Tuesday, March 8, 2011

Magic Dust Makes Free Markets Work

Here’s some levity, after the seriousness of the last two posts.

Maybe there is a solution to the contradictions, absurdities, and mountains of empirical evidence against neoclassical and Austrian economics.

The answer: magic dust. It seems to work well in the video below!

Mises the Hypocrite: When Reality Trumps Praxeology

A commentator on my last post has alerted me to this fascinating article on the Mises.org blog:
Richard M. Ebeling, “The ‘Other’ Ludwig von Mises: Economic-Policy Advocate in an Interventionist World,” Mises Daily, March 26, 2010
This provides a discussion by Ebeling of Mises’ policy advice to the old Austro-Hungarian empire and then the Austrian republic which replaced it, on the basis of “lost papers” of Mises recovered in 1996 and the 3 volume Selected Writings of Ludwig von Mises.

One of the more interesting points that emerges is Mises’ policy advice for Mexico:
“in a lengthy monograph that he wrote during the Second World War devoted to economic reform in an underdeveloped country like Mexico, he took as ‘given’ that the politics of Mexican society was not ready to fully privatize, say, the national railway system or the oil industry. So as a ‘second best,’ Mises proposed transforming the railway system into a government-owned but privately managed corporation with strict rules and procedures to assure it was run in a relatively ‘business-like’ manner with the least likelihood of political interference. He even supported limited and temporary subsidies to assist poor Mexican farmers to establish themselves as more-successful private enterprisers.

And on tariffs, he did not propose immediate abolition of trade barriers in Mexico. He accepted that there were many industries that had grown up behind the tariff walls, and that they would resist immediate repeal of trade protectionism. So, instead, he advocated ‘incrementalism,’ i.e., a gradual reduction of the tariff barriers over several years.”
Now, in contrast to many other Austrian views on economics, Mises’ plans here appear relatively reasonable. You might even say that reality penetrated his ideological mind and overcame his praxeological theory.

But one will have to wonder how a man who proclaimed that all government intervention in the economy leads to socialism or chaos could advocate “temporary subsidies to assist poor Mexican farmers” without devastating self-contradiction. How could Mises possibly believe that his “temporary subsidies” would be abolished after some limited period of time, without sending Mexico on the path to socialism or chaos?

In an attempt to defend Mises from Schuller (1950), Rothbard characterised Mises’ position as follows:
“When Mises presents us with the choice between the free market and socialism, he is saying that in-between systems of a hampered market are not coherent, consistent systems. He demonstrates that any measure of government intervention in the market creates problems and consequences which present the people with a further choice: repeal this measure, or effect another measure of governmental intervention …. interventionist measures logically lead to one or the other [sc. free market or socialism]. Since a socialist system cannot exist, the only intelligent choice is the purely free market. ... Mises demonstrates that every form of government intervention in the market creates consequences that lead to an economy worse than that of the free market, .… For Mises, all government intervention in the market is irrational and therefore contrary to economic law” (Rothbard 1951: 184).
Perhaps Rothbard exaggerated Mises’ position somewhat, but a reading of Human Action mostly confirms his view:
“The maintenance of a government apparatus of courts, police officers, prisons, and of armed forces requires considerable expenditure. To levy taxes for these purposes is fully compatible with the freedom the individual enjoys in a free market economy. To assert this does not, of course, amount to a justification of the confiscatory and discriminatory taxation methods practiced today by the self-styled progressive governments. There is need to stress this fact, because in our age of interventionism and the steady “progress” toward totalitarianism the governments employ the power to tax for the destruction of the market economy. Every step a government takes beyond the fulfillment of its essential functions of protecting the smooth operation of the market economy against aggression, whether on the part of domestic or foreign disturbers, is a step forward on a road that directly leads into the totalitarian system where there is no freedom at all” (Mises 1996: 282–283).
Commenting on his support of the gold standard and attacking opponents of it, Mises makes a bold claim:
“However, the futility of interventionist policies has nothing at all to do with monetary matters. It will be shown later why all isolated measures of government interference with market phenomena must fail to attain the ends sought. If the interventionist government wants to remedy the shortcomings of its first interferences by going further and further, it finally converts its country’s economic system into socialism of the German pattern. Then it abolishes the domestic market altogether, and with it money and all monetary problems, even though it may retain some of the terms and labels of the market economy” (Mises 1996: 474).
One sentence in this passage deserves emphasis:
“all isolated measures of government interference with market phenomena must fail to attain the ends sought”.
If Mises really believed this, then his support for “temporary subsidies to assist poor Mexican farmers” stands as a bizarre, illogical position for him. According to him, even isolated instances of government intervention with the market must fail.

