Keynes and probability: An assessment

Abstract

Most interpreters agree that Keynes had a wide-ranging, complex, ‘vision of the world’, which underlies his theoretical contributions. Whenever this is forgotten, as happens in the so-called neoclassical synthesis, not only the original Keynesian spirit goes lost but also, and especially, we lose substantive bricks for our theoretical constructions. The paper considers an important instance of this general rule; namely Keynes's views on the logic of probability, meant as the field concerning human behaviour in an uncertain world (hence connected to, but distinct from, the pure theory of probability, meant as a field of mathematics). The paper begins by recalling the main aspects of the classical and frequentist approaches to probability and the main criticisms they received, pertaining among other things to the limits of their applicability. We then consider Keynes's own views, stressing three aspects: the definition of probability as pertaining to the field of logic, the notion of uncertainty and of the ‘weight of the argument’, the ‘theory of groups’. We then discuss the subjective approach of de Finetti, Ramsey and Savage, and contrast it with Keynes's own views. Finally, we consider the implications of our analysis for the interpretation of Keynes's General Theory, and of his attitude towards econometrics.     

Marx on Ricardo: an explanation of some important misunderstandings

Ricardo's theory of value and distribution is reconstructed by proceeding along the lines of Marx's critique of Ricardo. It is thus an anti-critique of Marx's reading of Ricardo. The chapter ‘On Value’ in Ricardo's Principles is shown to be a consistent and rigorous treatment of the determinants of prices of production. According to Ricardo labor-values merely serve to approximate more elaborate standards of value. Marx's criticism is shown to rest crucially on his own misinterpretation of Ricardo's definitions and presupposes his own – faulty – theory of surplus value. Therefore Ricardo's theory can – contrary to Marx's theory of surplus value – still be regarded as a fruitful complement to Sraffa's model.     

The age of the universal consumer: a reconsideration of Ricardo's politics *

This paper reconsiders Ricardo's political thought, its relationship with his political economy and, more generally, Ricardo's connection with the ‘philosophical radicalism’ of Bentham and James Mill. It is arguedinter alia, that Ricardo's politics were utilitarian and individualistic; that he developed a notion of a shared, homogeneous interest; that he believed that individuals should know their ‘real’ interests as a condition for their suffrage; and that he subscribed to a doctrine of virtual representation. It is also argued that Ricardo was considerably less ‘radical’ in his political views than some previous commentators have recognized.     

Reading Sraffa's Indices – a note *

Piero Sraffa took thirteen years to publish the General Indexto The Works and Correspondence of David Ricardo.The Index is compared to others and is shown to be exceptional in that it leads the way to specific interpretations of Ricardo's life and theory. The choice of entries referring to theory is based on Ricardo's own concepts and carefully avoids neoricardian, Marxian and neoclassical terms. Examples discussed concern ‘comparative advantage’ and ‘value’ The entries referring to Ricardo's life are proof of Sraffa's broad historical interests and focus on certain characteristics of Ricardo.     

Tozer on machinery

This paper examines John Edward Tozer's mathematical treatment of the classical approach to the machinery problem and his discussion of some arithmetical examples that had been presented by Barton, Sismondi, McCulloch and Ricardo. It is shown that Tozer (1) made a genuine contribution to the contemporary debates on the machinery issue, (2) anticipated modern formulations of the problem of the choice of technique, and (3) revealed a puzzling inconsistency in Ricardo's argument in the famous chapter ‘On Machinery’.     

On re-reading Joan Robinson's ‘On re-reading Marx’

This paper offers some reflections inspired by a re-reading of Joan Robinson's On Re-reading Marx on the 50th anniversary of its initial publication. Robinson wrote the pamphlet in the light of Sraffa's Introduction to Ricardo's Works and Correspondence, which suggested to her that the concept of the rate of profit was essentially the same in Ricardo, Marx, Marshall and Keynes. In addition to the connections among Ricardo, Marx, Marshall and Keynes, Robinson also addresses the issues of equilibrium and time, and the dogmatism of Marxism.     

Say's involvement in the 1819 French edition of Ricardo's Principles and the issue of rent

This paper focuses on Say's contribution to the first French edition of Ricardo's Principles and on the analytical consequences of his involvement on the issue of rent. Part one investigates the “story” of this edition. It stresses Say's friendship with the translator, his involvement in this publication and his attitude toward Ricardo. Part two analyses how elements from Say's thought were introduced into Ricardo's theory of rent through this edition. These elements conveyed ideas which were definitely at odds with Ricardo's theory and misrepresented Ricardo's true concept of differential rent which was central to his theory.     

