Jim Devine wrote:
Why don't you look at the work of Paul Davidson to find out? (See his
MONEY AND THE REAL WORLD.) For example, Davidson argues that the
non-ergodicity of the empirical world is an important reason why
people value money as a store of value rather than simply a means of
payment (as in neoclassical theory). Holding money is a convention
that people have hit upon in order to minimize the impact of
fundamental uncertainty. But it doesn't abolish that non-ergodicity.
Davidson's treastment of "uncertainty" ignores the ontological
premises - specifically the ontological premise that "relations" are
"internal" - underpinning Keynes's concept of "uncertainty". It's
this ontological fact that makes the long run uncertain in this sense.
The further into the future are the phenomena we wish to predict, the
fewer will be the relations that can reasonably be treated as "given"
and the closer we will approach to the mpossible to meet requirement
of needing to know everything abefore we can know anything.
This problem is much more acute in the case of social phenomena than
in the case of, say, physical phenomena because the relations on which
human "character' depends change much more quickly than those
determining the character of physical entities, e.g. planets.
There is, however, sufficient stability in these relations to make
possible rational prediction over periods of time short enough to make
reasonable the assumption that features of "character" relevant to
such prediction will themselves remain stable.
This is the ontological assumption underpinning Keynes's approach to
investment as rational "speculation", i.e. as rational prediction of
the behaviour issuing from some particular degree and form of
irratioanlity (understood psychoanalytically as psychopathology -
pschoanalysis being consistent with the ontological assumption because
it makes the degree and form of psychopathology dependent on the
particular social - including family - relations within which
individuals develop and live).
So the assumptions underpinning Keynes's idea of "uncertainty" don't
produce analytic intractability. In fact, as Whitehead points out in
elaborating a philosophy of probability on their basis, they solve the
problem of rational induction.
The theory of probability they ground is a "frequency" theory where
the frequencies are the "truth frequencies" associated withe the
objectyive possibilities that constitute what Whitehead calls "real
potentiality". These are the real possibilities open from some
particular present "location" as conditioned by the internal relations
constitutive of that location. Since "real potentiality" changes with
changes in this location, so too do these probabilities.
As I've said, the assumptions also allow for rational ways of dealing
with "uncertainty".
In atddition to "caprice", Keynes points to a rational basis for
acting on what he calls the "optimistic hypothesis" about the long run
phenomena characterized by this kind of "uncertainty", e.g. about the
possibility of the actualization of a society closer to the "ideal
social republic" in that long run, a society characterized by greater
individual "rationality" elaborated as greater "virtuositiy" in
Aristotle's sense. The rational basis is that such optimnism
universalized would tend to be self-justifying.
Marx provides a different basis for the same prediction. He claims
that wage-labour works to develop the "virtuosity" - the "powers" and
will - required to imagine and create the new social form from which
all barriers to full human development have been removed. This is the
basis of his claim in The Holy Family that such a prediction is
rationally groundable in knowledge of what the proletariat "is".
The idea of "is" here includes objective and knowable values,
knowledge of which is required for imagining and creating a social
form actualizing them. Whitehead, who shares this ontological
assumption with Marx, also makes it a basis for rational predicition,
a basis alternative to a "statistical" basis.
The ontological assumptions do limit the applicability of particular
analytical methods, however. For instance, as I've many times pointed
out, they limit the applicability of axiomatic deductive reasoning in
general and of mathematical reasoning in particular, a point made by
Marshall, Keynes and Whitehead (as well as by Hegel, Marx and Engels).
The historical development of "rationality" elaborated as
"virtuousity" (and, correspondingly, the historical development of
"irrationality", of what Marx, following Hegel, calls the "passions")
can't be treated as quantitative change in a logical "variable", i.e.
"virtuosity" and the "passions" do not remain self-identical through
changes in their relations (and, in any event, aren't the sort of
variable having a numerical measure even when their identities are
fixed).
Davidson ignores this aspect of Keynes.
