Post Keynesian School
Kenysian believed the real characteristics of real world is:
Money matters in the long and short run; liquidity preference affect the decision making;
Economic system moving from past to uncertain future; decisions taken in investment, production and consumption in an uncertain environment;
Forward contracts in money terms developed to organize time consuming production and exchange processes;
The money-wage contract is the most popular one, Money –wage contract in economic system are called the “entrepreneur system”.
Unemployment is the common laisse-faire situation in a maket-oriented, monetary production economy.
Keynesian’s attack on Say’s Law
The orthodox economics not explain enough about the unemployment.
Keynesian demonstrated the Say’s Law is not true law relating the aggregate demand and aggregate supply functions.
Say’s Law
Aggregate demand relates the entrepreneur’s expected sale with the level of employment will hire. D
The higher expected sales ,the more workers will be hired. Z
Aggregate demand relates the buyers’ desired expenditure with the given level of employment.
All expenditure (AD) equals to the total cost of aggregate production (AS).
D= fd(N)
Z=fz(N)
Say’s Law asserts fd(N) = fz(N)
Say’s Law: all cost of production is recouped by the sale of output.
Never a lack of effective demand.
No obstacle to full employment.
The aggregate demand and supply functions will be coincident if:
Money is neutral;
Gross substitution: everything a good substitute of everything else
Ergodic axiom: future can be predicted in terms of probabilities.
Keynes’
Accept the normal firm short run supply function developed by the Marshallian Economics as Aggregate supply function.
Divide the aggregate demand function into two classes:
D1 expenditures depend on the level of aggregate income, therefore the level of employment.
D2 expenditure not depends on the level of aggregate income.
D1= f1(N)
D2 f2(N)
D2 relates to income D2= f2(N) so long as f1(N) + f2(N) = fz(N) for all value N, then Say’s Law is not applicable.
Special case in Classical theory:
D2= 0
D1 =f1(N) =fz(N) = Z
In “Fundamental psychological law” “the facts of experience” are marginal propensity to consume and to save were always less than one.
f1(N) would never coincident with fz(N), even if D2 =0. Say’s Law not applicable of “the fcats of experience”.
Can Relative Price Changes Induce D2 to fill the Gap?
In classical theory, all income earned in accounting period is divided on the basis of time preference:
spending income on currently produced consumption goods;
spending income on current investment goods that will be used to produce goods for future consumptions.
Fist step: Kenys’s time preference theory:
How much current income is spent on the current consumption of goods;
How much current income is not spent on the consumption goods, but instead is saved by purchasing liquidity assets.
Second step: liquidity preference:
Income earners determine what liquidity assets the saved income should be stored to transfer the purchasing power to future period.
Liquidity assets have the essential properties:
Non-producible for industry products; (which means industries can not ask labour to produce money) e.g. money doesn’t grow on the tree.
The existence of non-producible liquid assets or money applies that all income earned on the production of consumption goods is not spent on the products produced by labour.
Non-substitutable for industry products;
So the demand for the liquidity assets doesn’t create demand for industrial products.
Keynes developed his liquidity preference theory to demonstrate the involuntary employment:
The essential properties of money and interest:
The elasticity of productivity of all liquid assets including money is zero or negligible;
The elasticity of substitution between liquid assets and reproducible goods was zero.
Investment Spending, Liquidity, and the Non-neutrality of Money Axiom
D2 expenditure not related to the income. Agents can exercise demand of D2 by borrowing. D2 is not constrained in the current income. D2 is constrained by expected future cash flow. Keynesian multiplier effect: Money is created by borrowing from a bank system. Keynesian financing mechanism: where increases in the nominal quantity of money are used to finance increased demand for producible goods which results increasing employment levels. <>
What Type of an Economic System is ‘Irrational’ Enough to use Money Contracts?
Neoclassical economy’s fundamental axiom is the neutrality of money where economic agents are presumed to make rational decisions.
Money contracts used by modern economics are irrational since fixed payments in nominal terms, can impede economic agents from self interest maximizing.
For the post Keynesian, binding the money contacts are method for dealing with future uncertainty.
Cooperative economy: production is organized; inputs are rewarded with output produced measured by the contribution. E.g. prisoner (no unemployment)
Entrepreneur economy: production is organized by entrepreneurs who hire factors of production and look to their recoupment from selling the output for money; no guarantee that all money paid out to inputs will be spent on the products industry.
Information, Decisions and Uncertainty
Post Keynesian perspectives on uncertainty: probability distributions are not the basis for comprehending real-world behaviour under uncertainty. (Davidson 1978, 1982)
