective demand are the same thing except the latter is only used in equilibrium state, it is better to wipe off this concept by the principle of Occam’s razor. In this sense, I have to say that Keynes failed to define or conceptualize the concept of effective demand.

So, the real question will be how to define the concept of effective demand in such a way to validate the asymmetry between supply and demand. What do you propose or answer to this question?

(2) Employment function

Of course, there are in General Theory many hints from which we can try to start a new construction of the concept of effective demand. The most suggestive chapter is Chapter 20 The Employment Function.

At the beginning of this chapter, Keynes defines employment function as follows:

The employment function only differs from the aggregate supply function in that it is, in effect, its inverse function and is defined in terms of the wage-unit; the object of the employment function being to relate the amount of the effective demand, measured in terms of the wage-unit, directed to a given firm or industry or to industry as a whole with the amount of employment, the supply price of the output of which will compare to that amount of effective demand.

The definition given in Chapter 3 is dependent of the concept of equilibrium (the point of intersection of the aggregate demand function and the aggregate supply function). The concept of effective demand examined in Chapter 20 is different from the concept of Chapter 3 at two points. First, it is defined on any time (equilibrium or not). If we want to be loyal to the Chapter 3 definition, the employment function should be the inverse function which connects (aggregate) demand with the amount of employment. Here Keynes is speaking of an effective demand at an out-of-equilibrium state. Second, the effective demand is something which can be divided or distributed among firms or industries. If something called effective demand can be conceptual, why should we define it only on the specific aggregate state?

Keynes must be confused in his definition of effective demand. This is understandable if we consider that he was trying to formulate his new ideas in the old framework of equilibrium. Because equilibrium with unemployment is impossible, he had to appeal to some odd concept so that he can introduce a new equilibrium concept. For some time, this new formulation was accepted as reasonable, because Keynes's policy message was strong enough that many people were persuaded by their policy awareness and wanted to believe in the new theoretical construction, even if it seemed rather odd. But, of course, when the micro foundation came to be questioned, it was inevitable to abandon this peculiar formulation and abandon the concept of effective demand itself at the same time.

Examination of Chapter 20, however, teaches us that it is possible to reformulate the concept of effective demand. The solution is to define it at the firms’ level. In anytime, whether the economy is in equilibrium or not, a firm receives a flow of demand for their products at the quoted price (quoted by the firm itself, price set by the firm). At any point of time, if we choose a suitable (short) period of time, this amount of flow can be defined as effective demand for the firm. As far as the firm receives (or expects to receive) this flow of demand, the firm are willing to sell its products as much as demand comes. In order to respond in this way, the firm engages to produce as much as demand comes. Then, proportional to the production level, an amount of labor employment becomes necessary, if the production method is fixed for the present. This means that the employment function is defined at the firms’ level (or industry level in some cases). In this aspect of determination of variables, causal relationship is evident. It is the demand expressed for each firm (or for each product of the firm) determines amount of employment. In this sense, the employment function has clear causal meaning. It expresses the firm's behavior. We can sum up these functions for those firms at a given time. Then aggregate employment function is the net some of employment functions for all firms (In the process of aggregation, we should deduce from the effective demand of the firm the amount of demand which goes to other firms as intermediate inputs. If this takes time, the calculation becomes ambiguous).

Demand distributions (or share of demand expressed for each industry or firm) may change according to the consumers' taste, the state of income distribution, investment and others. If the distribution changes the total amount of employment changes accordingly except when all firms have the same labor input coefficient in relation to amount of demand. Therefore, the aggregate amount of demand does not determine the amount of employment exactly. The aggregate demand function is only conceivable as the sum of inverse functions (net of double accounting) of the employment functions.

(3)Effective demand or effectual demand

The adjective "effective" is rather new and one may thinks as an invention of Keynes. But in the tradition of economics, similar concept existed from the time of those classical economists like Smith, Say, Malthus and Ricardo. One cannot clearly distinguish these two concepts: classical economic effectual demand and Keynes's effective demand, except that the original Keynesian definition was conceived as aggregate demand instead of demand expressed for each firm or industry. Keynes wanted to make his principle of effective demand a revolution in economic theory. But his attempt was a failure. We should reflect what induced this.

My diagnosis is this. Keynes wanted to build his theory in the frameworks of equilibrium. Be it Marshallian or Walrassian, it is a barter economy and the money exists just as n+1 commodity. It is impossible to make any asymmetry between supply and demand. Keynes should present a real monetary economics but he couldn't.

How is your understanding? What is your diagnosis for the Keynesian failure?

(4) Say's Law

Say's law is a puppet enemy Keynes (practically) invented if order to explain the novelty of his ideas. What Say wanted to say in his famous "Des Débouchés" chapter simply is (according to my non-biased reading) that economic growth is possible. Say wanted to say that there is no absolute level of demand over which economy cannot exceed. If the supply increases in a good proportion, the demand increases as well. Of course, at the time of Say, it was quite difficult to explain how the proportional growth is possible and realizes. Keynes's favorite expression "supply creates its own demand" (Keynes repeats this expression four times in Chapter 2 The Postulates of the Classical Economics) is rather an invention of James Mill (See for example, S. Hopp, J.-B. Say's 1803 Treatise and the Coordination of Economic Activity, ECONSTOR, 2004, pp.7-8.)

(5) Money Buys Goods but Goods don't Buy Money.

This is an expression which appears in Don Patinkin’s 1956 book. In his once influential paper of 1967, Clower once put it: Money buys goods and goods buy money, but goods do not buy goods. As his title indicates, Clower wanted to reconsider the micro foundation of Keynes's monetary theory. If we compare two expressions, the difference is evident. In Patinkin’s expression, money and goods play an asymmetrical role. Clower reformulates those roles in a symmetrical way. Theoretical implication is very different. Clower wanted to put in an equilibrium/disequilibrium framework. His dual decision hypothesis ended in a failure for he could not make clear the fundamental asymmetry between money and goods.

In a normal market economy (or in a pressure economy in Kornai's terms) it is money which takes the first move. In any face to face buyer and seller market, it is normally the buyer who determines if the transaction takes place. Or more precisely, in a modern market economy the sellers (producers, merchants or shopkeepers of restaurants and coffee shops) quote his/her prices. Sellers are ready to sell if buyers appear and express their desire to buy some amount of commodities or services at the quoted prices. In this face to face negotiation (even between a seller and a buyer representing firms), it is normally the sellers who set prices and the buyers who determines the quantities (to be transacted). Of course there are small numbers of exemptions. Organized security market is one of them. But it is a gross error to think this anonymous organized market is typical of market economy. Walrass wrongly thought in this way. But the organized markets like security markets and vegetable markets are exceptions.

(6) Difficulty lies not in production but in selling.

Classical writers knew this. At the very beginning of the Des Débouchés chapter, Say points out:

Les entrepreneurs des diverses branches d'industrie ont coutume de dire que la difficulté n'est pas de produire, mais de vendre; qu'on produirait toujours assez de marchandises, si l'on pouvait facilement en trouver le débit.

I doubt if the next English translation conveys what the entrepreneurs wanted to say:

It is common to hear adventurers in the different channels of industry assert, that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them.

The entrepreneurs are saying that as far as demand exists, they are ready to produce more and sell at the present price. Standing on the Marshallian or marginalist tradition (or completely competitive market hypothesis), this is impossible.

It is remarkable that Sraffa made a similar remark when he examined the Marshallian framework in his famous 1926 paper on the Laws of Returns.

Business men, who regard themselves as being subject to competitive conditions, would consider absurd the assertion that the limit to their production is to be found in the internal conditions of production in their firm, which do not permit of the production of a greater quantity without an increase in cost. The chief obstacle against which they have to contend when they want gradually to increase their production does not lie in the cost of production which, indeed, generally favours them in that direction-but in the difficulty of selling the larger quantity of goods without reducing the price, or without having to face increased marketing expenses.

Economic Journal 36(144) p.543.

The same thing is put in a different way:

[A] firm which is in a position to produce an increased quantity of goods at a lower cost is also in a position to sell them without difficulty at a constant price, such a firm could encounter no obstacle in a free capital market.

Economic Journal 36(144) p.550.

In this version, the problem is easier to see. When a firm's production obeys law of constant returns or increasing returns, it is not the level of prices which determines the volume of production and sales. It is the amount of effective demand expressed for the product.

Now it is clear why Keynes failed to define his principle of effective demand correctly. If I repeat, the principle of effective demand is not conceivable in the Marshallian framework of supply and demand (supply and demand curves or supply and demand prices).

(7) What is necessary for the reconstruction of the principle of effective demand?

The first thing to do is to escape from habitual modes of thought and expression (Preface to the General Theory). Keynes tried a long struggle to escape, but by adopting the Marshallian framework, he struggled in a wrong way. Don't you think so? If not, please tell me what your opinion is in this connection.

Should not we consider that conditions has changed.

Without a Bancor it is hardly possible for countries to follow Keynesian policies. All the more since the 70ties computers started to dominate the world. From that moment onwards speculation gradually became more rewarding than investments in productivity. This is important since we live in a system in which interest on money and land accumulate wealth. Where up till then this concentration liberated an enormous drive for investments in innovation and growth, gradually it unbalanced the relation between production and purchasing power for demand. Only an enormous growth in credits could counter this effect.

If we talk about Keynesian policies, we better keep in mind that if these lead to new debts inflation might hit back as stagflation at some moment in the future, or the concentration of wealth accelerates.

I expect a lot of IT innovations that allow payment systems in which digital monetary flows will be conditioning to circulate a specific amount of times earning taxes that allow the stimulation to be realised budget neutral.

Mahadeo,

thank you for your comment.

I live in the suburb of Tokyo. Cherry blossoms are now in full bloom. They bloomed two weeks earlier than the normal year. Every year, they bloom. We know that almost everything repeats, but with regards to finance questions it seems we think differently. "This time is different." We are hearing this expression since many centuries ago. Is human kind clever or silly?

Your approach are very close to reality. Economy is driven for profit and gain. And gain comes from differences and national differences have the property of modify commerce conditions. In first term, there are profits in international commerce, and historically you can see this now and in antique times, for example the silk road trade.

Henk,

I sometimes wonder if it is true that financial speculation is really rewarding than real investment.

We know some people who worked with Lehman or other investment banks and gained an enormous bonus of some 100 million US dollars. Many of the employees must have profited in those rosy years before the Lehman shock. After the shock, they were fired but that is all. They can spend an elegant life if they retire from the financial world. I don't speaking of those people.