Sraffa,Keynes and 'The Years of High Theory'

This paper argues that Shackle's interpretation of 'the years of high theory' is flawed. Shackle (1967) sees Sraffa's critique of the Marshallian theory of value only as a step in the development of the theory of imperfect competition. In the same vein, Shackle reduces the message of Keynes's General Theory to the claim that unemployment results from the existence of uncertainty and irrational expectations. Thus, Shackle leaves open the possibility that both Sraffa's critique of Marshall and Keynes's theory of effective demand do not question the internal coherence of neoclassical theory, but instead merely assert that market imperfections render it irrelevant for the analysis of the real world. This paper argues, in contrast, that the theories of Sraffa and Keynes should be interpreted as radical departures from marginalism, and represent a return to the surplus approach of classical political economy.     

Keynes's realisms

Abstract

Some authors pointed to a realist orientation in Keynes's thought. However, since ‘realism’ is a wide and sometimes equivocal term, one may ask what kind of realism Keynes's realism is. This paper argues that Keynes held to an ontological, logical–semantic and epistemic realism. Whereas ontological realism has metaphysical connections, logical–semantic realism involves a notion of truth, and epistemological realism presupposes a theory of knowledge. The character of the subject matter circumscribes the scope of this last kind of realism. Epistemological realism is related to the role of intuition and convention in Keynes's thought, the meaning and evolution of which is explained.     

The Point of Effective Demand

Abstract

Keynes's principle of effective demand conceives competitive equilibrium in terms of the choices of entrepreneurs, investors and consumers, rather than of the optimal allocation of factors of production. In The General Theory, effective demand is distinguished from aggregate demand and from income, expected or realised, and there is no suggestion that equilibrium means the convergence of expectations. Reconsideration of Keynes's use of time and equilibrium periods leads to the conclusion that he treats employment as in continuous equilibrium, at the point of effective demand, determined by the state of expectation, the correctness of which is strictly irrelevant. The nature of the equilibrium represented by the point of effective demand is here described, not in terms of the multiplier, but in terms of the continuous equilibrium of supply and demand in short-term forward markets. This reading is faithful to Keynes's conception of aggregate demand as dependent upon the expectations of entrepreneurs, and it resolves the meaning of his ‘long-period employment.’ Formal appendices identify the differences between Keynes and Walras and the nature of the multiplier. The paper concludes that the Keynesian cross and ‘Swedish’ analysis should be abandoned, and the Walrasian conception recognised as only the limiting case of general competitive equilibrium in a monetary economy.     

Rejoinder to Rosser,O'Donnell,and Carrión Álvarez and Ehnts on their criticisms of my ergodic/nonergodic formulation of Keynes's concept of an actuarial certain future vs. an uncertain future

This article provides my responses to recent criticisms of my argument associating Keynes’s concept of uncertainty with Keynes’s explicit statement that in our world of experience applying the “probability calculus” to historic data does not produce actuarial certain knowledge of future economic outcomes. Furthermore I have tried to explain, using Keynes’ own written statements how Keynes’s General Theory differs from old classical theory, new classical theory, Samuelson’s Keynesian Theory, and New Keynesian Theory.     

The Dutch and Portuguese-Jewish background of David Ricardo

This article deals with the Dutch and Portuguese-Jewish background of David Ricardo. The important pieces of information, found in the Amsterdam municipal archives, on the one hand correct, and on the other complement, the data presented by P. Sraffa. Recently, new evidence has been found on Ricardo's stay in Amsterdam in the years 1783?–?85. This evidence throws new light on Ricardo's relationship with his uncle Moses in Amsterdam. It is shown that his formal education was poor, but that his informal education may have been rich. The question of whether Ricardo visited the famous Talmud Tora in Amsterdam is settled in the negative.     

The Fault Line between Keynes and the Cambridge Keynesians: A Review Essay

This essay reviews Michael Ambrosi's important but neglected book on the formative period of Keynesian economics. The book traces the evolution of a Cambridge macroeconomic tradition running from Marshall and Pigou to Keynes, and interprets The General Theory as a response to Pigou's analysis of unemployment. Ambrosi also argues that Keynes's disciples, Richard Kahn, Nicholas Kaldor and Joan Robinson, were, in the 1930s, wedded to a Pigovian methodology and did not immediately recognise that Keynes had redefined the meaning of equilibrium in The General Theory. Keynes's attempt to redefine the analytical basis of neoclassical economics was thwarted, not merely by the neoclassical synthesis, but by those who claimed to be the inheritors and guardians of his vision.     

Is ex‐ante ex‐post analysis irrelevant to Keynes's theory of employment?