So how, then, could Mises’ market-distorting subsidies possibly achieve the goal he wanted for them? A miracle? Libertarian magic dust?

We are faced with yet another instance of Mises’ intellectual hypocrisy and logical contradictions.

A more serious accusation against Mises is his ridiculous view that social democracy leads to fascism. Let’s take an example from history which is highly relevant to Mises’ theory.

Engelbert Dollfuss became Chancellor of Austria in 1932. In March 1933, Dollfuss effectively abolished democracy, and established an authoritarian regime, but was assassinated in July 25, 1934 and replaced by Kurt Schuschnigg, who was Chancellor from July 1934 to the Anschluss in March 1938.

It is claimed that before 1934 Mises had become an economic adviser to Dollfuss, even a close adviser (see Hans-Hermann Hoppe, “The Meaning of the Mises Papers,” Mises.org, April 1997).

And what exactly happened in Austria in this period when Mises may have had some influence on economic policy? Let’s look at a few quotes from the specialist literature on the history of Austria in the 1930s:
“In tackling the economic crisis the Dollfuss-Schuschnigg dictatorship pursued harsh deflationary policies designed to balance the budget and stabilize the currency. The government’s program featured severe spending cuts, high interest rates, and frozen wages. From an orthodox economic point of view there was considerable success: by 1937, both industrial and agricultural production had surpassed the levels of 1929; trade was more favourably balanced; the National Bank had liquidated most of its foreign debt and even accumulated reserves of gold and foreign exchange. In a sense the Christian Corporative regime demonstrated the viability of the Austrian state, but it did so at the cost of alienating a majority of the Austrian people. On the eve of Anschluss a third of the population was still out of work, while those fortunate enough to have jobs were bringing home paychecks considerably smaller than before the Great War” (Bukey 2000: 17).

“Beginning in in 1931, [Austrian] unemployment grew rapidly, reaching a peak in 1933–6, with between 24 and 26 per cent of the labour force out of work .... When, in 1937 and 1938, there was a modest recovery, unemployment never dropped below the 20 per cent value. This had a devastating effect on the legitimacy of the Austrian system .... As the Austrian government sustained its reluctance to apply Keynesian policies, the economic recovery never entered a serious tale-off phase in the second half of the 1930s. Linked to an exhausted determination of the Austrian government to resist the pressures from Germany, the economic crisis of the 1930s should be seen as an additional reason why the Austrian society was receptive to the annexation by Germany in March 1938” (Gerlich and Campbell 2000: 55).
Austrians are fond of pointing to the US recession of 1920-1921 as (alleged) proof that austerity brings prosperity, but you will not find them using 1930s Austria as proof of that, even though their hero Mises may well have had a hand in the contractionary policies pursued by the Austro-fascists.

In reality, it was the vicious austerity and deflationary economics imposed on Austria that led to some measure of public support for the Nazi takeover (Utgaard 2003: 72).

Let apologists for Mises explain whether he supported or even designed those policies.

Bukey, E. B. 2000. Hitler’s Austria: Popular Sentiment in the Nazi Era, 1938–1945, University of North Carolina Press, Chapel Hill, North Carolina.

Ebeling, R. M. 2010. “The ‘Other’ Ludwig von Mises: Economic-Policy Advocate in an Interventionist World,” Mises Daily, March 26.

Gerlich, P. and D. Campbell, 2000. “Austria: From Compromise to Authoritarianism,” in D. Berg-Schlosser and J. Mitchell (eds). The Conditions of Democracy in Europe, 1919–39: Systematic Case Studies, Macmillan, Basingstoke. 40–58.

Hans-Hermann Hoppe, “The Meaning of the Mises Papers,” Mises.org, April 1997.

Mises, L. 1996. Human Action: A Treatise on Economics (4th rev. edn), Fox and Wilkes, San Francisco.

Rothbard. M. N. 1951. “Mises’ ‘Human Action’: Comment,” American Economic Review 41.1: 181–185.

Schuller, G. J. 1950. Review of Human Action: A Treatise on Economics by Ludwig von Mises, American Economic Review 40.3: 418–422.

Schuller, G. J. 1951. “Mises’ ‘Human Action’: Rejoinder,” American Economic Review 41.1: 185–190.

Utgaard, P. 2003. Remembering and Forgetting Nazism: Education, National Identity, and the Victim Myth in Postwar Austria, Berghahn Books, New York and Oxford.

Sunday, March 6, 2011

Austerity: The New Cross of Gold

Some human beings are charismatic and spell-binding orators. William Jennings Bryan (1860–1925) was such a person. He can be seen in the photo below.

