Davidson What is Post-keynesianism

8/7/2019 Davidson What is Post-keynesianism

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Responses to Lavoie, King, and Dow on What Post Keynesianism Is and Who Is a Post

KeynesianAuthor(s): Paul DavidsonSource: Journal of Post Keynesian Economics, Vol. 27, No. 3 (Spring, 2005), pp. 393-408Published by: M.E. Sharpe, Inc.Stable URL: http://www.jstor.org/stable/4538934 .

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394 JOURNALOF POST KEYNESIANECONOMICS

rebuke the lines for not keeping straight-as the only remedyfor theunfortunateollisions which areoccurring.Yet in truth here s no rem-edy except to throw over the axiom of parallelsand to work out a non-Euclideangeometry" 1936a,p. 16).In the second volume of his biographyof Keynes, Skidelsky(1992,pp.486-487) notes thatKeynes recognized hatEinsteinbeganhis "TheGeneralTheory of Relativity"by using a similarmetaphor n whichEinsteinsuggests that his revolutionary cientificanalysisis similartocastingdoubton the ubiquitoususe of Euclideangeometryto explainimportanteal-worldphysicalphenomena. n a wonderful ssayexplain-ing the relationship between Einstein's time-space continuum andKeynes's market-moneyconnection,Galbraith1996, pp. 14-15) sug-gests that it is not coincidentalthatthe titles of both the revolutionarytheoryof Einstein and thatof Keynes startwiththesame three words-"The GeneralTheory."Galbraith tatesthatthe firstthree wordsof thetitle to Keynes's 1936 masterpiece"areevidentlycribbedfrom AlbertEinstein" ibid.,p. 14), forboth Einstein andKeynesbelievedthey hadcreateda scientific revolution ntheirdisciplinein the sense thatrealismrequiredoverthrowingsome fundamentalclassical axioms. To throwover anaxiomis torejectwhatthefaithfulbelieve are "universal ruths."Keynes's economic theoryrequiredrejectingbasic mainstreamaxi-oms inorder o developa logicalfoundation or anon-Say's Law modelmore closely related to the real world in which we happento live. Inlight of Keynes's analogywithEuclideangeometry,Keynes and thosePost Keynesianswho startfrom Keynes's (1936a, ch. 2) principleofeffective demandtheorymightbe callednon-Euclidean conomists!Therestrictive lassicalaxiomsrejectedbyKeynesin his logical analy-sis were (1) the gross substitutionaxiom, (2) the neutralityof moneyaxiom,and(3) the axiomof an ergodiceconomicworld.If theseaxiomswererejected,thenKeynesbelievedthat essentialcharacteristics f thereal world where involuntaryunemploymentrather han full employ-mentwas the typicallaissez-faireoutcome couldbe understood.Lavoie's criticismLavoie(thisissue,pp.371-376) accuses me of beinginconsistent n my(Davidson,2003-4) definitionof who is a Post Keynesianvis-a-vis my1970s (Davidson, 1972) andearly 1980s (Davidson, 1980; 1982) viewof who could be includedin the Post Keynesian camp. Nevertheless,Lavoienotes thateven 20 yearsago, I listed somekey characteristics fPostKeynesianeconomics as:


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WHATIS POST KEYNESIANISM ND WHO IS A POST KEYNESIAN 395

1.Thenotion thattheeconomicsystemis aprocess movingirrevers-ibly throughcalendar ime.2. Expectationsplay a key role in anuncertainworld.3. There s an essential differencebetweenfinancialandrealcapital.4. Incomeeffects dominatesubstitution ffects.ApparentlyLavoie does not realize that the irreversibility oncept initem 1 (above) and the uncertainty onceptof item 2 require he rejec-tion of the classical ergodic axiom. Moreover,the difference betweenfinancial and realcapitalspecifiedin item 3 requires herejectionof the

neutralityof money axiom,whereas item4 requires hat the gross sub-stitutionaxiom not be ubiquitouslyapplicable n all demandfunctions.Thus, nreferringomy 1980s listof keycharacteristicsf PostKeynesiantheory,Lavoie has apparentlyunknowinglyendorseda small-tentPostKeynesianconcept.Logicalconsistencysuggeststhatthis list of thekeycharacteristicswould exclude those heterodoxeconomistswhosetheoryconflictedwith thesekey characteristics,venthoughthey wanted o beshelteredunder hePost Keynesiantent.But the readermay ask why I was willing to include these heterodoxeconomists nmyPostKeynesianamalgam n the 1970sandearly1980sif theirtheoriesdid not overthrowall the classical axioms thatKeynesrequired o be discarded o obtaina general theory.The answer s thatIwas naive in two distinctiveways.First,I wasadoptingapolitical strategy o trytoproducea largeunitedfrontof heterodoxeconomiststohelpextricateclassicaleconomics fromitspositionof dominance nthe economicsprofession.Inthosedays,thepoliticalmotto thatSidneyWeintraub ndI adoptedwas "theenemyofmy enemy is my friend."Second,I thought hat f thesealternative choolsproclaimed hattheybelieved in the Keynesianrevolution, then, in time, I could convincethem to modifytheiranalytical rameworkby removingthe same threeclassical axioms thatKeynes had overthrown.Once they adoptedthis"non-Euclidean"pproach s the basicfoundation or economictheory,then these heterodoxeconomistswould be freeto addexplicitadditionalpostulatesas necessaryto deal with the specific querieson which theywished to focus. Any conclusionsthatthey reached that could not bereachedvia Keynes'sbasicanalytical oundationcould then be directlyattributed o the invokingof additionalspecific axioms. Accordingly,the applicabilityof their results to the real world could be judged di-rectlyon the basis of therealismof theadditional estrictiveaxioms thatthey addedto Keynes's generaltheory.