In contrast to Keynes, he misidentifies "science" with axiomatic
deductive reasoning and assumes that all individuals are everywhere
and always "sensible" (a term he prefers to "rational" because of the
use of the latter to describe behaviour where "uncertainty" in
Keynes's senese is ignored). In other words, Davidson assumes that
all individuals (with the exception presumably of orthodox economists
whose axioms defining "rational" behaviour ignore it) act in conscious
awareness of the fact of "uncertainty" and do so "rationally"; they
are more "rational" than the rational agents who populate orthodox
economic theory,.
He mistakenly attributes all of this to Keynes.
As the last point suggests, he also ignores that Keynes is attributing
significant irrationality to the behaviour he's theorizing.
Thus, for Keynes, holding money is an irrational psychological means
of excaping from the anxiety "uncertainty" provokes. For Davidson, in
constrast, holding money is a "sensible" way of responding to the
"uncertainty" of the long run.
This implicitly requires howeever, the self-contradictory assumption
that the long-run future real value of money not be "uncertain". In
fact, on Keynes's premises, it isn't uncertain; it's practically
certain to be seriously eroded by inflation. Hoding it as a way to
dealing with the uncertainty of the long run is therefore not merely
not rational; it is, as Keynes, assumes, signicantly irrational, an
expression of psychopathology.
The mathematics of the EMH are elaborating the absurd hypothesis that
the individuals whose behaviour determines prices in financial markets
can and are correctly forming their expectations incorporating all
available information.
This hypothesis is itself rooted in psychopathology (and, therefore,
immune to rational critique). It's Keynes's second convention.
"(2) We assume that the existing state of opinion as expressed in
prices and the character of existing output is based on a correct
summing up of future prospects, so that we can accept it as such
unless and until something new and relevant comes into the
picture." (XIV, 114)
What counts as "news" - as "something new and relevant" - is itself
determined by mass psychology and is, in fact, not usually "relevant",
i.e. this convention, like the first, also produces expectations that
are both mistaken (not "correct") and irrationally anchored.
"We are assuming, in effect, that the existing market valuation,
however arrived at, is uniquely correct in relation to our existing
knowledge of the facts which will influence the yield of the
investment, and that it will only change in proportion to changes in
this knowledge; though, philosophically speaking it cannot be uniquely
correct, since our existing knowledge does not provide a sufficient
basis for a calculated mathematical expectation. In point of fact, all
sorts of considerations enter into the market valuation which are in
no way relevant to the prospective yield." (VII, p. 152)
Keynes, by the way, is using "correct" here in the sense I attributed
to Skidelsky, a sense confirmed in Skidelsky's own case by the earlier
passage I quoted from the article we're discussing, i.e.
"The chief of these ['conventions'] are the assumptions that the
future will be like the past (witness all the financial models that
assumed housing prices wouldn't fall) and that current prices
correctly sum up 'future prospects.'"
Finally, Keynes does explicitly take account of group psychology. His
third forecasting convention formally defines a "conventional
judgment" in terms of it:
"(3) Knowing that our own individual judgment is worthless, we
endeavour to fall back on the judgment of the rest of the world which
is perhaps better informed. That is, we endeavour to conform with the
behaviour of the majority or the average. The psychology of a society
of individuals each of whom is endeavouring to copy the others leads
to what we may strictly term a conventional judgment." (XIV, 114)
His theorization of this is derived from Freud's theory of group
psychology.
One aspect of this is that a psychological group of the kind likely to
be formed in financial markets will tend to become "manic" because of
the changed individual personality structure created by the formation
of a psychological group in Freud's sense. Such mania will inevitably
end in panic and depressive collapse when the psychological group
breaks up.
So Freud's theory of group psychology explains the periodic "manias,
panics and crashes" characteristic of these markets, i.e. it explains
why: "At all times the vague panic fears and equally vague and
unreasoned hopes are not really lulled, and lie but a little way below
the surface." (XIV, pp.114-5)
Ted
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