Bryan’s speech to the Democratic National Convention in 1896 was one remembered in history, for good reasons. Of course, human beings are human beings. I suspect that no human being can be right on every social, economic and cultural issue of his/her day. William Jennings Bryan was wrong on prohibition and in his opposition to Darwin’s theory of evolution, though not in his opposition to the vile Social Darwinism that was popular in his time.

He was also absolutely right in his denunciation of the gold standard. To this day, his speech opposing it remains one that will inspire all those fighting against wrong-headed, false, and pernicious economic doctrines. His metaphor of the “cross of gold” is a vivid one, which invokes images that will move anyone with a Christian cultural background. You do not need to believe in god (I personally don’t) to find the metaphor and speech poignant and powerful.

The metaphor has also been used by Post Keynesians and progressive New Keynesians like Paul Krugman in denunciations of modern neoclassical economics.

The crescendo of William Jennings Bryan’s speech can be heard in an audio recording he made later in 1921 that captures the mesmerising spirit of that speech. You can hear it in the YouTube link below.

At the end of his address he proclaimed:
“If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
Now, while many of the “commercial interests” of the world may well line up behind the advocates of austerity these days, just replace the words “cross of gold” with “austerity” and you have a perfect denunciation of the madness that is gripping policy-makers all over the world today.

If we want a good example of what extreme domestic wage and price deflation does to a country, then we need look no further than the brutal neoliberal austerity in Estonia and Latvia. In a somewhat less extreme form, it was been pursued in Ireland too, although Irish voters recently delivered their rather vehement rejection of the neoliberal assault on them.

That means nothing to Obama and the US Democrats, who announced a budget on February 14th, in which there are plans to cut $1.1 trillion in spending over 10 years, including heating subsidies for the poor. Do we need any further proof of the moral bankruptcy of the US Democratic party? But, then, they have always essentially been a party of business. What do they care if U-6 — the most reliable government measure of unemployment — stands at about 16%, and the Shadowstats.com estimate (perhaps more accurate) has hit a shocking 22%? After all, they have more important things like non-problem of the deficit (which, at any rate, would just fall naturally if the economy returned to full employment and progressive tax reforms were implemented in the next boom period). But let us move on.

In the UK, austerity is being pursued by the coalition government. And, while we expected this economic illiteracy from the Tories, the more insulting development, to many people, is the behaviour of the Liberal Democrats, who may well go down as the worst sell outs in British political history (though I personally doubt whether the Lib Dems were ever progressive on economics).

It is of course a shame to see the political descendants of Lloyd George’s 1929 Liberal party morphed into a neoliberal party in bed with the Tories. Contrast today’s “liberals” with those of 1929 who, when the UK was experiencing high involuntary unemployment, took advice from John Maynard Keynes and announced their radical plan to use fiscal stimulus and employment programs to cure the economic malaise (see Bill Mitchell, “We can conquer unemployment,” Billy Blog, September 24th, 2010).

The Liberals’ stirring election manifesto in 1929 was called “We can Conquer Unemployment!,” and it proclaimed:
“The word written to-day on the hearts of British people, and graven on their minds is Unemployment. For eight years, more than a million British workers, able and eager to work, have been denied the opportunity. At the end of 1928 the total reached a million and a half; a quarter of a million more than a year before. These workers with their dependants, represent four or five million souls. They are a very nation, denied the opportunity to earn their daily bread, condemned to hardship, to wearing anxiety and often to physical and mental demoralisation. What a tragedy of human suffering; what a waste of fine resources; what a bankruptcy of statesmanship!”
Indeed. But one will look in vain for a major party like that in the UK today.

In Australia, the ruling Labour coalition government is pursing a fiscally conservative policy of levying special taxes to pay for the reconstruction after the disastrous floods and cyclone, while the clueless Liberal party wants to cut spending to pay for reconstruction. The only sensible policy is more fiscal stimulus in Australia (or just restore Australia’s former tap system of issuing bonds), which is needed anyhow given the country’s relatively high involuntary unemployment.

In fact, all these countries are badly in need of further stimulus and major reforms in economic policy. At this point, the banks may as well be nationalised and turned into public utilities. Financial regulation needs to be imposed on the financial sector, even investment banks to some extent. Commodity buffer stocks are also a must — the world requires an effective policy to stabilise the price of food and other basic commodities, before we have a repeat of the food riots and chaos that broke out in 2008.

The beginning of austerity should set off alarm bells. These developments signal a turn to deflationary, contractionary folly in the major Western countries. The task of progressives and left wing people everywhere is to oppose this, with uncompromising rejection.