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Unfortunately, he historyof this wide-tentamalgamthat WeintraubandI (andothers)attemptedo cobbletogether n the last decades of thetwentiethcenturymerelydemonstrated ow idealisticourpoliticalviewwas and how ineffective my powers of persuasionwould be. Despitemorethan20 yearsof my discussions-with Sraffians,Kaleckians,Cir-cuit theorists,Marxians,and other heterodoxeconomists-on the needto reject these classical axioms to achieve a real-worldanalysisof anentrepreneurial conomy, these lattergroupsinsist on maintainingoneor more of these restrictiveclassicalaxioms.Historyhas shown thattheenemiesof my enemy often werenotPost

Keynesianfriends.In the lastdecadesof the twentiethcentury,thoughthe various heterodox theoreticalschools of thoughtcrowdedinto thePost Keynesiantent, many denied Keynes's call for a non-Euclideaneconomics. Instead,they insistedtheir analyticalframeworkcapturedthe essence of Keynes'srevolutiondespitethe fact thattheirtheoreticalmodels were logically inconsistentwithKeynes's general theory.This unwillingnessof manyheterodoxeconomiststo adoptKeynes'sanalyticalframework,while still claimingto be Post Keynesians,per-mitted mportantmainstreamconomists oargue hatPostKeynesianismwas not a coherent theoreticalschool. For example,Tobin wrote: "Aschool of self-styledpost Keynesians... rejectequilibriumanalysisal-together... and emphasize the macroeconomic implications of thenoncompetitive tructure f economics. Theirvalidpointsdo not addupto a coherent heory" 1985, p. 115).1Or,as Solow wrote:"ModemPostKeynesiansseem to saythatKeynes's basiccontribution omacrotheorywastherejectionof theequilibrium onceptashopelesslyahistoric.Thetextbookmodel ... ignoredthe essential importanceof finance. Nowsome of this is almostincomprehensibleo me, andthepartI do under-stand strikesme as way out of proportion.... Thusfarso-calledpost-Keynesianismseems to be more of a state of mindthana theory" 1976,pp. 343-344). Or,as theDombusch andFischer'smainstream extbooknotes:"postKeynesian conomicsremainsaneclectic collectionof ideas,not a systematicchallengeto neoclassicaltheory" 1990, p. 220).By permittingotherheterodoxeconomiststo use the Post Keynesianname while they arguedagainst(1) Marshall'sandKeynes's conceptsas equilibriumanalysisand theirapproach o supplyand demandfunc-tionanalysis,and(2) theneedforan axiomaticformal ogical approach

1This maybe true of some heterodoxeconomists,but it is not correctto attributetto those who adopt Keynes's principleof effective demand.


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todevelopingatheoretical ramework,PostKeynesiansmade teasy fororthodoxeconomiststodismiss thePostKeynesianmovementasmerelyanincoherentbabbleof aragtaggroupwhose ideas were often incoher-ent and who were not scientific enoughto do high-techmathematicaltheory as a check of coherence and consistency. And if Nobel Prizewinningestablishment Keynesian"conomistssuch as TobinandSolowsummarilydismiss Post Keynesian theoryas incoherentbabble,whyshouldthethousandsof graduate tudents, rying obecomeprofessionaleconomists and gain an academicposition at a prestigious university,take Post Keynesianismseriously?But even worse thanthe dismissal of PostKeynesiantheoryby Nobellaureates s the fact thatvariousindividualswithin the wide-tentPostKeynesianmovement often said disparaging hings about those of uswho used Keynes's principleof effective demand as the basis of PostKeynesiananalysis.2Moreover, omeof thesewide-tentPostKeynesiansexplicitly rejected Keynes's generaltheory aggregatesupply and de-mandanalysisasausefulanalytical ool, forinstance,Sraffians,Minsky,andKaleckians.Consequently, f Lavoie is claiming I am being inconsistent when Ichanged my vision of who to include in the Post Keynesiantent, myresponse s similar o one madeby Keynesmanyyearsago whenhe waschargedwithbeinginconsistentbecausehechangedhispositionon sometopic. Keynes'sresponsewas "wheneventsprovemy positionis wrong,I change my mind.What do you do, sir?"King's commentsI admireJohnKing's willingnessto admitthat,as a historian,he is em-barrassedby the fact that in his book, he was "clearlywrong on theoriginsof theconceptof ergodicity" thisissue,p. 377). Kinghadattrib-uted the origin of the discussion of the ergodic axiom in the PostKeynesianliterature o Lawsonrather hanDavidson.(Of course,KingmeansassociatingKeynes'suncertaintywith therejectionof theclassi-cal ergodicaxiom-but that is a minorquibble.)King also admits thathe was not correctwhen he suggestedthat theNew Keynesian'sefficiency wagetheories"shouldbe acceptable o PostKeynesians"(ibid., p. 378). King now asserts that what he meant to