I want to speak of those people who believed in the rosy story of those finance people and invested their money to a hedge fund, for example. We also know many investors who gained much. Some hedge funds promised their clients a return of more than 50 % per year. It is clear that they have gained much at that time. But, those investors to hedge funds, did they really earn that exorbitant rate in average throughout a bubble and a crash? Queen Elizabeth II invested in financial assets. It is well known that her asset value declined down to 1/3 of the peak value. What was her return in average? It is necessary to calculate throughout the business cycle, for example from the bottom to the next bottom of the cycle.

It may happen that those rich people are only cheated by financial houses.

Do you know a game called Pachinko? It is unique in Japan and you may not know it. It is a small sum gamble. You buy small metal balls with say 100 dollars and ply with those balls. If you are lucky, you may gain 500 dollars in a lapse of 3 hours time, for example. But, of course, this Pachinko game is a good business for Pachinko houses. It is rare to hear that a Pachinko house went bankrupt and now Pachinko game is a giant industry in Japan. It is evident that people who play Pachinko is loosing in average. But Pachinko continues to be very popular and is flourishing than ever.

To explain this phenomenon is simple. Those people who gained advocate that they have gained such and such amounts. When they loose, they keep silent. Of course, Pachinko is a fun. It has its own value. One can say that the people are paying for that fun. But I can add this. The net total sum pored in Pachinko is enormous. In 2007, it was 300 billion dollars.

It is necessary to observe the financial world with a cool eye. It will not sufficient to condemn it. As an economist, I think it will be necessary to explain why financial economy (FIRE if you like) grows faster than the real economy. In the case of Pachinko, psychology may be sufficient. It may not be so, in the case of financial economy.

Ah Yoshinori,

this is the kind of reasoning too few in our profession dare too follow. I like it, specially the example with obvious profitable Pachinnko!

Where you are talking about wondering if individuals are at the winning end, this possibly should make us critical in what seems to be common knowledge.

But in Holland over the last xx years over 25% of the BNP was earned by interest on money and real estates.

The attached picture based on data collected by Helmuth Creutz shows how interest payments reallocate income in Germany.

Presenly tax payers are paying billions because of Dutch and foreign banks that have played a risky game. Tax payers never saw the benefits, but they do pay.

This adds to the argument of concentration of money and when combined with the volumes of money not used to faciliate production, this might create an indication of what this concentrated wealth is doing.

Since money is created as interest demanding debts, every time the quantity of money extends, the demand also grows. If we forget about earth it would be best if the economy could also grow exponentially a bit tempered by inflation?

I think this is not about condemning the financial institutions, nor the "1%". It is about a system that has rules that does neither take into account earth limitations, nor the need to balance production with demand.

Francisco,

you thought that my approach is very close to reality. This is a highest compliment to an economics theory researcher like me. After the Milton Friedman's fake positivist proclamation, economics theory researchers made a custom to be bold of their assumptions being unrealistic enough. This fake positivism is widely accepted and still strongly supported. But we may frankly say that this is only an excuse.

We are living in a society and work and consume in an economy. We have our experience accumulated through out our life. It does not mean that it is easy to understand how our economy works. It needs sometimes highly abstract concept building　and theory analysis. Even though we have our experience and this is a part of the data we should take account of. The flaw of Friedman's arguments lies in the fact that many of the assumptions we make are also a part of our experience. He has no right to neglect assumptions and prefer deducted propositions from them, for most important character of science is to make a logically coherent system.

It is true that modern physics like quantum physics and elementary particle has a set of assumptions which is sometimes difficult to imagine. But this does not mean that the assumptions can be arbitrary. Physicists are always trying to construct more unified theory by which one may explain as wider phenomena as possible. If some of the assumptions become testable by a technology progress or theory development, they should be tested. If the result is negative, physicists start to find new theory which can explain new results and other already known results. They believe that the theory consistency is one of the most powerful methods which enabled the success of modern physics. Physicists say that theory and experiments (or measurements) are the two wheels of physics progress. In this case, theory is to search consistent explanation of various effects.

As we live in a real economy, we have some sense of reality from our direct experience. Sometimes such a sense may be flawed by a superficial observation or by a hasty recapitulation. If so, it should be explained. Friedman and many of his followers made a grave mistake in believing that assumptions can be arbitrary and need not to be testified even when they are testable.

Henk,

it is really amazing that Dutch people earn more than 25％ of their income by interest alone. Creutz'ｓ picture teaches us a lot. I myself am paying much more interest (on my housing loan) than that I earn from my savings.

As for hypertrophic tendency of FIRE sectors, we should still find out the mechanism which necessarily leads to this financial hypertrophy.

Yoshinori. please be aware that most interest you pay is hidden in the prices you pay and the taxes you pay. We have had Erasmus university in Rotterdam research the ones in prices and they came with averages between 30% and 50% of course depending on capital intensiveness.

I think Keynesian policy prescription is no longer viable in the presence of overwhelming sovereign debt. It was practical to use during Keynes time because most country don't have debt that are almost as big as their GDP or sometimes bigger. Thus, expansionary policy may only trigger short-term gains but will eventually lead to bigger problem in the future in the form of higher taxes and fiscal tightening. This has been the case with most country who have burden themselves with so much debt.

I think the biggest problem confronting countries is the debt servicing. A small book by Robert J. Barro entitled Crises of Governments is a good way to start in understanding the future problem facing the world today.

In my opinion in a couple of years from now, what we will be seeing is a Reverse-Keynes. This is now happening in Greece and EU. That is government will try to narrow down their debt burden caused by Keynesian policy. Unless, government can stem its debt burden it is fettered to do anything to the economy.

I am afraid that trying to get the debts of states down threathen the balance between production and demand and is not a sollution, unless reduced trhough inflation, which is obviously the policy.

Further: State debts would not be a problem if the creation of money was done according to the Chigaco proposal.

Dear All,

i can see that after very abstract discussion, we (Akram, Henk etc) are now coming back to the reality of nowaday fiscal policy. I come back to my point not any fiscal policy is useful, when possible, because of excessive public debt. We need a redistribution of incomes to people with lower incomes, to increase infrastructures, to capacity building in new emerging cost- and energy-saving sectors. This can be financed only through a sound spending review, able to cut all the waste of public money, which reduces disposable income and, therefore, consumption. In other words, we need a fiscal policy that is not increasing public debt, if we want to stimulate economic growth.

Yoshinori,

I come to study the value law on classics economic. Value is showed in two forms, one objective in some theories represented as labor value and a subjective view explained as "subjective value theories". Classic economy explains many economic facts with the labor value, but left out behavior of supply-demand curves. Subjective theories begin in plain air and have not initial values for their deep explanations.

Is it possible to formulate an economic theory like physic results that unify mater and energy, or accept wave particle dual reality?

Looking for an aproach to economics that represents the very complex question of commodities. One view that is different between century XVIII and XIX economic science and XX's Science is reference system making part of system referenced, like relativity theory and Heissenberg principle.

Economics can advance in understanding reality if accept this fact. Friedman, Smith, Ricardo, and many don't see the question of who quantify value of commodities.

Each people, each region, each productive segment, each profession has a reference system to determine how much value a commodities is.

Differences in reference systems augment when there are changes in culture, language, specific technology, technologic level and several others factors.

In first term to understand economics this difference must be accounted.

When a commodity is traded, each participant in transaction has a reference system to evaluate if the operation produces plus value or minus value for him in his reference system.

This reference system has character subjective.

Pachinko case is straight forward explainable by this subjective reference system in terms of each participator. At a side who promotes game obtains direct money benefits and in other each player have his particular benefit on game.

In financial case, big differences in reference systems in several countries, create a big plus value to be earned. This difference in the referral system between countries creates a huge capital gain. This gives rise to capital gain financial accumulations, originally in Italy with the Medici and Krugger, and then goes to the English aristocracy that appropriates higher relative amounts of profit.

In this case the financial class has its largest members linked to British colonial state.

Once formed this mass of financial capital, began to gravitate on society and by affinity is set in the housing market.

Dear Akram, Henk, Francesco,

thank you for your comments. You all question the economic policy to be taken now. It is important and may be only one use value of economic science except that economics itself is an intellectual pleasure and means a position which assures our employment for many of economists.

So, we may open a new question box in which we discuss policy question in detail. But it may be difficult to come to a conclusion with a firm consensus, for economic situation is very different from country to country and from time to time. There is no permanent and invariable economic policy which is good for all countries and for all times. If we don't clarify the details of the present situation of each country, we may disagree with our policies even if we have the same theoretical understanding.

The second problem is what you mean by names like "Keynesian policy." Is this equivalent to a government spending policy? Keynes talked much about interest rates. He was deeply concerned with exchange rate and international monetary system in general. Akram says that "Keynesian policy prescription is no longer viable." He also pointed out that "we will be seeing is a Reverse-Keynes" in a couple of ears or so. Yes, it seems from Japan, the austerity policy is a prevailing trend in EU countries. But, does it mean that Keynes's insight on how market economy works or does not work is useless?

When we think of a policy, we are thinking according to some kind of economic theory. Without it, we cannot even think of an economy, especially the macro economy of a country. But, the theory you rely upon, is it really reliable? For example, take the case of the neoclassical economic theory. It is the most influential theory in the present world. To be more precise, take the standard general equilibrium theory, i.e. Arrow and Debreu competitive equilibrium theory. Mainstream macro economic theory like the Dynamic Stochastic General Equilibrium theory (DSGE) totally depends on this micro theory, for it concentrate on the different time equilibrium problem assuming that every coordination difficulties in the given point of time are solved by the Arrow-Debreu type micro economics. DSGE people talk about exogenous shocks but they think all these shocks will be absorbed within a lapse of times and economy develops when there is sufficient supply of labor and capital. They believe that an automatic adjusting mechanism works at any time at any place and there is no need to worry about a situation where we are locked in a structural entanglement. What Keynes wanted to make clear were situations that an economy cannot escape from this or that entanglement without interventions of the Government.

I don't think Government is all mighty. Their capacity to change the economy is limited but I want to stress that the vision like automatic adjusting market is totally flawed. The fact that all of us are concerned in policy questions proves that we do not believe in this vision.

Any economic policy of the Government presupposes some kind of dysfunctions of the market. Then, what is necessary to reconstruct is how the market economy works and when it does not function as we expect. This is the very theoretical question and sometimes one which should be settled prior to the policy questions.

Do you know an expression "barbershop policy talk." In Japan, this is a very popular expression (In Japanese, we say "Tokoya Seidan"). Many people talk about this and that policies. Everybody can talk and criticize them, without any deep knowledge, without any profound thought. What is the minimum criterion which prevents our discussion to fall down to a barbershop policy talk? We should develop a suitable theory. We should think and talk based on that theory. Policy without theory is something like an old time econometrics. The latter was blamed as measurement without theory. I hope our policy talk don't degrade to policy without theory.