We have seen what it did to Latvia:
“Neoliberal austerity [sc. in Latvia] has created demographic losses exceeding Stalin’s deportations back in the 1940s … As government cutbacks in education, healthcare and other basic social infrastructure threaten to undercut long-term development, young people are emigrating to better their lives rather than suffer in an economy without jobs. More than 12% of the overall population (and a much larger percentage of its labour force) now works abroad. Children (what few of them there are as marriage and birth rates drop) have been left orphaned behind, prompting demographers to wonder how this small country can survive. So unless other debt-strapped European economies with populations far exceeding Latvia's 2.3 million people can find foreign labour markets to accept their workers unemployed under the new financial austerity, this exit option will not be available.”
Michael Hudson and Jeffrey Sommers, “Latvia provides no magic solution for indebted economies,” Guardian, 20 December 2010.
It is obvious that austerity Latvia-style has succeeded wonderfully, don’t you think? (see also Bill Mitchell, “When a country is wrecked by neo-liberalism,” Billy Blog, October 23rd, 2009).

The problem, unfortunately, is that one’s measure of success has to be causing depression, mass unemployment, 12% of the whole population working abroad, a brain drain, falling birth rates, and mass poverty.

I say in response: God damn that — and God damn neoliberalism.

The most extreme neoclassicals — and please don’t doubt that they exist — would impose this on us. They would demand much the same policies that were pursued by Weimar Germany from 1931 onwards. We must remember that it was not hyperinflation that turned Germany into the arms of a genuine lunatic: it was deflationary depression. And, while that historical episode might have been an extreme case, its lessons should not be forgotten.

Neoclassical economics is all based on totally flawed, dangerous and incompetent macroeconomics, and moral bankruptcy. Its policy prescription is domestic wage and price deflation and (in real terms) economic contraction. In a word: depression.

Welcome to the new cross of gold. Coming to an economy near you.


Saturday, March 5, 2011

Austrian Measures of the Money Supply

The Austrians have 3 measures of the money supply, as follows:
(1) TMS 1 = the True Money Supply (TMS), Austrian Money Supply, or the Rothbard Money Supply, which can be found on Mises.org.

(2) Shostak’s Austrian Money Supply (AMS = TMS 2), and

(3) Mike Shedlock’s M Prime (M'), which is an alternative measure of (2).
The most recent estimates of these measures can be found here:
Michael Pollaro, “True “Austrian” Money Supply, An Update,” The Contrarian Take, March 4, 2011.
True Money Supply (TMS 1) is made up of the following:
the currency component of M1 + total checkable deposits + savings deposits + US government demand deposits and note balances + demand deposits due to foreign commercial banks + demand deposits due to foreign official institutions.
More analysis of how this measure is calculated can be found here:
Salerno, J. T. 1987. “The ‘True’ Money Supply: A Measure of the Supply of the Medium of Exchange in the U.S. Economy,” Austrian Economics Newsletter (Spring): 1–6.

Shostak, F. 2000. “The Mystery of the Money Supply Definition,” Quarterly Journal of Austrian Economics 3.4 (Winter): 69–76.

Robert P. Murphy, “Lost in a Maze of Money Aggregates?” Mises Daily, February 14, 2011.
Mike Shedlock provides his own comments on this and an alternative measure that he calls M Prime (or M'):
Mike Shedlock, “Money Supply and Recessions,” January 9, 2007.

Mike Shedlock, “TMS: A Truer Money Supply?” July 14, 2008.

Mike Shedlock, “What is Money and How Does One Measure It?” November 3, 2009.

Mike Shedlock, “Money Supply Divergence - TMS1 vs. TMS2 vs. M2 - What does it Mean?” Monday, July 26, 2010.

Mike Shedlock, “True Money Supply (TMS) vs. Austrian Money Supply (AMS or M Prime) Update,” March 19, 2010.
Shedlock’s M Prime measure consists of:
cash + demand deposits with commercial banks and thrift institutions + government deposits with banks and the central bank + sweeps + other checkable deposits.
We can compare the various components of these measures of the money supply, with M0, M1, M2, M3, and MZM, in the following table.

Table Notes
1. MZM = money with zero maturity.
2. TMS = True Money Supply, Austrian Money Supply.
3. Reserves include required and excess, held either as vault cash or at the central bank.
4. This includes time deposits less than $100,000.
5. This includes time deposits of $100,000 and over.

For all of the Austrian rhetoric about how their measure is more accurate, it can be readily seen that there is not that much difference between M1 and the so-called True Money Supply (TMS). It is true that it removes svaings, but the removal of travellers check is an insignificant element. The only real difference in TMS is in the inclusion of US government demand deposits, and demand deposits of foreign official institutions and foreign commercial banks. But the simple fact is that the total amount of US government demand deposits, and demand deposits of foreign official institutions and foreign commercial banks is also an insignificant part of any of these measures of broad money.