2Kingnotes that"Minsky'sPost Keynesianismwas highly individual... [and]hewas even critical of PaulDavidson'smonetary heory... in his [Minsky's]dismiss-ive review of the latter's[Davidson's]Moneyand The Real World"2002, p. 113).


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writewas thatsome [wide-tent]Post Keynesians"had-probably mis-takenly-been attracted to them [New Keynesian theories]" (ibid.,p. 378). But it is not surprising hat those wide-tentoccupantssuch asfollowers of Kalecki, whose theory emphasizes monopoly elements,wouldbe attractedo the New Keynesianargumenthat t was the exist-ence of fixity of money wages andpricesthat"caused"unemployment.Ofcourse,hadKingusedmy small-tentdefinitionof PostKeynesianism,he would have immediately recognized that the attractionto NewKeynesians' efficiency wage theoryby some of King's wide-tent "PostKeynesians" s due to these economists acceptingone or more of thethreeclassical axiomsthatKeyneshad thrownover.Moreover,King still defends the non-Keynesian S-LMapparatus san essential descriptionof Keynes's general theoryframework,eventhoughHicks (1981-82), more thantwo decades ago, in a paper pub-lished in the Journalof Post KeynesianEconomics,specifically notedthathe (Hicks)waswrongwhen,in 1937he interpretedKeynesin termsof his IS-LM framework.Further,althoughKing rejects my claim thatMarx was a classicaleconomist,he does quoteJoanRobinsonas point-ingout thatdespiteMarx's dismissalof Say's Law,Marxsetabout"dis-coveringa theoryof crisis which wouldapplyto a worldin whichSay'sLaw was fulfilled"(Robinson,1942,p. 53). OnemightsimilarlyarguethatSamuelson,Modigliani,Tobin,andtheyoungerJ.R.Hicks didnotuse classicalanalysisbecausethey set aboutto explainhow unemploy-ment canexist in a world of flexible pricesas long as money pricesandmoney wages arefixed.I shall not even tryto rebutKing's pointswherehe indicates hediffer-encesbetween his andmy interpretationf Kalecki, Sraffa,Minsky,andHicks of the JPKE.Havingmet Sraffa,and knownandhadsignificantandlongtheoreticaldiscussionswithbothMinskyandHicks,I will stickto my interpretation f who ultimately supported and who rejected)Keynes's principleof effective demanddevelopedfrom Keynes's ag-gregatesupplyand demand unctionsas fundamentalo the Keynes vi-sion.Inhisbook,Kingexplicitlynotes thatMinskyhad "almostasmuchaffinity for the New Keynesians"(2002, pp. 113-114), and Minsky'sunwillingness o adopttheKeynes aggregatedemandandsupplyanaly-sis is well known.Minsky's affinityfor the New Keynesiansis partlydue to the factthat, ikeMinsky,New KeynesiansrejectKeynes'seffec-tive demandanalysisandKeynes's aggregatesupplyanddemand unc-tions as the fundamental ramework orKeynes's general theory.

Kingdoes raisethe issueas to whethermy PostKeynesianapproachscoherent,because he claimsmy analysisis "subject o the Sraffacapital