Francisco,

your problem setting is very important. Economy contains subjective part. It is necessary to include this subjective part in the theory. But, how to do this is quite difficult and even problematic.

You came to study classical value theory. It distinguishes use value and exchange value. Any commodity should have use value (or it must be evaluated as valuable). Use value depends both on objective and subjective factors. Is it possible to clarify all of these complex factors? Is it necessary to do that? Classical economists, Ricardo in particular, thought this is impossible and unnecessary. What determines exchange value of industrial commodities is the cost of production. In this typical case, or strong case in his expression, we do not need to know how people evaluate this ant that product. Subjective factor intervenes but not in the price. It determines how much the product is sold at the price determined.

It is necessary to remind that at the time of classical economics, there were no notion like price adjustment and quantity adjustment. All classical economists talked with the ups and downs of prices. This is one of reasons that classical arguments, including Ricardo, are frequently confusing. If we use more modern terminology, Ricardo wanted to say that producers (and sellers in general) determines the price of their commodity and it is the consumers (or buyers in general) who determine the quantity exchanged (against money). You posed the question "who quantify value of commodities." If Ricardo was questioned this now, he would have answered that it is producers (and wholesalers) which set prices.

To understand this crucial question, it is necessary not to fall in the Marshallian trap, that is, supply and demand curves thinking. Ricardo rejected the supply and demand proportion theory, which was popular among many protagonists of the political economy of his days. In this sense, there is no classical school but many of them. What I am referring to as classical economics is Ricardo and his modern interpreter Sraffa and no others. You yourself fall in the Marshallian trap, for you are complaining that classical economics left out explaining demand and supply curves.

Concepts of demand and supply curves developed since the beginning of neoclassical economics (or at the time of the marginalist revolution). Ricardo did not think in these terms but these concepts were implicitly supposed in the classical supply and demand theory of value. This is what Ricardo wanted to demonstrate it to be a wrong idea.

In the tradition of Ricardo and Sraffa, there is no demand curve nor supply curve. We should look into how the transactions take place in a situation where a seller and a buyer negotiate face to face. Many varieties are possible, but real price negotiation requires a lot of times for both parties. The more efficient market economy becomes, the more this becomes burden for both of them. Then, more efficient transaction system develops. The sellers set prices and buyers decide if and how much they buy. This system is not only efficient but also fair, because the sellers offer the same price for all people who want to buy.

This custom, i.e. the price setting is widely practiced by most of contemporary shop keepers. But this is not a recent custom. In Japan, this custom goes back to 1673, when Mitusi Takatoshi, the founder of Mitsui Konzern, opened his cloth shop in Edo (present Tokyo). His renovation and the reason of his success was what he named "right price without no inflation". He attached a price tag to all commodities and sold them at what quantity customers want at the price written in the price tag.

Now, this is widely practiced custom in the face-to-face transaction. But as the history of economics teach us, this simple recognition was the most difficult one and demand and supply curve thinking prevailed not only among neoclassical economists but also among many of classical economists (and those who are frustrated to the present day economics). One of reasons why demand and supply curve thinking so widely spread is the economists' custom to imagine that a market economy is something similar to security market (Walras for example) or other well organized commodity markets. But these are exceptional cases. Major part of industrial products (except for cotton flours, strings and clothes) is traded by predetermined prices. Producers adjust their production volume according to how much the sales goes.

You mentioned the deep cleavage between classical and neoclassical economics. The trouble with economics is that the newer theory is not necessarily more correct than the older theory.

Dear Yoshinori,

let me please disagree with you. As I can see it, our point is not without theory. Not at all. And it is not at all country-specific. It is general. Mine are not barbershop policy talk. It's just bringing the discussion to nowadays economic theory. In fact, my points are already quite old, I would say at a first year graduate master course level.

Of course, keynesian policy is justified on the ground of market failure and capitalist economies always reach an underemployment equilibrium. For me, this is undergratuate first year macroeconomics. A more advanced theoretical question is: at which conditions is a keynesian policy effective? My point is that Keynes did not address this point in a theoretically convincing way. I mean fiscal policy, but the same applies to monetary policy. To be consistent with Keynesian theory, any policy intervention will be effective only if: a) it is able to increase aggregate demand; b) aggregate supply reacts to an increase in aggregate demand. Keynes did not consider this problem and assumed that these conditions are always met. Unfortunately, this was a mistake. We could say that Keynes did not consider what could be called a state failure: these conditions are not always met, which makes (fiscal and monetary) policy fail. My point is exquisitely theoretical, as you can see.

Francesco,

disagreement is welcome. This must be the very beginning of our serious discussion. Would you please explain the core essence of your first year graduate master course? In particular, why a fiscal policy does not work at all when it is increasing public debt work?

Subjective value is unnecessary and even problematic only when you have different values for same commodity. This is a reality, more palpable in international commerce, for which exist two or more values for same commodities.

This has his origin in technology and innovation. When one people in China did think in to use silk worm to obtain thread for weave, he did create the one thousand years more big commerce and wars for commerce to move world.

Historically, silk has a value different in each place where merchant arrive, each value depends on local production cost of same commodities, on local production cost of local near like commoditie or, in total unknown of silk technology, quantity that one person can to pay for it.

Local production cost in Edo in XVII century, was very different of valuation of Japan products in Europe for Holland merchants.

First thing is understand production cost is a local concept, Adam Smith noted than city products are selled in agricultural regions at very high prices than in his production origin.

Century XVII science is a coherent set, and is very difficult to accept new ideas. Science phisic was driven for very exact experiments and with great effort give jump to relativity. Economie is yet in XVIII siecle science.

While local production cost has a relation in labor duration with commodities production, this has moral connotations. You can to relation sweat with bread, but in extended commercial transactions there is too much bread to be gained without sweat.

Problematic character of subjective value depending on reference system associated to, is understandable if free-effort character of differences in prices caused for different reference systems are considered. When differences in prices have no dependency on production cost, a depredative behavior appears that is in no form correspondent with economic assumptions. This depredative behavior is associated with alcabalas, taxes and carries us to an field that is politic and, in principle, many economists hate.

Marshall criticize Ricardo in these terms

" the growing belief that harm was done by Ricardo's habit of laying disproportionate stress on the side of cost of production, when analysing the causes that determine exchange value."

This only recognizes that a problem exist, but not yet Marshall see the different evaluation between buyer and seller of commoditie value. But Marshall and Ricardo an everyone till XIX siecle is traped in objective analisis of economy like Newton objective current paradigm.

In economic sense, production cost function determines supply curve, and in a local market production cost determines also demand (do not forget that demand is also commodities in same market). Local production cost determines reference system to assign value and prices to commodities and in a “local market” and local reference system is the only instrument to evaluate demand curve.

Local production cost curve is depending on algorithmic structure of technology applied and prime matter used. This is not a simple algebraic curve but a sequence of results in an algorithmic approach. This isn’t linear.

Demand-supply curve depending on different reference systems associated to determinate value, have not work or process work associated and can be represented by linear or simple curve representations. Like is good for Milton Freedman.

If supply curve exist this is drived for conditions of production, one good approach to this is presented for Charles Babbage (On Machinery and Industry 1830). This is related to production structure. Now, when a distance, in an ample sense, between producer and consumer exist, is possible to suppose demand and supply curves not determined for production costs or determined for how much you can you pay for it. Or anything that passes for consumer mind. This generates supply-demand thinking.

Most important than face to face transactions is knowing of production cost of commodity.

Relating to macroeconomic and Keynesian theory, when commodities are traded under different reference system of values, a plus value that not exist in buyer region reference system nor in seller region reference system appear as a gain, in money. This money is suppressed in one side and causes some commodities left unsold. In other side, exist as a money surplus, and give grow to finance system. This is the origin of financial bubbles and too many extraneous things what happen today in day.

Francesco,

Sorry. The last sentence of my previous post should be read as follows: In particular, why a fiscal policy does not work at all when it is increasing public debt ?

Francisco,

thank for your long comments.

It seems you are still in the Marshallian gravitation field. You are still thinking in the frame work of demand curve and supply curve as functions of prices. But, for most of industrial products, exchange value (relative prices) is determined by cost-plus principle. Prices are set before the exchange. Buyers, be they consumers or industrial users, should accept (in principle) the price set by the producer. There are of course several methods to cope with this situation. There may be negotiations. Most powerful method is to switch to other suppliers. But in this case also, the buyers are obliged to accept one of offers of the producers. In a most simple formula, the producers set prices, the users determine quantities. Your reference system works when you decide how much to buy.

I am not saying that asset prices are determined in this way. In short (for the typical situation), assets do not have their production cost. Most of them are non producible. They have no (or very week) objective criterion and that is why asset prices are so volatile and booms and bursts put economy in a deep confusion.

As for supply curve, you wrote: "production cost function determines supply curve". In another place, you also write: "Local production cost curve is depending on algorithmic structure of technology. ... This isn’t linear."

Have you ever measured the costs of a product as a function of production volume? I have searched broad literature, but reports based on the actual measurements are very rare. One exception is the work of Joel Dean in 1940's. He reports that cost curve is linear. A second approximation by a second order polynomial did not improve the fitness, he added. You may know Joel Dean. He is the founder of managerial economics, but his earliest work was cost measuring and this work is much important than his later contributions to economics.

By a theoretical examination, Sraffa in 1925 and 1926 demonstrated that the Marshallian pure competition framework is not tenable. Joan Robinson and Chamberlain developed a theory of incomplete or monopolistic competition, but it did not survived, in my opinion, the survey results of Oxford Economic Research Group inquiry (1930's). It is astonishing that all these facts are revealed before 1950's.

You cited Marshall defending his position: "the growing belief that harm was done by Ricardo's habit of laying disproportionate stress on the side of cost of production, when analyzing the causes that determine exchange value." It only reveals that Marshall as well as his contemporaries was thinking in the Marshallian cross diagram, the very core of all General Equilibrium model.

Dear Yoshi,

You are right the government capacity to prop up the economy is limited only. In the end of the day it is the private sector that matters most in what happen to the economy.

Today's buzz word, like Reaganomics, is Abenomics, which is consists of monetary policy, fiscal policy, and economic growth strategies to encourage private investment.

Will it work? Is anybody's guess.

Yoshinori,

I was just saying that a simple demonstration of the fact that keynesian policies alone do not work is that the economy of many EU countries, but also elsewhere, are losing in terms of GDP - not to mention employment - despite a dramatic increase in public deficit and debt. This brings me to the question: Does keynesian policy work tout court? This is the title of this discussion, by the way. I was trying to introduce an answer to the main point of the discussion saying: It does not make sense at all to speak of Keynesian policy in general. We shoud rather discuss the conditions for keynesian policy to be effective. My argument is: if keynesian policy does not come with a redistribution of incomes and does not increaese the production capacity is bound to be ineffective, no matter how big is the deficit or the increase in money supply ... I hope I have made my self clear this time.