And Mike Shedlock makes an interesting admission in relation to these Austrian measures:
“Note that M Prime closely tracks M1 while TMS closely tracks M2. In fact, M Prime = M1 + Sweeps for all practical purposes” (Mike Shedlock, “True Money Supply (TMS) vs. Austrian Money Supply (AMS or M Prime) Update,” March 19, 2010).
A number of other criticisms can be made of the Austrian concept of the True Money Supply (TMS). First, there is the doubtful inclusion of government deposits:
Mainstream thinking currently excludes from the money supply government deposits held in banks and the central bank. Consequently, if the government taxes people by one billion dollars, money is transferred from their deposits to the government’s deposit. This is viewed just as if the money supply fell by one billion dollars. In reality, however, the money is now available for government expenditure, meaning that money held in government deposits should be part of the definition of money (Shostak 2000: 73–74).
The trouble with this argument is that the money held by the government will not necessarily be spent, and until it is spent its nature is very much like excess bank reserves held at the Fed, which the Austrians do in fact exclude from their True Money Supply measure. Excess reserves held at the Fed are available for new loans made by banks, yet until the actual loans are made the status of the reserves is quite different from money in the usual broad money supply measures. As neochartalism/Modern Monetary Theory maintains, money taxed by the government and not spent is essentially money withdrawn from the economy and destroyed.

I will also note here that Shedlock’s inclusion of sweeps in his M Prime is rejected by Shostak for the True Money Supply (TMS) measure:
“Since January 1994, banks and other depository financial institutions have initiated sweep programs to lower statutory reserve requirements on demand deposits. In a sweep program, banks “sweep” funds from demand deposits into money market deposit accounts (MMDA), personal savings deposits under the Federal Reserve’s Regulation D, that have a zero statutory reserve requirement ratio. By means of a sweep, banks reduce the required reserves they hold against demand deposits. As a result of the sweep program one could argue that the money definition outlined above will not cover the total money supply. This criticism, however, is misplaced, for it has nothing to do with the definition as such, but with the difficulties of measuring money, which was transferred out of demand deposits by banks without the depositors’ consent (Shostak 2007: 76).”
NOTE: This is a work is progress, as there is much to be said.


Murphy, R. P. 2011. “Lost in a Maze of Money Aggregates?” Mises Daily, February 14, http://mises.org/daily/5028

Pollaro, M. 2011. “True “Austrian” Money Supply, An Update,” The Contrarian Take, March 4, http://blogs.forbes.com/michaelpollaro/2011/03/04/true-austrian-money-supply-an-update/

Salerno, J. T. 1987. “The ‘True’ Money Supply: A Measure of the Supply of the Medium of Exchange in the U.S. Economy,” Austrian Economics Newsletter (Spring): 1–6.

Shedlock, M. 2007. “Money Supply and Recessions,” January 9

Shedlock, M. 2009. “What is Money and How Does One Measure It?” November 3

Shedlock, M. 2010. “Money Supply Divergence - TMS1 vs. TMS2 vs. M2 - What does it Mean?” Monday, July 26.

Shostak, F. 2000. “The Mystery of the Money Supply Definition,” Quarterly Journal of Austrian Economics 3.4 (Winter): 69–76.

Friday, March 4, 2011

Davidson on the Austrian Concept of Uncertainty

Paul Davidson summarizes the concept of uncertainty held by some leading Austrian economists:
“Modern-day Austrian economists such as O’Driscoll and Rizzo believe in an economic world where there is an immutable external reality similar to the way nineteenth-century physicists viewed the working of the physical world. In their emphasis on uncertainty, however, Austrians often differ from mainstream Old and New Classical theorists. Many Austrians believe that the external reality may be predetermined by Mother Nature but this reality is too complicated for any single human being ever to process the information being sent out by market signals. The free market is the Austrians’ deus ex machine that provides the (in principle calculable) relevant probabilities and prediction to coordinate the plans and outcomes via a Darwinian process in a would of epistemological uncertainty and a programmed external reality” (Davidson 2002: 63).
The Austrians adhere to the concept of epistemological uncertainty, whereas Post Keynesian economics stresses the notion of ontological uncertainty (Barkley Rosser 2010: 171). This is an important difference and I will have more to say about it in the future.


Barkley Rosser, J. 2010. “How Complex are the Austrians?,” in R. Koppl, S. Horwitz, and P. Desrochers (eds), What is so Austrian about Austrian Economics? (Advances in Austrian Economics, Volume 14), Emerald Group Publishing Limited, Bingley, UK. 165–179

Davidson, P. 2002, Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham, UK.

Bibliography on George L. S. Shackle

George L. S. Shackle (1903–1992) was an economist who was concerned with exploring the consequences of radical uncertainty – in the sense of Keynesian uncertainty. Amongst those influenced by Shackle’s work was Ludwig Lachmann and the Austrian radical subjectivists.