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critique" this issue, p. 381). Inresponse,I notethat,first,there is noth-ing in Keynes's general theoryor my Post Keynesianwritingsthat issubjectto the Sraffacritique.Sraffa'scritique s againstthe use, as thedemandcurvefor realcapital,of a specificallyshapeddownward lopingmarginalproductivityof capitalcurve that does not have reswitchingpoints.As I specificallynoted(Davidson, 1983),themarginalproductiv-itycurveforlabor s not the demandcurveforlabor.From hisargument,it follows that a marginalproductivity urve for capital,no matterwhatits shape,is not the demandcurve forcapital n a money-using,market-orientedentrepreneurialystem.Inmy view, King's invoking he SraffacritiqueregardingKeynesandmy writings s merelyas a "redherring."King incorrectlyarguesthatKeynes'sacceptanceof the first "classi-cal postulate" equiredKeynes's analysisto be limited to a purelycom-petitivemodel. On page 245 of the General Theory,Keynes (1936b)specifically noted thathis general theorywas applicableto any givendegree of competition-and not only pure competition.Moreover, nhis responseto Dunlop and Tarshis n the EconomicJournal,Keynescomplainedthatthey were attackinghim wrongly merely because hewas "concedinga little to the other view" (1973, p. 411) when he ap-peared o acceptthe first classicalpostulate.For,despitethis concessionto "theother[classical]view,"Keynescould still demonstrate hatpurecompetitionand completely flexible prices could not assure an auto-matic market mechanism for achieving full employment equilibriumeitherin the shortrunorthe long run. So King's attempt o flog Keynesandmy Post Keynesiantheoreticalmodelby draggingoutpurelycom-petitive pricing and well-behaved twice differentialproductionfunc-tions is just, I am sorryto say, wrong.Over 40 years ago, Davidson and Smolensky (1964) showed howKeynes's aggregatesupplyanddemandanalysiscould be used to ana-lyze the hiringbehaviorof profit-maximizing ntrepreneurs iven anydegreeof monopolyincludingpure competition.We also demonstratedhow entrepreneurs' iringdecisions would be handledby Keynes's ag-gregatesupplyanddemandanalysis f entrepreneursid notprofitmaxi-mize but nstead argeteda specificrateof profit,orevensomeminimumlevel of profit.So King's argument hatKeynes'sandmy analysesareonly applicable o purelycompetitiveproductand labormarketand can-not deal with monopolyor monopsonysituations,or even non-profit-maximizingconditions,is incorrect.But King's claim is an illustrationof my point that if you permitawide-tentdefinitionof PostKeynesianism, henyou encouragepersonsto enter the tent who, for some self-interestmotivation,see it as desir-


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able to announceto the world thatKeynes and the narrow-tentPostKeynesiansarejust a bunch of charlatanswho do not recognizethatitwas elements of monopoly and nonflexibleprices that are the (sole?)cause of unemployment.3With friends ike these, who needs enemies?Finally, King gets to the questionof whatcoherenceis andwhy it isimportant n developing a theoreticalframework. agree wholeheart-edly withKing's weak versiondefinitionof analyticalcoherencewhereanytheoreticalanalysisthat containslogical errorscannot be coherent.But King goes furtherandarguesthat a "strongversion"of coherence"requires he articulationof a single, unquestioned,universal heoreti-cal framework,which can then be invokedin all mannerof analyticalandpolicy contexts,in the way thatgeneralequilibrium heoryused to[why the past tense, John?]operatein neoclassical economics" (thisissue, p. 382).Kinghasmisrepresented ot only whatKeynessaid abouthis generaltheory but also my position in this matterof the need for a coherenttheoreticalframework. n my dictionary,coherence is definedas "thequalityof and/orstate of coheringesp. logical ororderlyrelationshipofparts." nmy mind,there s no questionthat since no one has been ableto showanylogicalinconsistencynDebreu'sgeneralequilibriumheory,therefore,Debreu'stheory s coherent.Coherence,however, s a neces-sary,but not a sufficient,conditionfor a theoryto be applicable o real-world economic problems. Debreu's framework is coherent, butirrelevant, or a real-worldentrepreneurialystem, because it is basedon severalrestrictiveaxiomsthatcannot bejustifiedas relevant o whatKeynescalled the "worldof experience" 1936a,p. 3).A coherentrealistictheorypossessingthemaximum evel of general-ity mustbe the fundamentalanalyticalfoundationuponwhich all fur-ther theoreticaldevelopmentsare constructed.Keynes'stheoryhas themaximum evel of generality,because,as Keynesindicated, t has fewerrestrictiveaxiomsthanany classical theory currentlyexisting.Debreu,on the otherhand,believes that a "goodgeneral theorydoes not searchfor the maximumgenerality,butfor the right generality"(Weintraub,2002, p. 113).Debreu nvokes the additional estrictiveaxioms of grosssubstitution,neutralmoney, and ergodicity(or the orderingaxiom indeterministicmodels)to get whathe believes is therightlevel of gener-

3Afterall, decades beforeKeynes'sgeneraltheory,classical economistsalreadyrecognizedthatmonopolyand fixed moneywages andprices prevented he marketsfromautomaticallyachievingfull employment.


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ality. Narrow-tentPost Keynesianscan specify exactly why Debreu'sanalysisis irrelevant orproblemsof real-worldentrepreneurialcono-mies by citing his need for theserestrictiveaxioms.If heterodoxeconomistsaccept Keynes'stheoryas the most general,real-worldanalytical ramework,hentheycan add restrictive dditionalaxioms to expandthis generaltheoryfor specific analyticalandpolicycontextswhen they believe thatKeynes's theorycannotshed any lightuponthephenomenaunder nvestigation.Butit is for thosewho add ad-ditionalrestrictiveaxioms to defendthe insertionof thosepostulatesandnot for thosewhorelyon the basicgeneral heoryto provea negative.If, for any given set of conditions,a generaltheoryto which supple-mentaryrestrictiveaxioms have been added obtainslogical results thataredifferent hanwhatone would obtain from the basic generaltheory,as does Debreu'sanalysis vis-a-vis Keynes's analysis, then it is clearthat the differentconclusions can be attributed irectlyto the specifiedadditionalpostulatesimposed by the investigator. n this way, econo-mists whoprovidepolicyprescriptionsan bejudgedstrictlyby whether

