Although I agree with Winslow wrt. Davidson, Keynes is hardly the one to
be left the last word on uncertainty. Trapped within his own system and
unable to differentiate unambiguously between means and ends, he
confusedly splits "expenditures" (without defining exactly what it is
that is being spent!) into consumption and investment. All the while
understanding that any increase in I, requires a proportional increase
in future C to remain in equilibrium; so that the two are inexorably
related and cannot be split up at will. Be that as it may, without a
fitting definition of money, the former proposition is meaningless
anyway. Davidson (after Hicks) holds that "money is what money does" and
so forfeits any say in the matter too.
I'm still waiting for some economist to explain how money after having
been created out of nothing, when someone at an issuing bank accepts a
promissory note to have it paid back with interest later, turns into a
positive, free and clear "thing", different from representing a to be
repaid debt.
John V
Ted Winslow wrote:
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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