Paul Davidson took Keynes' General Theory of Employment Interest and Money seriously. The interpretation in mainstream textboooks misses important points. Keynes' book was about theory, not primarily about (short-run?) fiscal or monetary policy. Keynes does not explain persistent unemployment from imperfections or sticky or rigid money wages or prices. A general theory is one that has less axioms than the special case treated by, say, Marshall. Davidson identified, specifically, three axioms relaxed or rejected by Keynes:
- Neutrality of money. For Keynes, money is non-neutral in all runs.
- Gross substitution. Money has no substitutes; it cannot be produced from labor.
- Ergodicity. Important time series in economics can be non-ergodic. Numerical probabilities cannot necessarily be assigned to all possible outcomes. Some might not even be known.
Davidson, following Weintraub, took overall economic activity from a Keynes-like model of aggregate supply and demand. This is neither a 45 degree diagram found in, say, Samuelson's textbook, nor what is in current mainstream textbooks. Aggregate supply and demand are curves in the space of monetary proceeds and employment. Their intersection is the point of effective demand. In Davidson's development, investment is autonomous and not a function of current income.
Davidson's perspective led to conflict with other Post Keynesians. Labor markets do not clear, given either competitive or non-competitive markets. One does not need Kalecki's degree of monopoly. At times, he appreciated the internal critique of marginalism offered by Sraffa those developing his ideas. But he thought that they did not appreciate Keynes' emphasis on uncertainty. On the other hand, some, such as Eatwell, might argue that Davidson's emphasis on money was an imperfection. I think both perspectives assert that Keynes' rejection of Say's law is not confined to the short run.
Maybe developments in the theory of endogenous money are also in tension with some of Davidson's work. Keynes assumed in the General Theory, but not in the Treatise on Money, that the monetary authority could vary the supply of money.
Davidson also wrote about various policy suggestions and international financial institutions. For example, he did not think the Tobin tax would achieve its goals.
Davidson insisted that the Post in "Post Keynesianism" should be capitalized and that no hypen should seperate the words.
Some Aspects of Professional LifeDavidson received an undergraduate degree from Brooklyn College. He performed research in biochemstry at the University of Pennsylvania during 1950-1952. He performed military service during the Korean War.
He switched to economics. Sidney Weintraub supervised his doctorate dissertation at the University of Pennsylvania. He moved to Rutgers in 1958. I think his stint as an executive at an oil company in the early 1960s influenced his views on Keynes' user cost.
He helped found the Journal of Post Keynesian Economics in 1978 and co-edited it with Sidney Weintraub.
After a purge of heterodox economics at Rutgers, Davidson moved, in 1986, to the University of Tennesee at Knoxville. I know of a number of heterodox economists who came out of Rutgers when Davidson was there. The career of Anne Mayhew, an institutionalist, overlapped with Davidson at the University of Tennesee.
In more recent years, Davidson was a visiting scholar at the New School for Social Research, Bernard Schwartz Center for Economic Policy Analysis.
Obituaries elsewhere: Chicago Tribune, Greg Davidson on his father at Daily Kos.
Very Selective Bibliography- Paul Davison. 1968. Money, portfolio balance, capital accumulation, and economic growth. Econometrica 36(2): 291-321.
- Paul Davison. 1972. Money and the Real world. Macmillan
- Paul Davison. 1989. The economics of ignorance or the ignorance of economics? Critical Review 3(3-4): 467-487.
- Paul Davison. 1991. Is probability theory relevant for uncertainty? A Post Keynesian perspective. Perspectives on Economics 5: 29-43.
- Paul Davison. 1994. Post Keynesian Macroeconomic Theory: A Foundation for Successful Economic Policy for the Twenty-First Century. Edward Elgar
- Paul Davison. 2007. John Maynard Keynes. Palgrave Macmillan
- J. E. King. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar.
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7 comments:
«Neutrality of money. For Keynes, money is non-neutral in all runs.»
As stated that is somewhat imprecise because "money" is an overloaded term and it has in my view at least three different and very different meanings:
* Something that can be used as a unit of account.