the specificadditionalpostulatesaddedby any investigatorare relevantfor the real-worldproblemunderinvestigation.That is the approachtakenby Keynes when he arguedthat the "postulatesof the classicaltheoryareapplicable o a specialcase and notthegeneralcase... [and]the characteristics f the specialcase assumedby classical theory hap-pen not to be those of the economic society in which we actuallylive,with the result that its teachingis misleadingand disastrous f we at-temptto applyit to the facts of experience" 1936a, p. 3).Followingthis line of argument, havedemonstratedhatfor Arrow-Debreu models, rationalexpectationsmodels, and other mainstreammodels (e.g., old or new Keynesianmodels), the resultsobtained aredueto addingone or moreof the threeclassicalaxioms thatKeynesandsmall-tentPost Keynesiansrejectas applicable o the real world.In his "strongsense" view of coherence,King has conflatedthe con-ceptof coherencewiththeconceptof Bourbakian igor.Withthe devel-opmentof Bourbakianmathematicsand its introduction y Debreu ntoeconomics,rigor,perse, has becomethe relevantcriteria orjustifyingatheoretical ramework o thatthevery"truth" f a theoryor model neednot be testedor confirmedby its applicability o reality.Modem main-streameconomists, such as Debreu, Samuelson,Von Neumann,andMorgenstem,claim thattheirmathematicaleconomic)models arerig-orousand,therefore, rue in theonly useful scientific sense of the word.In this view, truthand consistencyare intertwined,and truth s estab-lishedsolely by providinga "model"knownto be internallyconsistent.


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This raises the importantquestion:Whatdoes one meanby "truth"neconomic analysis?Is "truth" eachedmerely by the use of any math-ematical heorythatmakes tpossibletocheck itsconsistencyrelative oanextendedset of axioms?If a real-worldobservation e.g., involuntaryunemployment)s not "true"within this extendedrigorousmathemati-cal approach, hen the additionof one or moreadditionalaxioms (e.g.,the assumptionof rigid money wages andprices)can makethe systemmorecompleteand theempiricalobservation"true"within theenlargedrigorousmathematical ystem.Alternatively, s "truth"btainedby an axiomatictheorybased on theleast numberof assumptions "ageneral heoryof employment, nterest,andmoney")thatis descriptiveandapplicable o reality?This alterna-tive was Keynes's vision-as suggestedin his analogy of comparingclassicaleconomistswithEuclideangeometersn anon-Euclideanworld.Itis also the belief thatunderliesSidneyWeintraub'sandmy visionof aPostKeynesianeconomictheory,wherethe axiomaticbaseshouldbe assmall aspossibleby rejectingrestrictivepostulates hatareclearly inap-plicable to the real world. Additionalconsistentaxioms added to thismaximum evel of generalitywill producespecialcase theories hatmaybe true within their restrictive argeraxiomaticfoundation,but thesecases may, or may not, be applicable o the real world. The onus is onthose who add such restrictiveaxioms, such as Debreu, Samuelson,Solow, Tobin,Stiglitz,Mankiw,andso on,todemonstratehe relevanceof theirspecific case axiomsto the realworld.If, on theotherhand,we acceptKing'swide-tentPostKeynesiandefi-nition,then whatis to stopDebreufrombeing awarded herightto usethe Post Keynesiannomenclatureif he wantedto)?Afterall, Debreu'stheoreticalmodel s nothingmore hanKeynes'saxiomaticgeneral heorywith sufficient additionalrestrictiveclassical axioms to achieve whatDebreuboasts is the"rightevel of generality" ather hanthe mostgen-eraltheoryavailable.Whatcriteriado Kingand Lavoie have for criticizingthe market-ori-ented policies derived from Arrow-Debreurationalexpectationstypemodelsthat ayourunemploymentroblemon agovernmentocialsafetynet thatcoddles workers ntoaccepting eisureinsteadof workingat themarketclearingrealwage?Ultimately, King fears that a small-tentPost Keynesianismis morelikely to get trampledon thana widespreadtemple of Babel. So hiswide-tentconcept is essentiallya hope that,despite the discordin thewide tent that turnsoccupantagainst occupantand thereforedoes thetheoreticalethnic)cleansing ob thatmainstream conomistswould oth-