Francesco,

"Does Keynesian policy work tout court? This is the title of this discussion, by the way."

When you wrote this, you are already mistaken. From the very start of my question, I foresaw that policy discussion alone does not help economics to develop further. Rather, it is the cause of confusions. That was why I wrote in the question box "putting the relevance or irrelevance of "Keynesian policy" aside".

Even when I said "I wonder if it is sufficient to return to General Theory or Treatises on Money" I did not mention any policy. General Theory and Treatises on Money include some part of policy discussion, but its main core is theoretical. Keynes tried to persuade people by his theories. In my understanding, however, he failed to this challenge, and with reason. Keynes did a long struggle to escape from old framework of thinking but he failed. The main reason lies in the fact that Keynes adopted as his framework Marshallian theory. He tried to deny some parts of it, for example, by the refutation of the Say's Law. But, he tried to put a new wine in an old skin. His theory became full of internal contradictions. Theoretically, this was the most important reason why Keynesian counter-revolution took place after 1970's. After more than 30 years of the micro foundation research program, it became clear for many people that New Keynesian and New Classical macro economics contained serious error and flaw and were far from reality that we cannot rely on the analysis based on these theories.

You have written that "Keynesian policy is justified on the ground of market failure and capitalist economies always reach an under-employment equilibrium". And you have added this: For me, this is undergraduate first year macroeconomics. What do you mean by the expression "market failure"? Why do capitalist economies reach “an under-employment equilibrium" and continue to stay in that state?

A more advanced theoretical question, after you, is: at which conditions is a Keynesian policy effective? You are right. But, how do you make clear those conditions without a theory? It seems your first year graduate course is no different from those confused New Keynesian economics.

Yoshi,

I have read again the question at the beginning. I see that you mentioned that the question on returning to Keynes should in your view be isolated from that on returning to his economic policy. This is hard, thouhg.

My point here regards the evolution of economic ideas itself! Economic ideas evolve, I believe, always to solve real economic problem or from failure of past policies. New economic theories do not come out of the blue, they are always an attempt to: a) reconcile the theory with new facts and empirical evidence; b) to elaborate a new policy solution to new economic and social problems. I think I am beeing Schumpeterian here.

I do not see any evolution in economic theory if not as an attempt to overcome the failure of previous theories or previous policy solutions. I don't think that economics is like natural sciences, but there is an "evolution of economic ideas", from rough to clearer, from the bad to the good ones, that should never be forgotten. Of course, new theories should be built on old ones.

Yes, it's true, Keynes made a mistake, because he thought that the good theory was the Marshallian theory of partial equilibrium, but this was apparently a mistake, since in that theory of perfect competition prices are always flexible, which is in disagreement with the assumptio of price rigidity which is behind his theory of underemployment equilibria (isn't it an outstending demonstration of a macroeconomic market failure?). Price rigidity is, in turn, essential to prove that market failure is a rule, not an exception. Going back to keynes requires solving this inconsistency. There are several contributions now that go in this direction. One that I like is Karlin and Soskice, who also link keynesian theories with nowadays economic policy and institutions.

Going back to Keynes means, therefore, also asking how a re-formulated Keynesian theory is able to address current economic policy issues to get out of the crisis. And here we come back to the points I have raised previously. In my view, Keynesian theory and policy was not, in its core, wrong. Just the opposite: I find it to be the best suited theoretical framework to understand the real world and the current crisis specifically, but we should give up some of the prejudices that Keynesian theorists have maintained over and over. In my previous interventions, I have tried to summarise in short the points that should be addressed to make Keynesian theory (and policy) be born again to a new life!

I find it rather confusing to understand what one says. The original question is that whether a totally different (promising) research is required for getting back to Keynes. Anybody disputes that! If not what kind of research you have in your mind. If you look at the physics we are very near to find our Higgs Bosons. We are going to the core. We even try to find out grand unification theory in Physics. A totally new concept is evolved. Look at the Accounting field there is a sea change because of globalization. We are getting back to concept of harmonization there. Taking a cue from this method can we not evolve or synthesize theories that helps us to understand Keynes in contemporary way. We should make a try.

In my opinion, the field where Keynes need to be re-researched is that of the regional sub-currencies that these days easily can be created. These sub-currencies could come into existence if for example the government of Spain, spends through its own digital payment channel providing all its payments with a bonus, however in a virtual payment system that only knows the facility to make costless payments to others in that system and where withdrawing money to a normal account, connected to cashing opportunities will be targeted with a 'cash-out fee'. Such a system can set rules such as that the cash-out fee initially is high, however reduces the more the money is being used, or the more time has passed. It also can introduce a negative interest to prevent hoarding and boost the economy.

This allows the governments to affect the circulation and with that the tax income, enabling to make economic impulses that have a guaranteed pay back. This opportunity that presently is researched in some Euro countries by regional governments will reopen the options for anti cyclical spending and will make anyway that part of Keynes' heritage very actual.

Francesco,

I agree with you that ideas evolve. As a part of ideas, economics and economic policies also evolve. The point is how they evolve and what will be the best way for us to obtain better theory and policy. As you say, theories and policies interact with each other. A policy failure, if it is conceived as deep and serious, gives a strong impact on theories. A theory framework change gives new orientation to policy making. You are right in insisting the importance of policies and the feedbacks we get from the observations over policy experiments. But you should remind one thing. An economic system is highly complex and it is often very difficult, if not impossible, to determine what was the main reason of the failure. To analyze these causations and implications is mainly the domain of theories.

At present, after Lehman shock, many people talk about evident failure of deregulations of financial market. "Keynesian policy" (understood as spending policy) came to be welcomed by many of politicians and commentators but was accepted as a kind of emergency evacuation measure. No real rehabilitation is made yet. A real synthesis of experience and theory should be made. Therefore, a discussion between theory people and policy people is useful, provided that we have a clear understanding that any examination of a policy requires a theory. There is no theory free policy examination.

In the case of present Keynesian revival, many scholars simply return to Keynes, whether it is real Keynes, true Keynes, or original Keynes. We have enough of them, but as far as we stay loyal to Keynes himself, we cannot go further. I doubt if these "Returns to Keynes" tendencies really help to rescue economics from the 3rd crisis of economics.

In my opinion, a very deep theory reconstruction is required. As Debasis put it, it requires a totally different research program. That is why I adhere to theory. It is the time to doubt all of our common sense and investigate how to restart again.

Debasis,

thank you for your comment. You understand my question and my interest very well. I feel I have to continue examining Keynes at more specific points. I stopped these examinations after writing two posts: (1) Re: GDP and other Aggregate Concepts and (2) Re: The Principle of Effective Demand. But, of course, there are many points to be examined and discussed. Please wait a few days. I will try to continue these examinations. The next topic will be the price theory.

Henk,

there are many people who are interested in regional currencies in Japan. Please take contact with Makoto Nishibe of Hokkaido University (see his homepage for example). If necessary, I can give you his e-mail address.

Regional currency may help to keep regional demand to remain inside of a region. But it is not almighty. A deep re-examination of economic theory is also necessary.

Dear Yoshinori,

I appreciate your comments.

I would welcome if you would introduce me with mr Nishibe.

Please be aware that what we are doing is quite different from other regional currencies, since we basically use a payment system through which one can lead flow of normal purchasing power, however during the time that flow passes through that payment system different rules apply. For example the software has the functionality to introduce a negative interest rate or force a specific multiplier on it.

Indeed monetary theory will need to be re-examined now that technology offers the opportunity to track down money by it's sources, manipulate the multiplier effect, changes the rules regarding interest tec.

all the best

henk

Henk and Yosh, I also want to contribute. My area is financial market, particularly stock market. I am fascinated by the idea of manipulation of multiplier effect - why not test it in stock market movements. Indian market is particularly of interest.

dear Debasis,

I know how our payment software can steer spending decisions under market conditions to affect the quantity of times it is being used in a region, but I have no idea at all how you intend to combine it with the stockmarket. What we are prepaing for Europe now is a way to create part of the guarantee of credit using this technology, because if we install conditions that make the money go around a certain time(s) we can collect a small contribution to allow the credit. The government could add part of the gaurantee based on additional tax income. In that way the credit becomes a kind of economic impulse made available by the market and government as along as there are unused potentials to activate.

But I can not connect our line of work to the stockmarket. Please tell me your idea!

all the best

henk

Dear Henk

Your idea, in your words, involves spending decisions under market conditions and also guarantee of credit with government inducement which becomes economic impulse that would activate unused potentials. In fact, I am not clear or sure on your thoughts. Suppose in a distress economy (country A) there is a chance of banks failing and the investment becomes non-productive. As a logical consequence an investor would transfer the money (legally or illegally) from A to a healthy economy. The rate of return which was earlier earned in that distressed economy (A) would be far less than what would be earned now. When A tends to recover, because of return differences, a part of the money may fly back to economy in A and possibly not in spending but in investment, i.e. in stock market (say) of A. Under such conditions, if a conducive system exists, the money is likely to boost the capital market. The government can earn tax from return on investment on this money and tap these sources for boosting the economy. However, I am not sure how I can relate it to Keynes.

dear Debasis,

From a point of view of a distressed country it can be beneficial for both businesses and market if a credit creates new purchasing power. In situations like Greece or Spain with so much spare capacity, the spare capacity that is activated because of this credit can be charged to contribute to its risk and still be profitable, while contributing to over a 100% backing/guarantee. This will bring back unused capacity into the economy.

Be aware that if there is too few spare capacity that can be provoked by these kind of supplier chain based guarantee programs, suppliers will prefer not to do business within a payment system that burdens them with colleting the amount needed for guarantee. So it only works when 'Keynesian spending" would be appropriate. It is a kind of market alterative for it.

Clearly as a result those parts of the stock markets that mirror real value of businesses will restore values, because overall the economy grows. Where that leads to additional investments (as opposed from changes in ownership of speculative positions) both developments indeed reinforce each other.

all the best

henk

Certainly an adjustment is require after misalignment of prices produce by the over-leveraging process based on the use of a strong currency as euro in a smaller economy like Spain or Greece; which by the way neither one which has the economic capacity to produce enough wealth to fulfill such compromises.

But the problem here is deeper, because we have the increasing phenomena of financial crisis, promote by the stagnation on the productive side of the economy and the every time more dynamic financial side.