Shackle owed an important intellectual debt to Keynes, and was generally classified as a hybrid Austrian/Post Keynesian (or someone who drew “Keynesian conclusions from Austrian premises”):
“[sc. Shackle was] a lifelong opponent of the neoclassical theory of the firm, which he regarded as devoid of any relevant notion of human agency and unable to contribute anything to the analysis of entrepreneurial choice. On this and on macroeconomic issues he had much in common with Austrian analysis ... Somewhat surprisingly, however, Shackle did not follow the Austrians and abandon macroeconomics altogether, remaining a Keynesian to the end – the most fundamentalist of all the ‘Fundamentalist Keynesians’” (King 2002: 186–187).
I will start a bibliography here on Shackle and his ideas on uncertainty. I will also update it regularly.


“Interview with G.L.S. Shackle,” Austrian Economics Newsletter, Spring 1983


Earl, P. E. and Stephen F. Frowen (eds). 2000. Economics as an Art of Thought: Essays in Memory of G.L.S. Shackle, Routledge, London.

King, J. E. 2002. A History of Post Keynesian Economics since 1936, Edward Elgar Publishing, Cheltenham, UK and Northampton, MA. pp. 185–187.


Carter, C. 1993. “George Shackle and Uncertainty: A Revolution Still Awaited,” Review of Political Economy 5.2: 127–137.

Ford, J. L. 1993. “G. L. S. Shackle: A Brief Bio-Bibliographical Portrait,” Journal of Economic Studies 12.1/2: 3–12.

Perlman, M. 2005. “Memorialising George L. S. Shackle: A Centennial Tribute,” Cambridge Journal of Economics 29.2: 171–178.

Stephen, F. H. 1986. “Decision Making under Uncertainty: In Defence of Shackle,” Journal of Economic Studies 13.5: 45–57.

Thursday, March 3, 2011

Bibliography on Keynesian Uncertainty

It seems to be my week for discussing the concept of uncertainty. This is a basic list of sources for the concept of radical uncertainty in Post Keynesian economics. I will try and update the list too.


Akerlof, G. A. and R. J. Shiller, 2009. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton University Press, Princeton.
Note that Akerlof and Shiller are leading New Keynesians. Post Keynesians will not agree with everything in this book.

Barkley Rosser, J. 2001. “Uncertainty and Expectations,” in R. P. F. Holt and S. Pressman (eds), 2001. A New Guide to Post Keynesian Economics, Routledge, London and New York. 52–64.

Davidson, P. 2004. “Uncertainty and Monetary Policy,” in P. Mooslechner, H. Schuberth, M. Schürz (eds), Economic Policy under Uncertainty: The Role of Truth and Accountability in Policy Advice, Edward Elgar, Cheltenham, UK and Northampton, MA.

Davidson, P. 2009. The Keynes Solution: The Path to Global Economic Prosperity, Palgrave Macmillan, New York.

Dunn, S. P. 2008. The ‘Uncertain’ Foundations of Post Keynesian Economics, Routledge, London.

Gerrard, B. 1994. “Animal Spirits,” in P. Arestis and M. Sawyer (eds), The Elgar Companion to Radical Political Economy, Elgar, Aldershot. 15–19.

Glickman, M. 2003. “Uncertainty,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics, E. Elgar Pub., Cheltenham, UK and Northhampton, MA. 366–370.

Minsky, H. P. 2008. John Maynard Keynes, McGraw-Hill, New York and London.

Skidelsky, R. 2009. Keynes: The Return of the Master, Perseus Books Group, New York. Chapter 4.


Barkley Rosser, J. 2001. “Alternative Keynesian and Post Keynesian Perspectives on Uncertainty and Expectations,” Journal of Post Keynesian Economics 23.4: 545–566.

Crocco, M. 2002. “The Concept of Degrees of Uncertainty in Keynes, Shackle, and Davidson,” Nova Economia 12.2: 11–28.

Davidson, P. 1988. “A Technical Definition of Uncertainty and the Long Run Non- Neutrality of Money,” Cambridge Journal of Economics 12: 329–337.

Davidson, P. 1991. “Is Probability Theory Relevant for Uncertainty? A Post Keynesian Perspective,” Journal of Economic Perspectives 5.1: 129–143.

Davidson, P. 1993. “The Elephant and the Butterfly: Or Hysteresis and Post Keynesian Economics,” Journal of Post Keynesian Economics 15.3: 309–322.

Davidson, P. 1996. “Reality and Economic Theory,” Journal of Post Keynesian Economics 18.4: 479–508.

Davidson, P. 2010. “Black Swans and Knight’s Epistemological Uncertainty: Are These Concepts also Underlying Behavioral and Post-Walrasian Theory?” Journal of Post Keynesian Economics 32.4: 567–570.