* Something issued by some authority for payments.
* Something having purchasing power ("currency").
For example doubloons are "money" but they no purchasing power in this century or in past centuries in China.
Now JM Keynes uses it only in the sense of "unit of account" (chapter 4: the entire "general theory" uses only two units, "typical" hours of work, and "money").
In particular JM Keynes that "money" in a modern economy cannot be saved in any significant way, in the sense of putting bags of it in some safe box.
Someone with excess purchasing power must necessarily spend it to buy some financial assets, whether these be on-sight repayable loans to a bank ("current accounts") or shares in a new airport, etc. so "saving" does not exist properly, there is just portfolio choice.
As to that the main distinction is between liquid and illiquid assets, and since in general there are very few long term liquid assets worth buying, the choice is between short and long investment. The consequences that he insists on are that "interest" is the price of *liquidity* not of money, and that decisions to become more or less liquid (less liquid: "invest") are not necessarily related to the decision how much purchasing power to consume and how much in total to invest ("save"). For example someone might at the same time decide to consume more of their purchasing power ("save" less) but at the same become less liquid ("invest" more).
Said another way the size of the balance sheet and its degree of liquidity are two completely different decisions, and interest is what motivates people to change primarily the composition of their balance sheet, and perhaps secondarily its size.
This is at the same time quite obvious and a harsh ridiculing of most "neoclassical" thinking, in particular the "loanable funds" propaganda.
«Gross substitution. Money has no substitutes»
My understanding is that for JM Keynes is that *liquidity* in a sense has no substitutes as it is radically different from *illiquidity*, but there are many types of assets that are "liquid" and among which there are portfolio choices as to risk and yield and degree of liquidity.
«Important time series in economics can be non-ergodic.»
“Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence.”
«In Davidson's development, investment is autonomous and not a function of current income.»
My understanding of JM Keynes is that the *size* of the balance sheet does depend (primarily but not only) on income, but its portfolio composition depends on "animal spirits" because while the consequences of liquidity are fairly bounded, the consequences of illiquidity are often unbounded. To say “investment is autonomous” without making the distinction between liquid and illiquid seem to me an oversimplification.
«money [...] cannot be produced from labor.»
I think that it is nowhere explicitly stated in the work of JM Keynes, but his argument about the "so-called Say's law" is based on the property that many liquid assets require only nugatory labor to produce (some words on paper, some typing on a keyboard) and therefore switching from illiquid assets, which are usually used in co-production with labour, to liquid ones means no employment is generated, so the supply of liquid securities does not generate its own demand (of labor at least). So even if the size of balance sheets does not change, a *general* shift in their composition to more liquid assets reduces "investment" in those illiquid assets that require labor to make and operate.
«the internal critique of marginalism offered by Sraffa those developing his ideas. But he thought that they did not appreciate Keynes' emphasis on uncertainty.»
The subtitle of his work was "Prelude to a critique of economic theory" is humble because the content is indeed a "prelude" and to a "critique". Except for the solution of the long-standing problem of finding a (composite) commodity whose "value" does not change with the distribution of the plusvalue.
So "uncertainty" is not an obvious sraffian concept, and neither is a great concern of the "classical" (pre-neoclassical) authors. But it is indeed a huge point together with "preference for liquidity", in my understanding of the "General theory".
«the size of the balance sheet and its degree of liquidity are two completely different decisions»
Said yet another way, the "propensity to consume" (size of the balance sheet) and the "preference for liquidity" (composition of the balance sheet) are distinct concepts.
I cannot resist adding yet another comment here which may seem trivially "methodological" but actually is very important:
«Aggregate supply and demand are curves in the space of monetary proceeds and employment. Their intersection is the point of effective demand.»
One of the most nefarious legacies of "neoclassical" propaganda is the habit to draw curves and intersections points, which is ridiculous because instead of curves they should be bands (lower feasible boundary, upper achievable boundary), and instead of points there should be areas, and often the bands and the areas (not necessarily just 2d, and not necessarily with sharp boundaries) are fairly wide.