So today we can see a bulk of debt like wealth and increasing prices as a accumulation process; but the market can't go up forever so when money stops to flow prices should go down, and the truth about the financial market is reveal, the most of the money invested on thus assets looks for for a capital gain, it is not invested on any productive project, which increase wealth but in a paper which prices is just an idea.

In addition to all this significant issues every open economy face the risk of a speculative run and economies inside of a monetary union have no capability to use monetary policy.

Dear Henk

Think of a developing / distressed country (A) where inflation is high but where flow of capital is restricted outward with respect to a developed country (healthy economy B) with liberal flow of capital. The money flows from A to B (legally or illegally) as a consequence of safe heaven. Now because of opportunity to make additional return (due to high inflationary factor) a part of money flows back to A invested in good investment opportunities, like real estate. Taking into account of depreciation of value of currency A, it still is profitable to invest in A. Under such conditions spare capacity does not come into play. Moreover, the money earned thus would be largely put into speculative activities like in stock market and real estates (say). In A, the price movement would be highly skewed rather than a fair price prevailing in B. The circle completes when money would again go back to B from A. Swiss Banks are examples. Greece and Spain are different cases. The risk of lending was not evaluated properly, like what happened in US during sub-prime crisis. Why an investor would now invest in Greece, when money could generate safe returns elsewhere. Accordingly, the question would now become can Keynesian theory explain the phenomenon, if not can we bring out an underlying concept to it, particularly, tying up economic development of the economy A.

I propose the return to Marx. According to Marx’s theory, scenarios of post crisis development include, among other things, the implementation of the following measures:

- the nationalization of major banks in order to reinforce guarantee of deposits

- the gradual compensation value of shareholder’s stocks of bank in proportion to the crisis (responsibility for unsuccessful financial transaction should be born by those who made them and not the state) through coercively union banks in several large structures

- the social and state control of medium and small banks.

Re: Conflict between micro and macro

In the time of Keynes, there was not a macroeconomics, for he is one of founders of macroeconomics. Since then, macroeconomics developed very much and it is taught as a standard course for economics students. Now there are many strands in macroeconomics but I confine myself to Keynes's and Keynesian macroeconomics. It is the understanding of almost all macro economists that what Keynes intended to say can be well formulated by macroeconomics. (Once again, I don't want to enter into concrete formulations. There is no consensus at all.)

At first two decades　after the appearance of General Theory, macro economists were busy constructing macro economics itself. After three decades, people started to wonder on the logical relations between microeconomics and macroeconomics. For many economists, including economics students, contradictory relationships between the two were evident. Therefore, the so-called "micro-foundation of macroeconomics problem" (or research program) gave birth. The first attempts were to conciliate standard Keynesian macroeconomics and standard microeconomics. However, reconciliation between the two economics was not an easy work. In short, the two were contradictory. The logical consequence of this recognition leads researchers to try to modify one of two economics.

Two trends were visible. One is to try to change macroeconomics. For example, Leijonhufvud (1968) claimed that standard interpretations (Keynesian economics) were mistaken and it was necessary to return to true Keynes's economics. The other trend was to think that conflict between the two economics was superficial and it was possible to give a good micro-foundation using a good formulation. Although two trends were pursued, the second trend was stronger than the first. I don't enter into the historical details of this research program. Summing compactly, this research program (including two trends) was a total failure. It was not a simple failure. The impossibility to give a plausible resolution to the micro-macro contradiction lead to a new economic thinking: abandon the Keynes's economics. One conspicuous example was rational expectation hypothesis. It led to the new classical macroeconomics.

It is true that the new classical macroeconomics became popular among economists, strongly supported by the arrival of libertarian (or neoconservative) political thought. But, many of economists were not political thinkers. We have to admit that the failure of the micro-foundation research program was one of the major causes of the defeat of Keynesian theory in theoretical economics. (I have to say that I am not talking about policy. I am mainly concerned with pure theory.)

After the arrival of rational expectation (RATEX) and real business cycle (RBC) theories, efforts to give a micro-foundation to Keynes's or Keynesian macroeconomics continued, but no big success was obtained. The slogan like Return to Keynes was revitalized not by a theoretical development in the Keynesian strand, but by an exogenous economic failure called Lehman shock.

Now I think it is clear that we have to abandon the hitherto tried micro-foundation program to a new program. It is time to change the micro-economics itself. Without a radical change of micro-economics, it is impossible in my opinion, to reconstruct Keynes's ideas.

Very good !

Do you believe in the number of downloads of publications?

I really don't know.

I guess it is correct

How can any economist know what is the best way to proceed without studying the historical cycles of booms and busts? Economics at the moment is ahistorical and uses static models that are an aproximation to reality. The work that Hyman Minsky started with the Financial Instability Hypothesis and which has been progressed by the Modern MoneyTheorists like Randall Wray and the Monetary Circuit Theorists like Steve Keen is a good place to begin, to construct a new theory. Minsky was a true Keynesian, who understood fully the significance of Keynes work with the General Theory. Keynes 2 Treatises on Money were ideas never fully developed untill the General Theory was finished. For me Minsky is the man to start looking at seriously!

Wayne,

thank your for your precious information. I am studying monetary theories, including that of Minsky, the Modern Monetary theory and Money Circulation Theory. I also made two question boxes on monetary theories: Money circulation in a scale-free network (1) and (2). My first question in ResearchGate was on Non-equilibrium Monetary theory. It remained unanswered until now. Your information must have given me an orientation, if it was given a few weeks ago.

I still feel we have some problems with monetary theories. One of them is that there is no clear distinction between real economy and monetary or financial economies in many of monetary theories. For example, Minsky does not distinguish the two. Or in another expression, he is only considering monetary economy and observed very little about what is happening in the real economy at the same time.

This vagueness may go up to Keynes himself. Keynes himself intended to build "a monetary theory of production". What he has succeeded to write down was practically a monetary theory without productions. For example, his concept of "investment" is ambiguous. In many places, it is a financial investment. I wonder if he has ever considered capacity building of a producing company.

My opinion is that two kind of economic theories are required: Real economics and FIRE economics. (FIRE means here Financing, Insurance and Real Estates.) How do you think on it?

I argue that Classical Economics was itself always misunderstood, and that Adam Smith was not an adherent of a totally free market. Smith favored caps on the interest rate, tariffs to protect local industry, and publicly-funded institutions. Advocates for a completely regulation-free free market misinterpreted Smith to claim a theory of Classical Economics that one of the allegedly original Classic Economists would have never supported.

Logically lack of regulation leads to problems as does excessive regulation. Those who adopt either side will inevitably be wrong as both are wrong extremes. Socialism and Anarchic Capitalism are both evil sides of the same coin and the proper balance is a government with some regulation, minimal regulation, to prevent abuse, but only enough to keep those in the private sector from harming small business, consumers, and the economy itself.

Caps on the interest rate are needed to stop extortion (which if used would have prevented the downfall of America's housing industry). Restrictions on international trade with countries whose minimum wages are too low are needed to protect democratic economies and working conditions worldwide, as otherwise trade will flow to communist countries like China who allow the mistreatment of workers through low minimum wages.

Nonetheless, some regulations in America have become too bureaucratic and excessive, and our tax code needs simplification. For example, requiring a company list the depreciated value of all equipment is a regulation nightmare that should never have occurred. We would be well served to simply rewrite the tax code with its complexity and toss out almost everything including many tax breaks, and simply ask enough of business to know what their earnings are and how many American workers they are hiring (for purposes of giving tax breaks to those who hire more in proportion to company earnings). That would not only allow business to prosper through reduced regulation but eliminate many loopholes that exist.

At any rate, the bottom line is that there are two separate extremes and BOTH are causing problems. America is actually experiencing difficulties caused by lack of appropriate market regulations and an excess of inappropriate regulations, to put it bluntly. Any economic style must not criticize one while idolizing the other.

Joshua,

I agree with you that Classical Economics is misunderstood as you have written.

Classical economists were often misinterpreted. In the policy dimensions, Smith was misinterpreted as a proponent of absolute free trade just as you have written. Misinterpretation occurs in theory dimensions too.

For example, Ricardo's famous "four magic numbers" (in the "On International Trade" chapter of his "Principles") are interpreted as the labor input coefficients for to produce units of cloth and wine which were arbitrary selected, say a yard and barrel for example. Standing on this interpretation, Chipman (in "A Survey of the Theory of International Trade: Part 1, The Classical Theory,” Econometrica, Vol. 33, p. 479) judged Ricardo' proof saying “This is a non sequitur."

In reality, Ricardo had chosen two units so that 1 unit of cloth is exchanged against 1 unit of wine. Maneschi called this Ruffin's "new interpretation." However, this correct interpretation was known in Japan since 1974. Late Professor Yukizawa showed it based on a detailed text analysis. I added a short note on this history in my 2011 paper with Fujimoto (Evolutionary and Institutional Economics Review 8(1): p.29, note 23. ).

Another point we should distinguish in interpreting Classical Economics is that a theory does not necessary imply policy of a specific orientation. It depends first of all on the situation the policy is applied. It is necessary to separate the range of policies implied by a theory and what an economist recommended as a good policy.

For example, Ricardo was for the free trade. But it does not mean that Ricardian trade theory necessarily implies free trade. I have shown that unemployment can occur when trade is suddenly liberalized (by removal of restrictions or by cutting down tariffs). For this point, please see my paper of 2007 (A New Construction of Ricardian Trade Theory, Evolutionary and Institutional Economics Review 3(2): 141-187, §4.)

Hi Yoshi,

My understanding of of Keen is that he sees a direct link bewtween debt, money and banks with the real economy and was one of the few economists who predicted the Global Financial crisis. Minsky also saw the links and began to incorporate these factors into his thinking. Wray was taught by Minsky and he believes Minsky took the monetary side of Keynes theory a step further to explain what was happening in the 80's and early 90s and what governments needed to do. I am just beginning to grasp some of the theoretical elements from Minsky , Wray and Keen. As yet I haven't got my head fully around their body of work. I also thinjk there are some valuable lessons to learn from Classical Economics, but I am sceptical about any form of equilibrium theorising. I will definitely read your paper on Ricardo Thank you

Wayne

Yes, I agree and in my 2004 book, Sustainability, Hominid Ecology and the Collapse of Complex Societies; Economic Anthropology and the 21st Century, Mellen Press, 2004, I use Adam Smith to show how his positions have been distorted by Free Market ideologues, but also how useful his critique of capitalism is today.

