Keynes, Uncertainty and the Global Economy 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 Keynes, Uncertainty and the Global Economy Beyond Keynes, Volume Two 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 797 0 Printed and bound in Great Britain by Biddles Ltd, www.biddles.co.uk Contents List of tables and figures vii List of contributors viii Preface ix G.C. Harcourt Introduction 1 Sheila C. Dow and John Hillard 1. The microeconomic foundations of Keynesian economics 6 Athol Fitzgibbons 2. Keynes’s ‘microeconomics’: some lessons 19 Piero V. Mini 3. Market structure, uncertainty and unemployment 45 Malcolm Sawyer and Nina Shapiro 4. Keynes’s theory of investment and necessary compromise 55 Victoria Chick 5. Some elements of a Post Keynesian labour economics 68 John E. King 6. Uncertainty, rationality and learning: a Keynesian perspective 88 Alessandro Vercelli 7. Organicism, uncertainty and ‘societal interactionism’: a Derridean perspective 106 Man-Seop Park and Serap Kayatekin 8. Classical liberalism in an environment of rational choice involving commitment and security as well as greed 128 M.C. Howard and R.C. Kumar 9. Some notes on the monetary debate within the Post Keynesian school 148 Giuseppe Fontana v vi Contents 10. Speculation and reasonableness: a non-Bayesian theory of rationality 165 Anna Carabelli 11. The Maastricht Treaty: unemployment, competitiveness and distribution 186 Jesper Jespersen 12. Policies for fighting speculation in foreign exchange markets: the Tobin tax versus Keynes’s views 201 Paul Davidson 13. An evaluation of the Tobin transactions tax 223 Philip Arestis and Malcolm Sawyer 14. Say’s Law in the open economy: Keynes’s rejection of the theory of comparative advantage 239 William Milberg Bibliography 254 Index 307 Tables and figures TABLES 1.1 Rationality and optimization 9 6.1 A summary of correspondences 101 9.1 The basic model of a monetary circuit 157 11.1 General government financial balances in Europe 193 11.2 Unemployment, unit labour costs and exchange rate variability, 1986–96 195 11.3 Capital: income share in OECD countries 197 12.1 Real GDP (annualized growth rate) in OECD countries 210 13.1 Countries with the largest volume of trading in foreign currency, 1992 and 1995 224 FIGURES 1.1 Uncertainty and intertemporal transformation 12 5.1 Point of arrival on quantity axis, determined from without 69 5.2 Real wage, determined from without 70 5.3 Effects of a tax-based incomes policy 74 5.4 Neoclassical and more general budget constraints 76 5.5 A macroeconomic model 81 5.6 The long-run variable coefficient Phillips curve 83 9.1 The long-term money supply 152 9.2 The liquidity preference line 155 vii Contributors Philip Arestis is Professor of Economics, South Bank University, London, UK Anna Carabelli is Professor of Economics, Università degli Studi del Piemonte Orientale, Italy Victoria Chick Emeritus is Professor of Economics, University College London, UK Paul Davidson is J. Fred Holly Chair of Excellence in Political Economy, University of Tennessee, Knoxville, USA Sheila Dow is Professor of Economics, University of Stirling, UK Athol Fitzgibbons is Associate Professor of Economics, Griffith University, Australia Giuseppe Fontana is Lecturer in Economics, University of Leeds, UK John Hillard is Director of Taught Postgraduate Programmes, Leeds University Business School, UK Michael C. Howard is Professor of Economics, University of Waterloo, Canada Jesper Jespersen is Professor of Economics, Roskilde University, Denmark Serap Kayatekin is Lecturer in Development Economics, University of Leeds, UK John E. King is Professor of Economics, Department of Economics and Finance, La Trobe University, Australia Ramesh C. Kumar is Associate Professor of Economics, University of Waterloo, Canada William Milberg is Associate Professor of Economics, New School University, USA Piero V. Mini is Associate Professor of Economics, Bryant College, USA Man-Seop Park is Associate Professor of Economics, Korea University, Seoul, Korea Malcolm Sawyer is Professor of Economics, University of Leeds, UK Nina Shapiro is Associate Professor of Economics, Saint Peter’s College, USA Alessandro Vercelli is Professor of Economics, University of Siena, Italy viii Preface It is both a pleasure and a privilege to write the Preface to the 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.