How Uncertain is the PK School with Uncertainty?

How Uncertain is the PK School with Uncertainty?

The theme of the conference

Where do we go from here? Great Leap Forward

The PK School is veryuncertain

What is the PK – School ?

Where is the PK - School ?

What is to do?

First we have to step backward, before we

can make the big leap.

Chapter 12: The State ofLong-Term Expectations

Long term expectations are decisive for investments.

Long term expectations are determined by psychological factors.

The role of knowledge has an influence to the “state of confidence”

The “state of confidence“ rules these factors. The “state of confidence“ is also influenced by

conventions.

Conclusions of Chapter 12

Uncertainty plays a major role for investments. A lack of confidence leads to lower

investments, less effective demand and higher unemployment rates.

The “state of confidence” has a higher impact on investments than monetary policy.

Chapter 18: The General Theory of Employment Re-stated

Given factors

Dependent variables

Independent variables

Given factors

Skill and quantity of available labor. Existing quality and quantity of available

equipment. Existing technique. Degree of competition. Tastes and habits of the consumer. Factors that determine the distribution of

national income...

Given factors

These factors are not constant but Keynes considers that these factors are not changing over a period.

Independent variables

The propensity to consume. The schedule of the marginal efficiency of

capital. The rate of interest.

Dependent variables

Volume of employment. The national income.

Implications

The given factors influence the independent variables but do not completely determine them.

The schedule of the marginal efficiency of capital is determined by the given factors, partly of the prospective yield of capital-assets of different kinds, whilst the rate of interest depends partly on the state of liquidity preference and partly by the quantity of money measured in wage-units. (GT p. 157)

Independent variables

Independent variables are consisting of three parts:

1. The psychological propensity to consume. 2. The psychological attitude to liquidity. 3. The psychological expectation of future yield

from capital assets.

Keynes's conclusion

“ ...the physical conditions of supply in the capital goods industry, the state of confidence concerning the prospective yield, the psychological attitude to liquidity and the quantity of money … determine between them the rate of new investment.“ (GT p. 157)

Conclusion of chapter 18

New investments are highly influenced by psychological factors in an uncertain world, namely determined by the “state of confidence“.

The relation between the „Treatise on Probability“ (TP) and the „The

General Theory“ (GT)

- The TP was submitted in 1907/08 and published in 1921.

- The GT was published in 1936.- There is a strong belief in the PK school there

would be a deep link between the GT and the TP.

Objective and subjective probability

- One fraction of the PK school (Continuists) assumes that Keynes developed an objective theory in the TP and let in unchanged until the publication of the GT.

- The other fraction (Discontinuists) assumes that Keynes first developed an objective theory of probability and later changed to a subjective theory due to the objections by Ramsey.

Uncertainty

- Both fractions assume that the definitions of risk and uncertainty are similar by Keynes and Knight.

- According to Keynes and Knight risk is defined as a quantifiable risk and uncertainty as a non-quantifiable risk.

- So, according to Ramsey, non-quantifiable risks can be quantified by betting quotes.

Uncertainty

- Both fractions do not consider the decisive question that there is a difference between Knight's and Keynes's definition of uncertainty.

- According to Knight uncertainty can be quantified by computational methods.

- According to Keynes uncertainty can never be reduced to a quantifiable risk.

Missing the point of Keynes

- The whole discussion in the PK School is a shadow boxing based on the hypothetical assumption that there would be a connection between the TP an the GT.

- The discussion misses the point that Keynes outlined uncertainty as a non-quantifiable risk which cannot be quantified by any methods.

- The discussion misses also the point that any statistical data from a time series of the past has no meaning for future events.

Conclusion

- The whole discussion is symptomatic for the current PK School.

- Theoretical discussions which have no meaning for Keynes at all and no meaning for the economic world of today.

Steeve Keen: Uncertainty in Chaos Theory

- In Chaos Theory the future cannot be predicted due to high complexity

- Chaos Theory is an epistemological in-determinism in contrast to an ontological in-determinism

Hyman P. Minsky: Bounded Rationality

- Bounded Rationality is also linked to an epistemological in-determinism in contrast to an ontological in-determinism

Paul Davidson: Non-ergodicity

- Non-ergodicity is linked to an ontological in-determinism

Keynes's criticism on Tinbergen

- Tinbergen uses multiple linear correlations without explanations for an economic model.

- The economic environment is not homogenous over a period of time.

- A set of empirical statistical data of the past has no meaning for statistical outcomes for the future (non-ergodicity).

Conclusion

Without ontological uncertainty liquidity preference, the non-

neutrality of money and the whole investment process according chapter

18 of the GT cannot be explained!