Post Keynesian Econometrics, Microeconomics and the Theory of the Firm THE POST KEYNESIAN ECONOMICS STUDY GROUP Post Keynesian Econometrics, Microeconomics and the Theory of the Firm and Keynes, Uncertainty and the Global Economy are the outcome of a conference held at the University of Leeds in 1996 under the auspices of the Post Keynesian Economics Study Group. They are the fourth and fifth in the series published by Edward Elgar for the Study Group. The essays in these volumes bear witness to the vitality and importance of Post Keynesian Economics in understanding the workings of the economy, both at the macroeconomic and the microeconomic level. Not only do these chapters demon- strate important shortcomings in the orthodox approach, but they also set out some challenging alternative approaches that promise to lead to a greater understanding of the operation of the market mechanism. The papers make important contribu- tions to issues ranging from the philosophical and methodological foundations of economics to policy and performance. The Post Keynesian Study Group was established in 1988 with a grant from the Economic and Social Research Council and has flourished ever since. At present (2002), there are four meetings a year hosted by a number of ‘old’ and ‘new’ uni- versities throughout Great Britain. These are afternoon sessions at which three or four papers are presented and provide a welcome opportunity for those working in the field to meet and discuss ideas, some of which are more or less complete, others of which are at a more early stage of preparation. Larger conferences, such as the one from which these two volumes are derived, are also held from time to time, including a conference specifically for postgraduates. There are presently over five hundred members who receive the Post Keynesian Study Group electronic newslet- ter and details of seminars. The Study Group has established a number of interna- tional links. As the present convenor of the Post Keynesian Study Group, I should like to thank Sheila Dow and John Hillard for the not inconsiderable time and effort they have spent in editing the proceedings and making these important papers available to a wider audience. John McCombie Downing College, Cambridge, UK Recent Developments in Post Keynesian Economics Edited by Philip Arestis and Victoria Chick Keynes, Knowledge and Uncertainty Edited by Sheila Dow and John Hillard Finance, Development and Structural Change Edited by Philip Arestis and Victoria Chick Post Keynesian Econometrics, Microeconomics and the Theory of the Firm Edited by Sheila Dow and John Hillard Keynes, Uncertainty and the Global Economy Edited by Sheila Dow and John Hillard Post Keynesian Econometrics, Microeconomics and the Theory of the Firm Beyond Keynes, Volume One Edited by Sheila C. Dow Professor of Economics, University of Stirling, UK and John Hillard Director of Taught Postgraduate Programmes, Leeds University Business School, UK IN ASSOCIATION WITH THE POST KEYNESIAN ECONOMICS STUDY GROUP Edward Elgar Cheltenham, UK • Northampton, MA, USA © Sheila Dow and John Hillard 2002 © All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. 136 West Street Suite 202 Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library ISBN 1 85898 584 6 Printed and bound in Great Britain by Biddles Ltd, www.biddles.co.uk Contents List of figures vii List of contributors viii Preface ix G.C. Harcourt Introduction 1 Sheila C. Dow and John Hillard 1. The division and coordination of knowledge 6 Brian J. Loasby 2. Innovation, equilibrium and welfare 15 G.B. Richardson 3. On the issue of realism in the economics of institutions and organizations: themes from Coase and Richardson 30 Uskali Mäki 4. Transactions costs and uncertainty: theory and practice 44 Peter J. Buckley and Malcolm Chapman 5. A Post Keynesian approach to the theory of the firm 60 Stephen P. Dunn 6. Trust, time and uncertainty 81 Vicky Allsopp 7. Keynes’s views on information 97 Sohei Mizuhara 8. The role of econometrics in a radical methodology 110 Bill Gerrard 9. Post-orthodox econometrics 133 Paul Ormerod 10. Realism, econometrics and Post Keynesian economics 144 Paul Downward v vi Contents 11. Keynes, Post Keynesians and methodology 162 Sheila C. Dow 12. How do economic theorists use empirical evidence? Two case studies 176 Roger E. Backhouse 13. Conflict in wage and unemployment determination in the UK 191 Philip Arestis and Iris Biefang-Frisancho Mariscal Bibliography 203 Index 257 Figures 4.1 Precision in decision making 55 13.1 Wage determination in the UK 192 vii Contributors Vicky Allsopp is Principal Lecturer in Economics at Middlesex University Business School, UK Philip Arestis is Professor of Economics, South Bank University London, UK Roger E. Backhouse is Professor of the History and Philosophy of Economics, University of Birmingham, UK Peter J. Buckley is Professor of