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Post Keynesian School

 

Kenesian believed the real characteristics of real world is:

 

Money matters in the long and short run; liquidity preference affect the decision making;

Economic system moving from past to uncertain future; decisions taken in investment, production and consumption in an uncertain environment;

 

Forward contracts in money terms developed to organize time consuming production and exchange processes;

The money-wage contract is the most popular one, Money –wage contract in economic system are called the “entrepreneur system”.

 

Unemployment is the common laisse-faire situation in a maket-oriented, monetary production economy.

 

Keynesian’s attack on Say’s Law

 

The orthodox economics not explain enough about the unemployment.

 

Keynesian demonstrated the Say’s Law is not true law relating the aggregate demand and aggregate supply functions.

 

Say’s Law

 

Aggregate demand relates the entrepreneur’s expected sale with the level of employment will hire. D

 

The higher expected sales ,the more workers will be hired. Z

 

Aggregate demand relates the buyers’ desired expenditure with the given level of employment.

 

All expenditure (AD) equals to the total cost of aggregate production (AS).

 

D= fd(N)

Z=fz(N)

 

Say’s Law asserts fd(N) = fz(N)

 

Say’s Law: all cost of production is recouped by the sale of output.

 

Never a lack of effective demand.

 

No obstacle to full employment.

 

The aggregate demand and supply functions will be coincident if:

 

Money is neutral;

Gross substitution: everything a good substitute of everything else

Ergodic axiom: future can be predicted in terms of probabilities.

 

 

Keynes’

 

Accept the normal firm short run supply function developed by the Marshallian Economics as Aggregate supply function.

 

Divide the aggregate demand function into two classes:

D1 expenditures depend on the level of aggregate income, therefore the level of employment.

D2 expenditure not depends on the level of aggregate income.

 

D1= f1(N)

D2 f2(N)

 

D2 relates to income D2= f2(N) so long as f1(N) + f2(N) = fz(N) for all value N, then Say’s Law is not applicable.

 

Special case in Classical theory:

D2= 0

 

D1 =f1(N) =fz(N) = Z

 

 

In “Fundamental psychological law” “the facts of experience” are marginal propensity to consume and to save were always less than one.

 

f1(N) would never coincident with fz(N), even if D2 =0. Say’s Law not applicable of “the fcats of experience”.

 

Can Relative Price Changes Induce D2 to fill the Gap?

In classical theory, all income earned in accounting period is divided on the basis of time preference:

spending income on currently produced consumption goods;

spending income on current investment goods that will be used to produce goods for future consumptions.

 

Fist step: Kenys’s time preference theory:

How much current income is spent on the current consumption of goods;

How much current income is not spent on the consumption goods, but instead is saved by purchasing liquidity assets.

Second step: liquidity preference:

       Income earners determine what liquidity assets the saved income should be stored to transfer the purchasing power to future period.

       Liquidity assets have the essential properties:

              Non-producible for industry products; (which means industries can not ask labour to produce money) e.g. money doesn’t grow on the tree.

        The existence of non-producible liquid assets or money applies that all income earned on the production of consumption goods is not spent on the products produced by labour.

           Non-substitutable for industry products;

      So the demand for the liquidity assets doesn’t create demand for industrial products.

 

Keynes developed his liquidity preference theory to demonstrate the involuntary employment:

The essential properties of money and interest:

The elasticity of productivity of all liquid assets including money is zero or negligible;

    The elasticity of substitution between liquid assets and reproducible goods was zero.

 

<Say’ Law’s gross Substitution axiom: Increasing the demand for the liquid assets or money / “savings” will push up the non-reproducible goods. As the price of non-producible goods rose, the demand for non-producible goods will spill over to the demand for reproducible goods.>

 

<In Post Keynesian Economic: Increase the demand for “savings” even if it rises the relative price of non-producibles, will not spill over into demand for producible goods. Income effect dominates the substitution effect>

 

Investment Spending, Liquidity, and the Non-neutrality of Money Axiom

D2 expenditure not related to the income. Agents can exercise demand of D2 by borrowing. D2 is not constrained in the current income. D2 is constrained by expected future cash flow. Keynesian multiplier effect: Money is created by borrowing from a bank system. Keynesian financing mechanism: where increases in the nominal quantity of money are used to finance increased demand for producible goods which results increasing employment levels. < increase money supply, increase output, thus increase the employment level>

 

What Type of an Economic System is ‘Irrational’ Enough to use Money Contracts?

       Neoclassical economy’s fundamental axiom is the neutrality of money where economic agents are presumed to make rational decisions.

       Money contracts used by modern economics are irrational since fixed payments in nominal terms, can impede economic agents from self interest maximizing.

       For the post Keynesian, binding the money contacts are method for dealing with future uncertainty.

       Cooperative economy: production is organized; inputs are rewarded with output produced measured by the contribution. E.g. prisoner (no unemployment)

       Entrepreneur economy: production is organized by entrepreneurs who hire factors of production and look to their recoupment from selling the output for money; no guarantee that all money paid out to inputs will be spent on the products industry.

      

Information, Decisions and Uncertainty

       Post Keynesian perspectives on uncertainty: probability distributions are not the basis for comprehending real-world behaviour under uncertainty. (Davidson 1978, 1982)

       Decision makers in an uncertainty environment, either avoid choosing between alternatives or follow their animal spirit for positive action.

 

Classifying Decision-making Environment

       The objective probability environment (rational expectation hypothesis) (past is statistically reliable to guide the future)

       The subjective probability environment (individual’s mind)

       The true uncertainty environment. Keynes’ view: Uncertainty has no calculable probability.

Keynesian deny objective probability associated with rational expectation hypothesis

       Rational expectation functions derived from the ergodic stochastic processes, where averages calculated form past observations cannot be persistently different from the time averages of future outcomes. That objective of probability is not uncertainty. Also economic is non-stationary processes.

(If the economy is encompassed by the objective probability, people have perfect knowledge about the future. Increasing or decreasing money supply, in the long run there is no effect on the output and employment, money is neutral.)

 

The subjective probability environment and true uncertainty

The subjective probability can be interpreted as the degree of conviction.

       The true uncertainty still exits because decision makers either does not have any clue for subjective probability calculation or calculation future pay-offs.

 

[In expected utility theory: prospect is a list of consequences with an associated list of probabilities, such these probabilities sum to utility. Consequences are mutually exclusive possibilities. Individual preference is defined over the set of prospects.]

 

The true uncertainty is: (i) decision maker can not conceive the future consequences (ii) decision makers can not assign probabilities to all future consequences (no possible outcomes, no assigning probabilities).