Return to Marx

Marxist theory of crisis

From the Marxist theory point of view, the capital in the fields of material production that could not be effectively used “flooded“ into the areas which material goods and resources for the development of human traits are not created: the financial speculation and numerous forms of intermediary activity; “the entertainment industry“; the sphere of, bureaucracy and corporate governance. The accumulation of capital in these areas decreased the overall efficiency of capital, caused the crisis and indicated the potential exhaustion of information and communication technologies (physical capital). Representatives of technological determinism, see the cause of the crisis in evolutionary changes of technological structure of the global economy. Recognizing the secondary importance of institutions, the representatives of technological determinism and other supporters of evolutionary economics focus on the dynamics and forms of technological determinism. On the other hand, institutionalists focus on the role of institutions in increasing and decreasing transaction costs that cause negative financial flows. In this way, the relationship between institutionalism and evolutionism is broken up and the illusion of a common interest of institutionalism and evolutionism is voided. Pointing out the causes of the crisis, the economic theory (Marxism, institutionalism and evolutionism) provides the basis for developing programs for exiting (out) of the crisis. Behind different programs for the crisis are “hiden“ economic interests of different social groups. These differences are analyzed in the first place, in Marxism. The analysis of social interests emphasizes the programs for production supporting, solving social problems, etc.

Thanks Niccolo, I mustt have a look of that book of yours, it has me intrigued!

Wayne

Milos, I agree Marx has many insights that haven't been fully followed and I think Minsky also drew from Marxian Economics as did Joan Robinson and Sraffa.

Wayne

I think that one of Marx's failures was in ignoring the cultural factors. This is why I have concentrated my studies in places like Japan. It is obvious that Marx was influenced by Hegel who thought Africa and most of the non_western world had no history and no role in the future. That was unfortunate, but by taking a longer view, as I have done in recent articles we can see the role of history and culture in performing economic trends related to complex societies.

When Marx investigated relationship between person and history, he attempted to answer on the question: does made have one or more opportunities in the choicing of action. The deliberate choicing of action is made according to system of internal values.One uses system of internal values in order to detect which actions are appropriate, regular and socially useful.

Question for professor Niccolo Coldoro

Whether is the system of internal values one of cultural factors of economic behaviour?

Something more that should be added about Marx`s contribution on capitalism crisis is the law of the decline tendency of the profit rate, this subject is reveals several social, economical and political struggles, first the profit rate is divided on three kinds of capitalist: landlord, financial and industrial capitalist; so on this days we can see how this three classes fight their share of the declining profit rate, at the same time this three kind of capitalist fight as class against the workers pushing backwards the wages share of the product. This active forces are expressed into economic policies that promote the financial interests and reduce the wage share on the product, all this leave the economy with a restricted aggregate demand and a industrial side with a deep stagnation. Foundation of the actual crisis.

Dear Milos:

I think that my research has shown, building on the vast amount of anthropological data since Herskovits published his Primitive Economics in 1952, that cultural trends in economic behavior are established during enculturation. People can vary their interpretation, but generally choices are defined during socialization. In practice, however, we find that people are quite irrational in making decisions and magical thinking dominates most financial decisions people make today in the global market. Gillian Tett's book, Fools' Gold and my book last year, The Anthropology of the Credit Crisis: Magical Thinking, Irrationality and the Role of Inequality, investigate this feature of behavior.

Dear Wayne: My 2004 book published by Mellen Press came out in a paperback 2nd edition in 2009, updated and expanded under a new title, War, Religion & Taxation for $18 but cheaper used.

Thanks Niccolo , I must read it!

Behind different programs of exit from the crisis are “hiden“ economic interests of different interest groups. These differences are analyzed in the first place, in Marxism. Analysis of different types of groups enables division of scenarious for solving the crisis into two main groups.

The first group of scenarious is based on the premise that the support of the financial sector (financial capitalist) is necessary to ensure the stability of the financial system that is in the interest of all citizens (preventing dumping, saving jobs, etc.). Support of the financial sector is a technical question and it is related to solving the crisis and not to social interests.

The second group of scenarious proposes, more or less, radical changes that regulate the financial system and ensure exit from the crisis on account of reducing the income and assets of subjects who actively invested in financial speculation for the last ten years. If the economy was in the last decade denominated as the "casino capitalism", then we should say, "Society for the loss in the financial casino does not need to be compensated - such are the rules of the casino." Аssets under this scenario do not go into commercial banks, but directly on supportting of production, public affairs, dealing with social problems without the interference of private financial institutions (interest).

The most radical way is the financial socialization . It's "surgical intervention" in the financial sphere, which includes the eliminating of financial flows in order to reinforce socially useful functions of the financial system. Such steps, in particular, suggests the following:

- the nationalization of major banks in order to reinforce guarantee of deposits

- the gradual compensation value of shareholder’s stocks of bank in proportion to the crisis (responsibility for unsuccessful financial transaction should be born by those who made them and not the state) through coercively union banks in several large structures

- the social and state control of medium and small banks

Dear Milos:

You are right, we find very similar patterns of wealth transfer rituals in "primitive" traditional societies, like the attack of the witches among the Nupe, that is why I wrote one of my articles around how people worship the stock market like a god, but it is linked to a periodic wealth transfer that maintains a level of inequality.

Re: Real Economy versus Asset Market Economy

Sorry for all people who are interested in this question box. I was too busy to add my comments during these two weeks. Still I was continuously following what are discussed here.

When we think of reconstructing a Keynes's idea of effective demand, it is necessary to distinguish two economic fields. One is the Real Economy, in which everybody works and lives. It is the world of production and consumption, research and development, transportation and trade. The principle of effective demand works in this world.

The other is the Asset Market Economy. This is sometimes called FIRE economy after initials of Finance, Insurance and Real Estate. As the fire has been the Prometheus's most important gift to human kind, FIRE plays an important function as far as it contributes to the development of the Real Economy. But nowadays FIRE has become disproportionally too big. Asset Market Economy increased beyond the appropriate proportion to the Real Economy and it often swing around the Real Economy and causes a great damage to the Real Economy. Most recent episode is the Subprime Loan Bubble and its logical consequence the Lehman Shock. Two decades earlier Japan suffered much and long from the collapse of the Bubble of late 1980's.

In the analysis of modern economy, it is necessary to distinguish two fields and the pure theory must provide a framework which distinguishes two fields and their different functions.

In monetary theory, this means to separate two different money circulations: industrial circulation and financial circulation. This is what Keynes did in his Treatise on Money (1930) but he abandoned this distinction in The General Theory (1936). This may count as one of Keynes's major failures in his theory building of his new economics.

Keynes criticized the quantity theory of money but he failed to do it effectively because he did not distinguish two circulations. Now a new form of quantity theory of money is raging in Japan and in many other countries under the name of Quantitative Easing (QE). The second trial of QE in Japan is now going. It may "succeed" (in the Reflationist terminology) in making inflation in asset markets (stock market at first and real estate subsequently). Prices of industrial and consumption goods remain stable until now, but it is too early to make any judgment on the future movement. We have to wait how the situation develops.

The experience of the first trial of QE in Japan (from 2001 to 2006 ) shows that QE was not very effective. The monetary base of Japan (annual means of published monthly average) increased by 71％ from 2000 to 2005. Domestic Corporate Goods Price Index (base 2000) went down from 99 at the beginning of 2001 to less than 95 in 2003 and regained 100 level at the beginning of 2006 when the Bank of Japan (BOJ) "released"(finished) the QE policy. We may barely say that QE 2001-2006 succeeded to recover the price level of 2000 but no more. Of course, we may say that inflation would have occurred if BOJ continued its QE policy after 2006. At that time BOJ was much more loyal to the classical central bank's obligation that is to keep prices stable. Current QE experiments all over the world may reveal how well QE works. At any rate we may get more information about monetary movement by the enforced increase of monetary bases.

So far one thing is clear. Real economy and asset market economy response very differently and we should distinguish these two fields.

I would say the discussion has to start elsewhere first.

Citation of your answer:

"When we think of reconstructing a Keynes's idea of effective demand, it is necessary to distinguish two economic fields. One is the REAL ECONOMY, in which everybody works and lives. It is the world of production and consumption, research and development, transportation and trade. The principle of effective demand works in this world. The other is the ASSET MARKET ECONOMY. ..."

As i would say, there is no existing definition for a real world unit of "one economic part".

You talking about real world economy - but i would say there is no economic unit for this real world economy.

Today there is money for measuring the real world economy (which is that economy we really live in and which we use daily) ... and there is the other world of asset economy ... which i totally agree, is not real.

The basic problem creating a reason for this discussion is the simple fact that in the economic metric system based on money ... both looks the very same.

If the asset economy can (miraculously) create money ... and this reads totally alike any value of our real world products ... the theory is wrong.

If you have no tool to describe the difference of virtual economic products (unreal products) and real world products ...

... you should start with the real world unit definition of the economic theory first.

That is exactly what i am doing.

The only tool to describe the physically existing real world today - where a lot of people are running around, building lots of stuff, using that stuff and trying to be the most happy person at all by its economic characterisics - is "money".

Excuse me for this short unprecise description, but from a far above point of view (the moon or else) this is together called "world economy".

I would therefore ask for a more deeper discussion - why is the economic theory not even able to talk about looking for and defining pure real existing units to be measured and - as a result - giving a real world based definition of economics?

In open words: As long as the economic theory still circles around in the money-universe as the only thing to describe what is happening in our very real world around of all of us - it can never be sufficient.

So my short conclusion: Return to Keynes is not sufficient. Return to the basic questions has to come first.

At the end, I would say, will the answer be like: "Money is not the right way of measuring any given economy since it is a virtual unit and can never be linked to any physical real world characteristics".

Using Money for measuring is wrong as long as you want to measure the size of any given economy.

Money is the perfect Medium for exchange - but all of exchange has to take place in our very real world.

Money is only the medium of exchange - the medium for a transaction of some printed paper for some part of our very real world economic products.

The very real world economic products are real and therefore must be somehow measurable.

Th...

https://www.researchgate.net/post/To_make_the_understanding_of_Economics_easier_the_study_teaching_of_Economics_must_be_accompanied_with_that_of_Mathematics_Does_anybody_agree?exp_tc=tprc

Olaf,

my position is very close to your conclusion: Return to Keynes is not sufficient. Return to the basic questions has to come first.

However, you are making several errors in reading my proposals. Your discussion is also confusing. At least it is not developed as it can be understood by those people who are not accustomed to your terminology or to your way of discussion.

First of all, I never talked directly about "real world economy". I am proposing to make clear distinction between Real Economy and Asset Market Economy. Real Economy is not the same thing as Real World Economy.

Of course, both Real Economy and Asset Market Economy are parts of the Real World and, if you define the economy in the Real World Real World Economy, I am talking about Real World Economy. I am not talking about an imaginative factious world in which an imaginative "representative individual" tries to maximize his/her utility in a never ending demand and supply matching process. But this is assumed from the beginning of my discussion.

