Some Post-Keynesian Suggestions for Brad DeLong

G.L.S. Shackle

Commenting on a Lars P. Syll post, Brad DeLong  grants that there may be something profound in the Post-Keynesian view that neither market participants nor economists “know the data-generating process.” “OK,” Professor DeLong allows, “suppose we decide to give up” this assumption, “what do we then do - what kind of economic arguments do we make – once we have made those decisions?"

I have a few suggestions, but first let’s be more specific about the Post-Keynesian complaint.  There is no “data-generating process” if, by this, Brad means a stationary, ergodic process (See P. Davidson, John Hicks, and even K. Arrow). (For reference, here’s Wikipedia’s definition of “ergodic”: “A stochastic system is called ergodic if it tends in probability to a limiting form that is independent of the initial conditions”).

More generally, the application of the probability calculus to the behavior of market participants isn’t wholly satisfying (See J.M. Keynes [weight of an argument], G.L.S Shackle [conceptual deficiencies of the probability calculus], and Taleb [Black Swans and Fat Tails]).

If one accepts these skeptical propositions (at least provisionally), then the following analytical suggestions seem worthy of consideration.  (I offer these without explanation, hoping the connections aren’t too hard to figure out):

1. “History” should take its place alongside “Equilibrium” in economic modeling and argument;

2. Hysteresis isn’t an “add-on."  Many (maybe even most) real-world outcomes are path dependent;

3. Disequilibrium is the normal state of the “macroeconomy,” the ex post accounting world rarely corresponds to the ex ante expectations that produced it, and you can't ignore "out-of-equilibrium behavior";

4. Agent-based modeling (Santa Fe style) may prove useful in thinking about interactions among agents with different “views of the world,” the bulls and the bears, etc.;

5. Leave Tobin’s “Liquidity as Behavior Towards Risk” aside in favor of G.L.S. Shackle’s analysis of the elemental need that’s satisfied by money in a contemporary economy the future states of which can’t be known today; and

6. Coordination problems are important (if there are no rational expectations to replace the missing futures markets of Arrow and Debreu).