A true Post Keynesian

11 January, 2017 at 18:45 | Posted in Economics | 1 Comment

keynes3But these more recent writers like their predecessors were still dealing with a system in which the amount of the factors employed was given and the other relevant facts were known more or less for certain. This does not mean that they were dealing with a system in which change was ruled out, or even one in which the disappointment of expectation was ruled out. But at any given time facts and expectations were assumed to be given in a definite and calculable form; and risks, of which, tho admitted, not much notice was taken, were supposed to be capable of an exact actuarial computation. The calculus of probability, tho mention of it was kept in the background, was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself …

Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders Wealth a peculiarly unsuitable subject for the methods of the classical economic theory.

John Maynard Keynes

And this emphasis on the importance of uncertainty is not even mentioned in IS-LM ‘New Keynesianism’ …


1 Comment

  1. Prof Syll concludes: “emphasis on the importance of uncertainty is not even mentioned in IS-LM ‘New Keynesianism’”.
    This conclusion appears to stem from a narrow static and mechanistic interpretation of some textbook expositions of the IS-LM framework.
    In his “General Theory” Keynes’ notions of uncertainty are embodied in his descriptions of the demand for investment goods (“the marginal efficiency of capital”) and the demand for liquid assets (“liquidity preference”). These elements of the general theory (and the underlying uncertainties) are fully included in Hicks’ original 1937 paper. The IS and LM curves shift if there are changes in expectations regarding uncertain factors.
    Moreover, Hicks adds additional sources of uncertainty beyond those mentioned by Keynes:
    “Surely there is every reason to suppose that an increase in the demand for consumers’ goods, arising from an increase in employment, will often directly stimulate an increase in investment, at least as soon as an expectation develops that the increased demand will continue. If this is so, we ought to include [income as an extra factor influencing investment demand], though it must be confessed that the effect of [income] on the [investment demand] will be fitful and irregular.

    one cannot escape the impression that there may be other conditions when expectations are tinder, when a slight inflationary tendency lights them up very easily. … In these circumstances, the situation is unstable at any given money rate; it is only an imperfectly elastic monetary system – a rising LM curve – that can prevent the situation getting out of hand altogether.”
    J. R. Hicks – Mr. Keynes and the “Classics” – Econometrica April 1937, pp. 157-158

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