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WHATIS POST KEYNESIANISM ND WHOIS A POST KEYNESIAN 403

erwise have to try to do themselves, somehow a large numberof ca-cophonousvoices will be heard.Unless an economic catastrophe uchas theGreatDepressionshouldagaincloudeconomicreality,I fear thatif we follow King's wide-tent philosophy, we are accepting themainstream's"finalsolution" or Keynesand the Post Keynesians.Dow's criticismI find thatSheilaDow's comments(thisissue,pp. 385-391) representasignificant, but not complete, change in her view of the need for aBabylonian approach.In her earliercalls for a Babylonianapproach(Dow, 1985), differenceswere welcomed merelybecause this assuredthattherewould be no single acceptedwaytobeginanalyzingeconomicproblems.At theearlystageof developmentof Dow's Babylonianposi-tion, apparentlyany approachother thanthe mainstreamgeneralequi-libriumapproachwasacceptable.Babylonianismwas thenpresented,asDow statesin her current omment,as a stark"counterpointo the axi-omatic-deductiveogicalstructure f Cartesian-Euclideanhought"thisissue, p. 386).Dow seems to think hatI amprone oexpressKeynes'sgeneral heoryanalyticalframeworkand my Post Keynesianwritingsin terms of anaxiomatic-logicapproachprimarily solely?)"inthe interestsof persua-sion"(ibid.,p. 386) of mainstream conomists. Dow believes my viewof Keynesand Post Keynesianism s only a strategyforpersuasionandnot the "true"Babylonian methodological approach embedded inKeynes's general theory."If mainstreameconomists accept only oneform of logic, then the argumentseems to go that the case has to bemadein terms of thatlogic, or be brandedllogical. And, indeed,it is alegitimateelementof a pluralist strategyfor heterodoxeconomics thatsome lines of argumentareexpressed n thelanguageof theorthodoxy"(ibid.,pp. 386-387, emphasisadded).Inhernextparagraph, owever,Dow questions hereasonableness"torepresentKeynes's own approach, ar less thatof Post Keynesians,asaxiomatic" ibid.,p. 387). If we areto take this comment at face value,thenDow is suggestingwe shouldignoreKeynes's (1936a, p. 16) Eu-clideanversusnon-Euclidean nalogy nwhich onemerely"overthrows"theaxiom of parallels o workout anaxiomaticnon-Euclidean conom-ics. Dow's view of Keynes's approach lies in theface of Keynes's be-lief in therevolutionarypproach edeveloped njuxtaposinghisgeneraltheory,vis-a-vis classical economictheory, na similarwaytoEinstein'sgeneraltheory,relativeto Newtonianclassicaltheory.


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Galbraith1996, p. 15)hasnoted thatclassical Newtoniantheorypre-supposesan absoluteseparationand,therefore, ndependenceof spaceandtime. Einstein's revolution nvolved a "generalheoryof relativity,"where space and time were interrelated. n classical economic theory,moneyand marketsare assumedto be absolutelyseparateandindepen-dent(i.e., money is neutral)so thatchangesin themoneysupplydo notaffect thequantity old on marketsanymore thantime affectedspaceinNewton's classical view of thephysicalworld.Keynes's theory,on theotherhand, permittedmoney and markets to be interrelated-just asEinstein'stheorylet time andspacebe interrelated.

Keynes,likeEinstein,did not abandonogicalaxiomatic-based oher-ence. Since "space-time is curved,"Einstein merely extended "theReimanniangeometry of curved space to the physical universe....Keynes's reference to overthrowingEuclid's axiom of parallelsis anunmistakable llusion to thisfeatureof Einstein'stheory" ibid.,p. 17).Inoverthrowingome of therestrictive xiomsof classical heory,Keynescould demonstrate he interrelationship etween markets,real output,and the quantityof money.In theprefaceto the German-languagedi-tion to his masterpiece,Keynescalled thebook ageneral heorybecauseit was based on fewer axioms than classical economictheory(Keynes,1936b). It was the restrictiveclassical axioms that Keynes overthrewthat had separatedmoney from markets and real outputoutcomes inclassical(andmodernWalrasian-Debreu)heory. Keynesneverarguedthathis generaltheoryhadabandonedaxiomatic-logicalmethodology.Dow apparentlyconflates (1) the Debreu Bourbakianmathematicalargument hat the rightlevel of generalityrequiresan axiomatic math-ematicallyrigoroussystemwheremoneyis presumed o be neutralwith(2) Keynes's requirementor a logical theoretical ramework o under-standreal-worldeconomicproblemsandprocesses.The latterrequiresan axiomaticbase that is readily applicable o the realworld.The fact that for important rucialdecisions, the economic systemisnonergodicand,therefore,decision-makers know hat heydo not knowjust what will happen" as Hicks, 1981-82, p. vii, putit), does notmeanthatrigorousdeductive ogic hasno roleto playin a theoryof economicdecision-making.Nevertheless,Dow suggestsshewishestoreplacerig-orousdeductivelogic with"ordinaryogic"or "humanogic."Dow claimsthat t is "arequirementordeductiveaxiomatic ogic thattheknowledgeof axiomsbe heldwithcertainty"thisissue,p. 387) and,therefore, he existence of uncertaintyn the worldunder nvestigationmakes the use of axiomaticlogic inapplicable.Here Dow apparentlyconflates the uncertaintyhatthe decision-makers n one's model (and