Ex‐ante ex‐post analysis has become a standard tool in macroeconomics. Yet Keynes dismissed it. We argue that Keynes's dismissal of ex‐ante ex‐post analysis is not an oddity but an indication of the originality of his theory of employment compared to standard macroeconomics. First, the principle of effective demand does not amount to a process that determines employment and income at the point of intersection of the traditionally defined ex ante supply and demand functions. Second, the finance motive allowed Keynes to confirm the identity of aggregate supply and demand already asserted in The General Theory. This latter conclusion is puzzling, however, since the principle of effective demand presupposes the possibility of a discrepancy between supply and demand. We suggest that Keynes's theory of employment is linked to a theory of income distribution whereby profits are a redistributed share of factor income which is transferred to firms when prices exceed factor costs. The identity and the equilibrium condition then relate to separate measurements of income and output, factor cost and prices.     

Was Keynes a Realist?

Lawson (1989a) has interpreted Keynes as a philosophical realist, adhering to the view that the economy has a constant inner structure. Against this it is claimed below that, although Keynes speaks about realism, it is not in this sense, but in the common sense way of referring to actually observable entities of an economic model. In addition, it can be shown that Keynes's views can be interpreted as instrumentalist—he emphasises characteristics such as usefulness and convenience, besides and instead of truth. Thus, truth and truthlike concepts do not, in Keynes's thinking, have the paramount position that they have in realist philosophy.     

Krishna Bharadwaj's “Return to Classical Theory”: an attempt towards an archaeological reconstruction

Abstract

In the wake of Sraffa's ‘return to classical theory’, Krishna Bharadwaj undertook a critical reassessment of Marshall's claim to continuity with classical theory in general and Ricardo's ‘intensive margin’ in particular. Her analysis is based on an analytical separation between two distinct ways of economic reasoning: the ‘surplus based’ and the ‘demand and supply based’ theories. Calling it an ‘archaeological reconstruction’ of the history of economic theories, I will examine how such an interpretation of theoretical shifts clarifies both the presuppositions behind analysing at the ‘margin’, and hence its radical departure from the conceptual content of the classical theory.     

Joan Robinson and the three cambridge revolutions

Joan Robinson's association with three Cambridge ‘revolutions’—imperfect competition, effective demand and capital theory—is examined in the context of her personal and intellectual partnership with Richard Kahn, John Maynard Keynes and Piero Sraffa. Initially, imperfect competition appeared to have successfully extended marginal analysis to all market forms. It also allowed Richard Kahn and Joan Robinson to persuade Keynes to present the main argument of The General Theory in terms of aggregate demand and aggregate supply. By the early 1950s, however, Joan Robinson had rejected the Marshallian methodology and had become a strenuous censor of neoclassical theory. In this paper the origin of her critique is traced to her reading of Sraffa's Introduction to Ricardo's Principles.     

Keynesian uncertainty and the instability of beliefs

In an influential critique, Coddington (1982) argues that Keynes uses the theme of uncertainty in an opportunistic way in the General theory emphasizing it when it suits his purposes and ignoring it when it does not. This reading is examined in the light of Keynes's earlier Treatise on probability. The first part of the paper argues that Keynes's epistemology differs in important respects from the one Coddington is attacking, and in particular, that Keynes's account contains conceptions of uncertainty not considered by Coddington. The two premises of Coddington's argument are then assessed. These are: 1) that Keynes provides no account of the relative impact of uncertainty in different decision-making contexts; and 2) that uncertainty is not a sufficient condition for unstable beliefs about future outcomes of current (investment) decisions. It is argued that Coddington is mistaken in asserting 1) and, although 2) is correct in principle, that there is nevertheless a strong presumption that uncertainty does lead to unstable beliefs in the particular situations Keynes describes. The conclusion is that the connection between uncertainty and unstable beliefs cannot be regarded as either analytically destructive or somehow beside the point, even on Coddington's terms.     

Marx and the Development of Critical Political Economy

Abstract

Although relevant analytical developments were provided over time by the critique of economic theory, they did not succeed in inhibiting the occurrence of a full-fledged revival of the neoclassical interpretation of capitalism. The development of critical economics and its capability of checking the influence of the dominant economic culture have been especially prejudiced by the failed integration between the analyses of Marx and Keynes. Following Keynes, once the ‘inducement to invest’ had been singled out as the central question for the explanation of output levels, one should have promptly acknowledged that on this very question Marx's analysis was significantly richer and more relevant than Keynes's—the richness and relevance of the former ultimately resting on the great attention Marx dedicated to the complex question of the influence of income distribution on the capitalists’ incentive to invest. It is argued in the article that through the study of this influence Marx succeeded in putting together the essential elements of a critical theory of effective demand, based on the principles and mechanisms that govern the distribution of income between profits and wages.