The "neoclassical" propaganda insists on that because in order to "prove" JB Clark's "fables": the aim is to "prove" that "equilibrium" is both path-independent and unique, so that income distribution is determined exactly *and* solely by the marginal productivity of factors (plus the other two less important "fables").
Because if the distribution of income is not exactly determined, but lies in some kind of area shaped by bands, then the actual distribution of income, a point in that area, is essentially (space-wise) arbitrary (that is the actual point is determined by power, not by "tâtonnement"), and if it is not solely determined by the productivity of factors, and is path-dependent, then it is essentially (time-wise) arbitrary (that is actually determined by power or exogenous shifts). Also there is no need for the more subtle argument of re-switching, even if it is interesting.
Note: as I often say all the often absurd or contradictory postulations of "neoclassical" propaganda have the effect of creating an optimization landscape that is purely convex with a single maximum. If schedules are bands or there is time dependency then there are multiple maximums, and which one obtains in fact is an arbitrary one.
Note: my wild guess is that "re-switching" introduces not just convexity or concavity (both with positive curvature) in the variational optimization landscape, but also *saddle points*, that is negative curvatures. But our blogger does not seem interested in drawing his interesting examples that way.
Note: my wild guess is also that the actual variational optimization landscape in case of "Wicksell effects" has also "catastrophes" ("anomalous" state change topologies) as classified by Thom (according to him there are almost only 7 such topologies).
https://mathworld.wolfram.com/Catastrophe.html
«many liquid assets require only nugatory labor to produce (some words on paper, some typing on a keyboard)»
Or some brush-strokes on a canvas, or some cutting of a carbon crystal, or some mining of gold. It is not just "money" or other "fiat" (paper) assets, it is all form of "collectibles" (those commodities where the exchange price vastly exceeds their labour-value or even use-value) from stamps to "experiences" to gold, which are often (but not necessarily) quite liquid (as long as there are collectors or flippers to collectors).
They are one of the types on "non-economic goods" that are substantially ignored (propaganda reasons) by most "economic theories", even if they are quite important in practice.
Any generalized switch of balance sheets from illiquid assets used in joint-production of commodities to "collectibles" invalidates “the "so-called Say's law”. Consider for example the limit case of all balance sheets switching to be entirely in stamps or tulip bulbs: enormous increase in stamp or tulip bulb prices, but colossal deflationary effect on production, with near 100% unemployment of workers, as all assets used in joint-production with labor get liquidated :-).
Now try to imaging large developed real-world economies treating residential housing land as collectibles :-).
«Said another way the size of the balance sheet and its degree of liquidity are two completely different decisions»
The point I am belaboring here is that in the "General Theory" there are actually *two* arguments that are completely outside "neoclassical" propaganda (for JM Keynes those were "the classics", e.g. Marshall):
#1 Balance sheets matter.
#2 They matter as to size, but most importantly as to composition.
The really revolutionary point is actually #1. It has been developed well by H Minsky with the economy as (also) a set of interlocking balance sheets ("Stabilizing an unstable economy"), and by M Pettis that has applied the same approach to international finance ("The volatility machine").
https://digitalcommons.bard.edu/hm_archive/144/
https://hbswk.hbs.edu/archive/the-volatility-machine-emerging-economics-and-the-threat-of-their-financial-collapse
https://www.financialsense.com/contributors/michael-pettis/why-thin-air-money-is-not-created
“Mon, Oct 19, 2015 - 9:13am By Michael Pettis [...] Most insightful of all, Minsky characterized the economy as a system of interlocking balance sheets, and because he taught us to think of every economic entity as effectively a kind of bank, with one entity’s assets being another’s liabilities, it follows that economic performance is partly a function of the direction and the extent in which the two sides of each balance sheet are mismatched. Because these mismatches vary as a consequence of past conditions and future expectations, when institutional distortions are deep, balance sheet mismatches in the aggregate can be systemic, in which case they determine how an economic system behaves and responds to exogenous and endogenous shocks.”
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