You say "there is no existing definition for a real world unit of 'one economic part'". You say at a different point that "the only tool to describe the physically existing real world ...is 'money'". Further you ask for a deeper discussion to "defin(e) pure real existing units to [be] measure(d) a real world".

I don't understand your phrase 'one economic part' but it seems that you are proposing to define a unit (or units) by which to measure the economy (or a size of an economy). It seems that you are frustrated by the fact many of economic "quantities" are measured by monetary terms. Your conclusion seems to be that "money is not the right way of measuring any given economy since it is a virtual unit and can never be linked to any physical real world characteristics".

If this is an objection (or "contestation" in French) against mainstream macroeconomics, you may be right. Most of variables are measured as aggregates of added values. But I am not proposing that kind of macroeconomics at all. Macroeconomics is not Keynes itself. It is a kind of defective derivatives of Keynes’s economics.

But your proposal that we should use physical units if we are to analyze the real world economy seems not well founded. We may use physical units and I normally talk about a vector of many kinds of goods and services (in stead of aggregate value or sum) but that fact alone does not assure us that we are correctly observing or analyzing the real world. It may be a first step but only a first step. Many other hurdles wait before us. I want to discuss how to go beyond these hurdles and achieve a breakthrough.

A Paper that should be read

I recommend Fujimoto's new paper: Evolution of firms and industries.

https://www.jstage.jst.go.jp/article/eier/9/1/9_O2012001/_pdf

This brief paper is written as an introduction to the special issue in Evolutionary and Institutional Economics Review's recent number. But the topic is not confined to "evolutionary economics." It is rather a new Keynesian manifest or a new vision over how contemporary economy works.

The author distinguishes three layers of economic entities. (Production and designing) Sites at the bottom layer, firms and industries at the middle layer and national and international economy at the top layer. In all of these layers, he observes, the same kind of efforts are made, namely, efforts to narrow the demand and supply gap. Standard formulation of Keynesian economics only analyzes the aggregated level of the whole economy. It never goes down to firm and industry levels or to site level either. This macroeconomic custom deprives economists of viewing economy in its concrete aspects. Macroeconomists are only working with the dubious abstract aggregate variables. They are content of very superficial knowledge of the real economy obtained through statistics.

Fujmoto is an empirical researcher who worked more than 30 years exploring the automobile industry in Japan and all over the World. He is now extending his study to much wider questions: to explain what is happening in the globalized world economy and what the top management should do in face of many difficult problems under the present situation.

His vision on the economy from bottom to top levels is full of insights which should be taken into consideration when we want to incorporate Keynesian idea in the reconstruction of Keynes's economics. His vision many give us a starting point for new economics which incorporate the concept of effective demand and firm level competition. He also offers a new framework of value theory, which Keynes and Keynesians neglected for so many years.

Dear Yoshinori,

thank you for your answer. You are right with correcting me with the real world economics term. Maybe I used not the right wording in my point of view.

My intention is rizing some basic questions, very basic questions as a reaction of the problems of the economic theory during the last years.

Lets take all existing theories as a tree. So we have a lot of very important economists of today and of the past adding branches and leaves to this tree. That is an easy picture and i think this is clear.

And now we "use" today one area of that tree more than others. The other could be older or just others.

And so I interpret your question as the question: "Do we need to use that other branch from old keynes over there? Is that sufficient?"

At this point I would say again: No, it's not at all sufficient.

My point is quite extrem: I want to open questions about some part of this tree of economic theory. I want to add the questionas a reaction to your right question: Do we need a discussion about some basic assumptions also - or at first?

This might look like a more philosophical discussion and might look like not relevant for todays problems at all since the economic theory has led us through decades of extreme economic growth ... and how could that theory be wrong at its core if it does this?

My point is that i read many of todays problems as problems can be described in a wider picture of "limiths of growth". And my argument is that there is no economic theory or no answer of any economic theory about a plausible way of describing these limits of the real world.

As an attachment you find my presentation from the last annual conference 2013 of MinD, Mensa in Deutschland e.V. in April 2013.

It describes my theory much better, I hope.

Hi Yoshi,

You are right on 2 points about Keynes firstly he never integrated nor elaborated his ideas about money fully into The General Theory. However Keynes was about to come up with a more clearer view about Money before he died. Secondly economists must now look beyond Keynes for answers to the current dilemma facing Economics. I wouldn't discount some of the clues Keynes has left us about his thinking on Money but I believe they aren't enough.

Is it possible that a new integrated monetary theory might displace our old ideas about conventional fiscal policy? Only time will tell.

Warren Mosler, who was a financial markets player in the USA I believe has a better understanding about how money markets really operate today than most economists.

See http://moslereconomics.com/ . He has an interesting blog and he has talked about ther uses and the deficiences of QE and the dilemmas facing Japan. Worth a look when you get a chance. Look forward to reading Fujimoto's new paper asap

Thanking you for getting me to REALLY THINK HARD about these issues!!!

Wayne

I think He has really been the best Economist. The one who dared and the one who wanted to start back from real facts. If Economics should help societies to work fine, then let's start to analyze real facts, just like persistant mass unemployment.

He certainly, and surprisingly, with a minimum of math formalization ( if almost not all) described what Economics is. What generates production and activity is Demand.. Whatever people want, and can pay for, will be produced. And remunerations of factors (possible from those purchases) will be used elsewhere.

Real economy is complex, but the basic nature of an economy will always remain to produce and exchange among complementary individuals constituting a society.

What is the problem today, and what is the problem that no Economist has been able to solve ? The answer: restore confidence; find the way to make agents beleive everything will go fine, and everyone will be richer.

If keynesian stimulations have sometimes failed, it is not only because of spendings on foreign products, but also because what matters is what people really expect as a result. Certainly, nothing could be predicted before such a stimulation in the past. If today it may be uneffective, perhaps is it more because people would not expect it to be effective. Certainly, I would personnally say no more keynesian stimulations in such a context because under pessimism and lacks of confidence, effects are just worst.

One solution according to me (perhaps too much radical, but certainly effective) is to kill the problem of uncertain sales that prevent firms from hiring and producing. It could be to create special labour contracts that force the new workers to spend parts of their income here and there..., and for instance to be customer of firms hiring people and participating to this operation. At least, for example, during the five first years following the signature of the contract.. There might be some sort of more or less restricting contracts, certainly preferrable to no job, no income or a freedom of consuming poorly.

@Atef:

You say Keynes described, "What generates production and activity is Demand.. Whatever people want, and can pay for, will be produced."

And you say to solve the todays problem, the answer is: "restore confidence; find the way to make agents believe everything will go fine, and everyone will be richer."

I think Keynes was right in some way - but he did not had the real answer also. And the answer you serve is also not the real answer.

My point (see my other postings) is that the real world answer is not even discussed at the moment.

"Rich" is nothing without someone deliver in exchange all the kind of things you want for the money. Money does not create whealth. Confidence also creates nothing.

If a Demand is there (someone want something) ... another player in the game has to do a given amount of work to create it - by himself, by slaves or by external energy used productively in a machine.

Thermodynamics are clear: Without more energy used for production there is no growth of the amount of "doing".

For your comment this means that you have to look at the available amount of work which is available in total.

human bodywork (labor) or energy used in machines.

If that energy available does not grow there is no growth possible. Confidence is only a small factor and the idea of "whatever people want, and can pay for, will be produced".

Think about the term "and can pay for". Money is a medium of exchange. You can change only if it contains some kind of value. That kind of value has to come by someone. There is no free lunch at all.

Someone has to do work - money just changes the ownership of things.

The problem rises if the energy available gets harder to extract. Then it will cost more of the energy available in total to get the next energy alone.

Or in money terms: Energy gets more expensive.

The end of external energy of todays immense fossil fuels is reached when the energy return on energy invested is equal. If you need the same amount of energy to engineer, to build, run and service the rigs in tar sands and also for processing of that tar.

Then we do not have the stockpile of free fossil energy any more - and someone other has to do the work to run all the generators, all the machines, trucks and so on.

Again: There is no free lunch at all. Keynes did not understand the importance of energy. Demand and confidence is nice to have an economy running nicely - but all of the work HAS to be done.

I think the economic theory has do be rewritten - starting at first with the definition of who is doing the work necessary inside of an economy, with the definition of the core characteristic of economy.

Today we use up the huge stockpile of stored work, stored energy. Some part of it goes into production, into useful work. Some part heats some ovens, some drives our cars just to move around (61,5% of total todays oil consumption is used in cars).

Getting rich means - ignoring for the moment the money for exchange - having more of some kind of stuff - whatever kind of stuff it ever is.

I ignore the money because it only changes the owner of the stuff.

Stuff has to be created.

Creation is a physical process.

All physical processes needs energy.

Energy is the lowest common denominator of all kind of economics.

Therefore the economic theory has to be rewritten, the economic theory has to be denominated to its core: useful work, useful used energy.

Or in other words - to the use of "amount of energy productively used" as the numéraire of any given economy. (see my paper)

That is a new kind of economic theory - and not easy to understand coming from monetary economics. But there is no way of of this, I am sure.

Return to Keynes with some modifications. The world today is more complex than what Keynesian theory can handle. It must be a combination of Classical, neo-classical, Keynesian, Neo-Keynesian, Monetarists and the new schools with a blend of modern day complexity of the globalized financial world with sufisticated issues such as cross boarder movement of capital to finance non economic activities such as terrorism.

Re: Expectation of whom and on what

Now many people emphasize the importance of expectation. In this question box, Atef Khelifi raised this question. In Japan, many reflationists claim that the government's and central bank's commitment to the inflation target is important, for the market will not a form firm expectation without such a commitment. It is evident that those people think that an expectation is crucial to the success of their policy. Many other people discuss the state of expectations and it is evident that they are thinking that the expectation is important for the well functioning of the economy.

Keynes himself wrote two chapters on expectation (i.e. Chapter 5 EXPECTATION AS DETERMINING OUTPUT AND EMPLOYMENT and Chapter 12 THE STATE OF LONG-TERM EXPECTATION) in his magnum opus. It may be right that he emphasized the role of expectations but his treatment of expectations and discussion on them seem to be misplaced.

In Chap 5, Keynes starts his observation correctly. He point out that short and long term expectations affects the investment and quantity of employment. At this point, he focuses on the entrepreneur’s expectations: short term and long term prospectus on the quantities of the firm's products. If one can expects a good demand for one of the products, the top management or the factory manager give the directive to increase the production volume 'per day) of that product. If a steady increase is expected for more than 3 years for example, the management starts to consider a raise of the production capacity.