Dempster, G. M. 1999. “Austrians and Post Keynesians: The Questions of Ignorance and Uncertainty,” Quarterly Journal of Austrian Economics 2.4: 73–81.

Dequech, D. 1999. “Expectations and Confidence under Uncertainty,” Journal of Post Keynesian Economics 21.3: 415–430.

Dixon, R. 1986. “Uncertainty, Unobstructedness, and Power,” Journal of Post Keynesian Economics 8.4: 585–590.

Dunn, S. P. 2001. “Bounded Rationality Is Not Fundamental Uncertainty: A Post Keynesian Perspective,” Journal of Post Keynesian Economics 23.4: 567–587.

Ferderer, J. P. 1993. “Does Uncertainty Affect Investment Spending?” Journal of Post Keynesian Economics 16.1: 19–35.

Ferrari-Filho, F. and O. A. Camargo Conceição. 2005. “The Concept of Uncertainty in Post Keynesian Theory and in Institutional Economics,” Journal of Economic Issues 39.3: 579–594.

Fontana, G. and B. Gerrard, 2004. “A Post Keynesian Theory of Decision Making Under Uncertainty,” Journal of Economic Psychology 25: 619–637.

Glickman, M. 1994. “The Concept of Information, Intractable Uncertainty, and the Current State of the ‘Efficient Markets’ Theory: A Post Keynesian View,” Journal of Post Keynesian Economics 16.3: 325–349.

Hoogduin, L. 1987. “On the Difference between the Keynesian, Knightian and the ‘Classical’ Analysis of Uncertainty and the Development of a More General Monetary Theory,” De Economist 135.1: 52–65.

Keynes, J. M. 1937. “The General Theory of Employment,” Quarterly Journal of Economics 51: 209–223.

Koppl, R. 1991. “Retrospectives: Animal Spirits,” Journal of Economic Perspectives 5.3: 203–210.

Kregel, J. A. 1976. “Economic Methodology in the Face of Uncertainty: The Modelling Methods of Keynes and the Post-Keynesians,” Economic Journal 86.342: 209–225.

Lawson, T. 1985. “Uncertainty and Economic Analysis,” Economic Journal 95: 909–927.

Lawson, T. 1988. “Probability and Uncertainty in Economic Analysis,” Journal of Post Keynesian Economics 11.1: 38–65.

Minsky, H. P. and C. J. Whalen, 1996–1997. “Economic Insecurity and the Institutional Prerequisites for Successful Capitalism,” Journal of Post Keynesian Economics 19.2: 155–170.

Ravetz, J. 1994–1995. “Economics as an Elite Folk Science: The Suppression of Uncertainty,” Journal of Post Keynesian Economics 17.2: 165–184.

Runde, J. 1994. “Keynesian Uncertainty and Liquidity Preference,” Cambridge Journal of Economics 18.2: 129–144.

Rutherford, M. 1984. “Rational Expectations and Keynesian Uncertainty: A Critique,” Journal of Post Keynesian Economics 6.3: 377–387.

Schinckus, C. 2009. “Economic Uncertainty and Econophysics,” Physica A 388.20: 4415–4423.

Setterfield, M. 1998. “Path Dependency and Animal Spirits: A Reply,” Journal of Post Keynesian Economics 21.1: 167–170.

Terzi, A. 2010. “Keynes’s Uncertainty is not about White or Black Swans,” Journal of Post Keynesian Economics 32.4: 559–565.

Wednesday, March 2, 2011

Keynes on the Probability of Events in the Future

Keynes believed that the probability of future events under uncertainty came in different forms, and divided the probability of events into these 4 types:
“(i) that there are no probabilities at all (fundamental uncertainty),
(ii) that there may be some partial ordering of probable events but no cardinal numbers can be placed on them,
(iii) that there may be numbers but they cannot be discovered for some reason, and
(iv) that there may be numbers but they are difficult to discover” (Barkley Rosser 2001: 559).
We can also say that overarching these is another type of uncertainty caused by David Hume’s problem of induction. If we argue with Hume that we have no basis for believing that induction is rational, then even belief in the future uniformity of nature becomes uncertain. The radical sense of uncertainty that emerges in the absence of (1) a justification for induction and (2) belief in the future uniformity of nature is a fundamental philosophical problem indeed - and certainly for everyone who holds an economic theory (for a solution to the problem for Keynesians, see “Risk and Uncertainty in Post Keynesian Economics,” December 8, 2010).


