Downward concludes that critical realism is the appropriate method for Post Keynesian economics (Downward 1999: 181).
For Downward, the
“behavioural ‘core’ of post Keynesian pricing theory can be identified through the focus on the mark-up. In deference to research on actual agent decision making under conditions of uncertainty, post Keynesians should emphasise that prices are set by firms adding a mark-up to some measure of average costs. The mark-up is determined ex ante in the uncertain pursuit of some (possibly multiple) objective(s).” (Downward 1999: 181).This is in contrast to neoclassical economics that neglects overhead/fixed costs, and frequently has unrealistic assumptions in its behaviour theory.
Econometric studies are only a limited and incomplete form of evidence on pricing and the fundamental empirical work must remain qualitative case studies (Downward 1999: 183).
Demand obviously influences flexprices, and it can influence mark-up prices too, but does so to a lesser degree than costs. Downwards’ own research finds that “prices display considerable inertia” (Downward 1999: 184).
Businesses’ general unwillingness to change prices is rational, and is part of their behavioural attempts to overcome uncertainty and stabilise expectations (Downward 1999: 187).
These conclusions are highly problematic for neoclassical economics.
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.