If production volume is increased, at least the total work hour will be increased and eventually the number of employments will be increased. If an investment in capacity is decided, equipment will be ordered and construction works will starts. This will increase employments directly or indirectly. In this sense, the expectations of entrepreneurs or managers of firms are very important and we should closely observes how the expectations of these people are changing.

In Chapter 12, however, Keynes starts to discuss expectation which will be revealed in the Stock Market. He starts to discuss mass psychology on the prospective movement of stock prices. Keynes made two mistakes in switching his attention firm the entrepreneurs' expectations to the expectations of the individual investors. First, he did not make clear distinction between asset market economy (of which Stack Market is a part) and the real economy. What increases effective demand and employment is the investment in the real economy i.e. production increase or capacity increase. Investments in stocks are first of all a transfer of property right of stocks and have no direct relevance to effective demand and real investments. If new money is poured into the market, the general price of stocks may increase. Actually, by the effect of Abenomics, the Tokyo Security Exchange Price Index (Nikkei 225) went up by 50 ％. This of course changes the minds of asset holders and they begin to purchase luxury goods. This may influence the expectations of entrepreneurs and may change employment and investment indirectly.

The second mistake (and it may be Keynes's fatal misconception) is that what interest rate determines the capacity investment. As is proved at the time when Keynes is still alive, the Oxford Economic Research Group's Inquiry showed that the entrepreneurs take little consideration on the level of interest rates (short or long). If an increase of demand for product is expected, he or she will undertake to invest in the production capacity of the product. Although this is the most important state of expectations which determines the total volume of real investment but Keynes didn't discuss this important question.

Mode of change of entrepreneurs' expectations is very different from those of Stock Market or any other Asset Markets. For example, interest rate may influence portfolio selection. They may behave as Keynes described it as a kind of Beauty Contest. But the expectation of an entrepreneur is much less influenced by the general mood of the economy. Even in a high boom, some goods don't sell at all. In the middle of strong depression, some goods sell quite well. So the top management put highest weight on the trend of the product sales. If it is good, he or she will make an optimistic expectation. If the trend is bad, he or she will make a pessimistic expectation. Keynes and his followers (and many macro economists) forget this most important fact.

This discussion of Japan's economy and the global crisis has generally ignored the cultural components on which people in Japan make economic decisions. Like its drop in fertility, Japan has made substantial economic and social transformations in the past that are unlike those that have patterned Western economic history. To discuss Japan in the context only of that Western pattern is rather a blind exercise in my opinion. I have placed two of my articles on Japan's culture history and economic history on this website if anyone is interested in this background.

Niccolo,

Discussion on Japanese culture and behavior deserves independent discussion. I have searched your articles but as there are so many articles I could not find the suitable ones. Would you name the title of the papers?

You may be working on archaeology and anthropology. In economics field, Japan's economic development in Edo period may be an interesting example to be compared with industrial revolution which took place in Great Britain.

Dear Yoshinori: They both have Japan in the title, but the more appropriate for this discussion is "Japan and the Concept of Sustainability" published in the International Journal of Anthropology, the other is in the Anthropological Quarterly.

With his excellent comments, Professor Niccolo has attemp to animate economists on ResearchGate to write about the cultural context in which actors make decisions. In order to explain the cultural context in which actors make decisions, I want to say something about rationality of situation.

If markets are cultural constructions, and the economy is treated as an institutionalized process, then rationality can not be treated independently of the cultural context and the fact that the actors are embedded in society and its institutions. Rationality includes appropriate social competence, which economic agents obtain through processes of socialization, cultural integration, learning and etc. The rationality of actor which is embedded in society and its institutions implies that the actor`s measurements are culturally specific . In this context, in economic literature the role of the rules, social capital and similar factors in human behaviour is emphasized.

Fo example, Fukuyama occupies a particular position in the debate on social capital. It should be considered implementing Fukuyama’s social capital in explaining the causes of the drastic increase in socially inconsistent outcomes in America during the 60es of the 20th century. In Fukuyama’s opinion, the increase in female labor force and the availability of better birth control measures caused a dramatic decrease of succinct family social capital, which changed the norms governing marriage and responsibilities of spouses. The most significant was the decline in the strength of norms that regulate wife’s responsibilities for establishing and maintaining harmonious and productive relationship between the spouses. All this led to a lack of harmony in the home, which was the husband’s the main responsibility. From Fukuyama’s perspective, the decline in family social capital produced a plethora of negative outcomes such as: increase of divorce rate and the number of children born out of wedlock, violent and property crime, child abuse, alcoholism, drug addiction, etc

Big support for Niccolo of Milos from Serbia

I forgot to write "and the economy (in anthropological perspective) is treated as an institutionalized process..."

Dear Milos:

Thank you for the clarification on culture and choices in the market place. I do have a problem with Fukuyama's argument. I think that the data do not show that women in the work force increased social capital in the 60s to the 1990s. Most of the studies of income and well being (I analyze this concept cross-culturally in my 2004 book Sustainability) show a stagnation in American incomes during this time. You can see also that in the War years (WWII) women entered the workforce in huge numbers (though this idea tends to minimize the labor of farm women who also had to replace the labor and management of farms while the men were at war and I think this is unfair). In the immediate post-war period there was some instability as women adjusted to the influx of men back into the labor force and there was some adjustment necessary for this discrimination. Nevertheless, the 50s showed a dramatic increase in wealth spread over the general population, part due to government financing of infrastructure but also, I think, to the progressive taxation of the Eisenhower years where the basic income tax rate on the richest percentile was over 90% and other tax regimes in states and localities added to the constant transfer of wealth into productive labor intensive and especially education and research and development. Violent crime has also dropped dramatically since the 1970s while our spending on prisons has leapfrogged over that for education: We pay for prisons more than we do for

student education

(http://chronicle.com/article/5-States-Spend-More-on-Prisons/40565). I address these issues in my new book, The Anthropology of the Credit Crisis: Irrationality, Magical Thinking and the Role of Inequality, MTC Press, 2012.

Niccolo,

thank you for your information. After writing that I could not find relevant papers, I actually found them. They are hidden in the second page of your articles site.

I read the paper "Japan and the Concept of Sustainability" and was amazed that you have summarized the long history of Japan in such a concise way. You are a good story teller.

Many people in Japan argue also the Edo Period (under Tokugawa reign) gives us hints for more ecological and sustainable civilization. I roughly agree with them, but as you have written, it will not be easy for the modern Japanese to return to the life of Edo period. We are too much accustomed to the modern civilization which consumes a lot of fossil energies. Atomic generation was considered to be a possible path for some time, but Fukushima showed how fragile that path was.

Now in economics, we have a new trend called global economic history (GEH). It makes part of global history but is also a part of economics I believe. Major part of its discussion is historical of course, but for some part I have some doubts on their theses. Many historians in GEH enquire why industrial revolution took place in 18th and 19th century Britain. They argue that industrial revolution emerged because wage rate was higher in England than in other European countries. This seems too simple as logic why machines came to be utilized by many of factories. Accidental factors must be more important.

Another doubt is on the thesis that human life condition was practically constant since agricultural revolution up until to the Industrial Revolution (18th and 19th century Britain). My vague idea is different from this. As the time passes, the life standard became slowly improved. If you (and other contributors) are interested in these questions, I want to open another question box specialized on these topics.

Dear Yoshinori:

I think I need to read your article, Economic theory and the complexity of capitalism, to get a better sense of your thinking. I wonder, regarding the Industrial Revolution, what do you think of Bad Samaritans by Ha-Joon Chang? He has a very different take on why the West was successful (different also from mine).

Dear Nicolo,

I have not read Bad Samaritans, but have read the book of the same author: Kicking Away the Ladder. Hajung Chang criticizes the developed countries' recent trade policy. It is not justified, he claims, for England in 17th and 18th century and United States in early 19th century have set various kinds of trade barriers in order to protect and enhance their infant industries. As far as historical facts are concerned, his criticism is right but he is criticizing Ricardo's trade theory wrongly.

It is true that Ricardo supported free trade and demanded free import of corn. But that does not mean that the Ricardo's comparative trade theory always support free trade. My paper on Ricardian trade theory is an effort to extend certain analytical restraint to more general situation: for example, to include traded inputs in the theory. This is important, for under the current globalization, trade of intermediate goods plays an important role. Triangle trades like Japan-Korea-US and Japan-China-US are supported by trade of intermediate goods. It is usually commented (in the undergraduate textbooks for example) that Ricardian trade theory only admits labor inputs but cannot treat capital goods like machines. This kind of understanding is misplaced for Ricardian trade theory can well analyze intermediate goods (intermediates materials and machines as fix capital) and is applicable to current trade situation like triangle trade or processing trade. But it does mean that we should enhance globalization further.

Hajung Chang does not distinguish policy and theory. In this question box also, there are many researchers who do not distinguish policy and theory. But, policy and theory are independent. Ricardian trade theory does not necessarily imply free trade policy. It can clarify when for whom free trade is profitable and what kind of troubles can occur when a trade barrier was removed suddenly.

For instance, in my paper, I have clarified how and when gains from trade are obtained. Theorem 4.1 (of Shiozawa 2007) tells that trade is profitable for employed workers of all countries. But this does not mean that it is good for unemployed workers. Standard trade theory, Ricardian or HOS (Heckscher-Ohlin-Samuelson) theory assumes the full employment. Then this inconvenience or loss was not noticed and many trade theorists claim that free trade is good unconditionally. But, with my theory, unemployment occurs necessarily when trade barriers are removed suddenly. In this way, there are looses from trade and we should face trade conflicts seriously (See Section 4.2).

(Between countries like United States and Japan, trade conflict persisted for a longtime: textile industry and iron and steel industry in 1960's and automobile industry in 1980's for example. Curiously enough, trade theory in economics did not analyzed why trade conflict occurs. Trade economists ignored the existence of trade conflict because they could not explain by their theory why and how trade conflict can happen. These questions were only discussed in the field of International Political Economy (IPE). Although IPE is named economy, it has been a part of political science and there were practically no communication between IPE and the economics trade theory.)

However, what I want to discuss is not to argue pro and con on the globalization of the world economy. We may well discuss the question but the discussion I have proposed is on the global history and the industrial revolution interpreted in the perspective of global history.

P. S.

For analytical details of Ricardian trade theory, please see my paper:

Y. Shiozawa 2007 A New Construction of Ricardian Trade Theory / A Many-country, Many-commodity Case with Intermediate Goods and Choice of Production Techniques, Evolutionary and Institutional Economics Review, 3(2): 141-187.

https://www.jstage.jst.go.jp/article/eier/3/2/3_2_141/_pdf