Barkley Rosser, J. 2001. “Alternative Keynesian and Post Keynesian Perspectives on Uncertainty and Expectations,” Journal of Post Keynesian Economics 23.4: 545–566

Uncertainty and Non-Ergodic Stochastic Systems

The concept of uncertainty in economic life was used by Keynes in the General Theory (1936) and also in an article defending his new theory the next year (see Keynes, “The General Theory of Employment,” Quarterly Journal of Economics 51 [1937]: 209–223).

Paul Davidson notes the nature of uncertainty in the Keynesian/Knightian sense:
“Keynes’s description of uncertainty matches technically what mathematical statisticians call a nonergodic stochastic system. In a nonergodic system, one can never expect whatever data set exists today to provide a reliable guide to future outcomes. In such a world, markets cannot be efficient” (Davidson 2002: 187).

“Keynes … rejected this view that past information from economic time-series realizations provides reliable, useful data which permit stochastic predictions of the economic future. In a world where observations are drawn from a non-ergodic stochastic environment, past data cannot provide any reliable information about future probability distributions. Agents in a non-ergodic environment ‘know’ they cannot reliably know future outcomes. In an economy operating in a non-ergodic environment, therefore – our economic world – liquidity matters, money is never neutral, and neither Say’s Law nor Walras’s Law is relevant. In such a world, Keynes’s revolutionary logical analysis is relevant” (Davidson 2006: 150).
Certain types of phenomena in our universe are what mathematicians call non-ergodic stochastic systems. The concept of radical uncertainty applies to such systems, like medium term weather events, financial markets, and economies, and other natural systems studied in physics.

In these systems, past data is not a useful tool from which one can derive an objective probability score for some specific, future state of a quantitative variable in the system. Of course, such a system can still have trends, cycles and oscillations, both in the past and future. For example, stock markets certainly have cycles of bull and bear phases, but trying to predict the specific value of some stock x, say, two years from now with an objective probability score is not possible.

But the fundamental point is that it is still possible for a powerful agency or entity to reduce uncertainty in these systems, or at least in theory in some of them. It is entirely possible that in the future – with a far more advanced human civilization – we could use technology to control local, regional or perhaps even global weather.

And even today a powerful entity like the government can intervene to reduce uncertainty in the non-ergodic stochastic system we call the economy.

Is Climate a Non-Ergodic Stochastic System?

Does the earth’s climate system have the property of non-ergodicity? This question has occurred to me more than once, but I am actually unsure of the answer.

Some quick research suggests that climate models appear to make an ergodicity assumption about climate systems:
“Thus, it is perfectly valid to consider our climate a realization of a continuous stochastic process even though the time-evolution of any particular path is governed by physical laws. In order to apply this fact to our diagnostics of the observed and simulated climate we have to assume that the climate is ergodic. That is, we have to assume that every trajectory will eventually visit all parts of phase space and that sampling in time is equivalent to sampling different paths through phase space. Without this assumption about the operation of our physical system the study of the climate would be all but impossible.

The assumption of ergodicity is well founded, at least on shorter time scales, in the atmosphere and the ocean. In both media, the laws of physics describe turbulent fluids with limited predictability (ie, small perturbations grow quickly, so two paths through phase space diverge quickly) (von Storch and Zwiers 1999: 29–30).
But then what about longer time scales? If “the laws of physics describe turbulent fluids with limited predictability” on short time scales, what sort of predictability can they provide on medium or long term time scales?

Let’s assume, for the sake of argument, that long term climate is non-ergodic, in the way that a free market economy is. Does that mean all intervention would be useless and ineffective in such a system to affect the state of it? Does it mean that we are all doomed to (in a manner of speaking) live in a “free market” climate forever?

In fact, that does not follow at all. It is probably very likely that our future technology, when it becomes sophisticated and powerful enough, will be used by humans to intervene and control climate, e.g., by preventing ice ages.


David, P. A. 2007. “Path Dependence, its Critics and the Quest for ‘Historical Economics,’” in G. M. Hodgson, The Evolution of Economic Institutions: A Critical Reader, Edward Elgar, Cheltenham. 120–144.

Davidson, P. 2002. Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham.

Davidson, P. 2004. “Uncertainty and Monetary Policy,” in P. Mooslechner, H. Schuberth, and M. Schürz (eds), Economic Policy under Uncertainty: The Role of Truth and Accountability in Policy Advice, Edward Elgar, Cheltenham. 233–260.

Davidson, P. 2006. “Keynes and Money,” in P. Arestis and M. Sawyer (eds), A Handbook of Alternative Monetary Economics, Edward Elgar, Cheltenham, UK and Northampton, Mass. 139–153.

Keynes, J. M. 1937. “The General Theory of Employment,” Quarterly Journal of Economics 51 (February): 209–223.

Storch, H. von and F. W. Zwiers, 1999. Statistical Analysis in Climate Research, Cambridge University Press, Cambridge, UK and New York.