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the realworld)face, with theinvestigator'swillingnesstorecognizeand"know" hatas decision-makers' ear of the uncertain uture ncreases,decision-makerswill searchfor instruments nd institutions hatpermitthem to postpone using their commandfor committingreal resourcestoday.Inmodem-dayentrepreneurialconomies,the existenceof moneyand a well-organizedspot market or liquidassetspermitssuch an ab-stention.In economicsystemswithoutsuchhuman nstitutions-for in-stance,akibbutz,a feudaleconomy,a RobinsonCrusoeeconomy-sucha postponement s not possible. The decision-makers n such environ-mentsknowthat,despitethe uncertainuture, heyarerequiredo use alltheircurrently arnedcommandoverreal resources mmediately.In otherwords,the existence of an uncertain uture,per se, does notinvalidatethe use of axiomatic deductivelogic. Even in a nonergodic(uncertain)environment, f an economy does not use money and mar-ketsto organizeproductionandexchangeactivities,Say's Lawwill ap-ply. Thus, we shouldnot be surprised hatclassical economics does agood job of representingdecision-makers'behaviorregardingoutputand employmentresultsin command economies such as feudalism,amonastery,or a nunnery,and so on. Whatis logically differentaboutamonetaryentrepreneurialconomy from a nonmonetary ystem is theexistence of moneyandliquiditycreating nstitutions hatallow incomerecipients o separatentimethe incomeearningprocessfrom thespend-ing on goods and services process. In a consistentlogical theorythatrejectsthe neutralmoney axiom, when decision-makersbecome morefearful of a futurethatthey "know"they cannotknow, then they canpostponeusing theirtoday's earningsto purchasereal goods and ser-vices and insteadbuy liquid assets. This rush to liquidity is possiblewhenthegeneral heorypermits he existenceof moneycontracts,money,andwell-organizedspotmarkets hat make assets thatpossess specificessentialpropertiesiquid.The essentialpropertiesof theseliquidassetsare(Keynes, 1936a,ch. 17)elasticitiesof productionand substitution fapproximately ero. Theseelasticitypropertiesmeanthatmoneyand allotherliquidassets do not growon trees(i.e., are not reproducible),andthatproduciblesare not gross substitutes or liquidassets.I am not quite sure what Dow meanswhen she says that it is "a re-quirementof deductiveaxiomatic ogic that heknowledgeof axioms beknown withcertainty"this issue,p. 387). Just becauseKeynes andthePost Keynesiansdevelop a theoryof economic decision-makingwhenthe decision-makers"know" hey do not know what will happen n thefuturedoes not mean that the theorybuildercannotknow with "cer-tainty,"that if liquid assets exist, then as fear of the future increases


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amongthe actorsin ourtheory,the aggregatedemandfor liquidassetswill riseattheexpenseof aggregatespending ncome on realgoods andservices.Inher discussionof "ontologyandaxioms,"Dow makestheveryvalidpoint that"longchains of [axiomaticdeductive]reasoningarevulner-able to errorbeing multiplieddownthe chain" thisissue,p. 388). This,however,does notmeanone should not use the axiom-baseddeductivelogic methodology.Itonlymeanstheorists houldbe carefulnotto makelogicalerrors n theirdeductivereasoning.Debreu'sanalysisand classi-cal theory ngeneral-which assuresafullemployment quilibrium ut-come-is apparently ree of logical errorsdespite the long chains ofdeductivereasoning.Classicaltheory's"teaching s misleadinganddi-sastrousif we attempt o apply it to the facts of experience"(Keynes,1936a,p. 3), not because its deductive chain containserrors(which itdoes not) but, rather,becauseits axiomatic foundation mplies charac-teristicsfor the economic system that"happennot to be those of theeconomic society in which we actually ive"(ibid.,p. 3).

Logically, consistentclassical theorists such as Nobel prize winnersDebreu,Friedman, ndLucasare, ikeRicardo,offering"usthesupremeintellectualachievement,unattainableby weakerspirits,of adoptingahypotheticalworldremotefromexperienceas thoughit was the worldof experienceandthenliving in it consistently" ibid.,p. 192).For Oldand New Keynesiantheoristswho attempt o develop Keynesianpoli-cies while utilizingan Arrow-Debreumicroeconomicfoundationor arationalexpectationsmodel,their "commonsensecannothelp breakingin-[to their long chains of deductivereasoning]with injuryto theirlogical consistency"(ibid., p. 192) as they introduce ogical errorsorinconsistencies into these models they call "Neoclassical SynthesisKeynesian"or "New Keynesianmodels (with rationalexpectations)."Withsuch inconsistencies nherentn mainstream"Keynesian"models,is it any wonder that the classical analysis of Friedman,Debreu,andLucasvanquishedKeynes andconqueredmainstream conomictheoryin the lastdecadesof the twentiethcentury?Ultimately,Dow retreats romheroriginalargument Dow, 1985)fora wide openBabylonianmethodologywhereintuition,and animalspir-its, can overrideaxiomaticrigorousformallogic. Dow now calls for a"structured luralism." n this structured luralisticview, each hetero-dox school is free to invent its own ontology-as long as they have asharedstartingpoint of the social worldbeing understoodas an open,organicsystem.Somehow it seemsthatthis call fordifferentontologiesjustifies ignoringthe use of "mathematicalormalism."