International Business and Director of the Centre for International Business, University of Leeds (CIBUL), UK Malcolm Chapman is Senior Lecturer in International Business, University of Leeds, UK Sheila Dow is Professor of Economics, University of Stirling, UK Paul Downward is Reader in Economics, Staffordshire University, UK Stephen P. Dunn is Policy Advisor, Strategy Unit, Department of Health, Economic Advisor, Her Majesty’s Treasury, and Senior Research Fellow in Economics, University of Staffordshire, UK Bill Gerrard is Reader in Economics, Leeds University Business School, UK John Hillard is Director of Taught Postgraduate Programmes, Leeds University Business School, UK Brian J. Loasby is Emeritus Professor of Economics, University of Stirling, UK Uskali Mäki is Professor of Philosophy, Erasmus University Rotterdam, The Netherlands Iris Biefang-Frisancho Mariscal is Senior Lecturer in Economics, University of East London, UK Sohei Mizuhara is Professor of Economics at Ryukoku University, Japan Paul Ormerod is Director of Volterra Consulting Ltd, UK G.B. Richardson is former Chief Executive of Oxford University Press and Warden of Keble College, Oxford, UK viii Preface It is both a pleasure and a privilege to write the Preface to this volume of the second Leeds conference on Keynesian matters, so ably organized by Sheila Dow and John Hillard. The conference was a wonderful occasion for me especially; I made new friends and renewed old friendships in pleasant surroundings and I heard serious, stimulating and inspiring papers and dis- cussion. The contents of the volume show that the wide-ranging interests, example and inspiration of Keynes himself guided our discussions. Much unfinished business from Keynes’s own agenda received attention: the vexed place of imperfect competition in the Keynesian system; the com- promises needed to do effective systemic analysis; the roles of knowledge, information and uncertainty in economic analysis; appropriate method- ologies; the place for econometric procedures in effective analysis; the use- fulness of the insights of Keynes and his followers for current international issues, not least taming speculators and coping with the economic igno- rance that underlies Maastricht. Because it was a gathering of Keynes scholars we were not afraid to learn from the past, from both historical events and scholars now dead. This was not piety but the application of critical intelligence combined with per- spective. I am sure that readers of the volume will get pleasure and knowledge in equal measure from it. It only remains now for me to thank the editors and the contributors for their splendidly cooperative efforts. Please read on: G.C. Harcourt Cambridge, UK ix Introduction Sheila C. Dow and John Hillard The first Keynes, Knowledge and Uncertainty conference was held in Leeds in 1993 under the aegis of the Post Keynesian Economics Study Group. The purpose of that conference was to gather together a distinguished international collection of authors to build on the impressive foundation of Keynes scholarship which had built up over the previous ten years. Not all were themselves Keynes scholars – some brought new insights from new developments in the philosophy of the physical sciences, and from post- modernism and rhetoric studies. The aim was to provide a forum for an exchange of ideas along the lines of taking forward the insights of Keynes, which were now better understood, in the development of methodology, theory and policy for the 1990s and beyond. The proceedings of this con- ference were published by Edward Elgar in 1995, under the title of Keynes, Knowledge and Uncertainty. The second Keynes, Knowledge and Uncertainty conference took place in Leeds in 1996, again under the aegis of the Post Keynesian Economics Study Group. Its aim was to build on the work of the first conference, taking ideas forward still. This theme is encapsulated in the title for the conference volumes, Beyond Keynes. The majority of chapters in the Keynes, Knowledge and Uncertainty volume had focused on the methodological implications of Keynes’s philosophy, spelling out in particular the implications of adopting a non-dualistic, open-system mode of theorizing. But two chapters in par- ticular (by Skidelsky and Fitzgibbons) reminded us of the ultimate goal, which is to provide useful policy advice. In the present volumes, the empha- sis has shifted on from methodology. While some chapters still focus on methodology, they are tied into wider discussions in other chapters about developments in theory, empirical work and policy questions. Post Keynesian economics is most developed at the macroeconomic level, yet the orthodox agenda has brought to the fore a concern with understanding macroeconomic outcomes in terms of individual behaviour. The theoretical chapters in both volumes deal, in one way or another, with microfoundations.