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Dow thenadmitsthatmy PostKeynesianview of a nonergodicontol-ogy (andI assume Dow would considerKeynes'sanalysiswith his em-phasis on uncertaintyand the nonstationarity f economic data)is anacceptablemethodologicalapproach. would,however,challengeDowand others to describe another"openand organic"ontology approachthat does not require he system to encompassa nonergodiceconomicenvironment. f otherheterodoxschool ontologies throw out the needforexplicitlystating hattheenvironments nonergodic, hen,by neces-sity,theseotherheterodoxsystemshavebuilt into thempreexisting awsof motionthatgovernfutureoutcomes-and we are back into the clas-sical world,even if we introduce he institutionof moneyandfinancialmarkets.UncertaintyhenbecomesmerelyanepistemologicalproblemthattheAustrianeconomic school has alreadydealt with formore thana century. f Dow and otheropen-systemadvocatesarewilling to admitthat a nonergodicenvironment s a necessaryand sufficient conditionforan"open,organic ystem,"hentheyareagreeing hatKeynes's heoryrepresents he maximum evel of generalityandthatthe small-tentdefi-nitionof PostKeynesianeconomics is theonlylogicalapproacho open,organic systems.I restmy case.

REFERENCESDavidson,P.Moneyand the Real World.London:Macmillan,1972.

- . "PostKeynesianEconomics:Solving the Crisis in EconomicTheory."PublicInterest,1980, special issue, 151-173. [Reprintedn The Crisis in EconomicTheory,editedby D. Bell andI. Kristol,New York,Basic Books.]. InternationalMoneyand the Real World.Macmillan,London,1982.- . "TheMarginalProductCurveIs Not the DemandCurvefor LaborandLucas'sLaborSupplyFunctionIs Not the SupplyCurvefor Labor n the RealWorld." ournalof Post KeynesianEconomics,Fall 1983, 6 (1), 105-117.-- ."Setting he RecordStraighton A Historyof PostKeynesianEconomics."Journalof Post KeynesianEconomics,Winter2003-4, 25 (2), 245-272.Davidson, P.,andSmolensky,E.AggregateSupplyand DemandAnalysis.New York:HarcourtBrace, 1994.Dornbusch,R., andFischer,S. Economics. New York:McGraw-Hill,1990.Dow, S.C. MacroeconomicThought:A MethodologicalApproach.Oxford:BasilBlackwell, 1985.

. "AxiomsandBabylonianThought:A Reply."Journalof Post KeynesianEconomics,Spring2005, 27 (3), 385-391.Galbraith, .K."Keynes,EinsteinandScientificRevolution." n P.Arestis(ed.),Keynes,Moneyand the OpenEconomy,Essays in Honorof Paul Davidson,Vol.1.Cheltenham,UK: Elgar,1996, pp. 3-20.Hicks,J.L. "IS-LM:An Explanation."ournalof PostKeynesianEconomics,Winter1981-82, 2 (2), 139-154.


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408 JOURNAL F POSTKEYNESIANCONOMICSKeynes,J.M. TheGeneralTheoryof Employment,nterestand Money.New York:HarcourtBrace, 1936a.

. "Preface o GermanLanguageEdition."TheGeneralTheoryof Employment,InterestandMoney.Berlin:DunckerandHumblot,1936b.. "RelativeMovementsof RealWages andOutput." n D. Moggridge(ed.),TheCollectedWritingsof JohnMaynardKeynes,VII.London:Macmillan, 1973, pp.399-412. [Originallypublished n EconomicJournal,March1939, 49, 34-51.]King,J.E.Historyof PostKeynesianEconomicsSince 1936. Cheltenham,UK:EdwardElgar,2002.. "UnwarpingheRecord:A Reply to Paul Davidson."Journalof PostKeynesianEconomics,Spring2005, 27 (3), 377-384.Lavoie, M. "ChangingDefinitions:A Commenton PaulDavidson'sCritiqueofKing's Historyof Post Keynesianism." ournalof Post KeynesianEconomics,Spring2005, 27 (3), 371-376.Robinson,J. An Essayon MarxianEconomics.London:Macmillan,1942.Skidelsky,R. JohnMaynardKeynes,The Economistas Saviour.London:Macmillan,1992.Solow, R.W. "AlternativeApproaches o Macroeconomics."CanadianJournalofEconomics,1976, 12.Tobin,J. "Theoretical ssuesin Macroeconomic." n G. Feiwel (ed.), Issues inContemporaryMacroeconomicsand Distribution.Albany: AlbanyStateUniversityofNew YorkPress, 1985.Weintraub,E.R. How EconomicsBecame a MathematicalScience.Durham:DukeUniversityPress,2002.

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