Keynes And The Expectations For Profit In Conditions Of Uncertainty
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The aim of this paper is to question the existence of economic laws that can uniquely determine capitalist ‘equilibrium’. The presence of uncertainty is one of the conditions that cannot be eliminated, which can make the equilibrium unstable and precarious. Therefore we will try to find possible improvements in the techniques of modern capitalism through collective action, beyond the rationale of ‘laissez-faire’. All this in a keynesian methodological view and in the presence of a social pact which, by committing the parties to the attainment of collective goals, minimizes the conflict.
If a separation between spending decisions and savings decisions is assumed, the role of an external subject that can affect the current and expected profitability is particularly important. Thus, this issue will be addressed, that is, the expectation of profit in a system of uncertainties, where well-governed capitalism can represent the closest frame to the most efficient system to achieve economic goals.
The abstract announces an interesting and important issue: what determined the unemployment equilibrium (although unstable and precarious) in Keynes’s macroeconomics with specific focus on the impact of uncertain profit expectations. The specific Keynes flavor in addition to uncertainty is introduced by assuming that decisions on real investment and savings are separated (lack of aggregate demand).
The paper consists of 7 sections which are surprisingly unrelated. Unfortunately, this incoherence makes the paper rather uneven and unfocused on the topic announced in the abstract.
All way through the paper there are a number of interesting reflections, but they don’t add up to a coherent story about business behavior under uncertainty and the macroeconomic implications.
The author is right explaining within the two initial sections that under-employment equilibrium/position can be explained by firms having – in the aggregate – too low expected demand for goods and services (due to low real investments compared to savings) and/or no profit incentive to expand production. This situation might be the consequence of ever present uncertainty concerning the future or other dysfunctional relations within the economy e.g. speculation, fixed exchange rate etc.
The author is also right in claiming that Keynes’s major concern was not the business cycle – but the persistent under-employment experienced during the interwar period. This theme, as many others during the paper, is just mentioned, but not properly analyzed or argued.
The formalizing in section 4 is not really useful. I am in sympathy with the ‘supply function’ being a mix of expected demand and profitability; but the math is not correct, variables not all defined – and, where has uncertainty gone? Of course, not an easy question to answer, but taking the title into consideration something on this issue would have been expected and is therefore missing. In the following text, suddenly four different definitions of ‘demand’ appear (although without mentioning ‘effective demand’?).
Section 5 is one page devoted to ‘neoclassical synthesis’, which according to my knowledge, does not mention ‘uncertainty’ one single time. As we know the ISLM-diagram is the short term presentation of New-Keynesian general equilibrium theory.
And this derailing of the paper continues in section 6 called ‘interpretation of the capitalist system’, which could be interesting. But the main reference is Patinkin, another neoclassical interpreter of Keynes.
In section 7 the sharp methodological difference between new-Keynesian and post-Keynesian macroeconomics is briefly, but clearly presented. One major difference is, of course, macroeconomics without uncertainty (New-Keynesian) and with emphasis on uncertainty (Post-Keynesian). I would have liked to have seen at least one convincing concluding presentation of why and how uncertainty makes such a methodological and therefore analytical difference – for instance be going through, carefully, Keynes’s chapter 19 or the post-Keynesian theory of wage-led growth.
So, I appreciate and respect the authors fine intention expressed in the abstract. But the paper does not give a clear, coherent argumentation on how uncertainty penetrates the expectation of profit and therefore contributes to the understanding of persistent under-employment (equilibrium).
I can recommend and have got inspiration myself from: Fanning, V. and D. O’Mahony, The General Theory of profit equilibrium: Keynes and the entrepreneur economy, Basingstoke: Macmillan, 2000.
This paper is commonly quite incomprehensible—the meaning of its sentences so opaque—that it is actually difficult to state what is wrong with it. That is to say, it is ‘not even wrong’, but rather, commonly makes propositions so unintelligible that they can’t easily be contested. I give just a few examples under ‘5’ below. (English language proficiency probably plays a part in this, but I think only a small part.)
And what is the, at least intended, value-add of the paper? The message seems to be that due to uncertainty the capitalist economy, unaided by intervention, has an unstable employment equilibrium, or multiple equilibria, so that collective action of some kind is desirable. Fair enough perhaps, but nothing new.
Here are some more detailed and particular comments:
1. The equations at pp. 4–5. In the second equation, Π is said to be ‘Profits’ and in the third equation, π is said to be ‘Technical conditions’. But for these equations to make sense, they must both refer to the same variable (probably output per worker); ‘q’ is also undefined (but evidently a mark-up on cost). The equations at the top of p. 5 are unexplained and unintelligible.
2. The first sentence of p. 6: ‘affirmation’. Should this not be ‘rejection’?
3. Keynes ‘regards affliction and anguish …’. There is no citation in support of this. I’m not aware of Keynes using such terms. It is then said that Keynes posits unemployment equilibrium (fair enough). And then a sentence: ‘This results in a conception of a living wage … [etc.]’. This does not at all follow. The same sentence includes a quotation, with citation to Morselli 2012 and Leijonhufvud 1968, but no page citation. Who is being quoted and what page? I can’t imagine this has any connection with Leijonhufvud.
4. The author commonly provides citations, in relation to specific points (even quotations) without any specific page numbers provided, a very poor scholarly practice; e.g., Keynes 1937a at the bottom of p. 1; a quotation from Keynes 1936 at the bottom of p. 2 (misquoted as well); Napoleoni 1985 at the bottom of p. 6; a quotation from Napoleoni 1985 at the bottom of p. 9
5. Examples of unintelligibility (more could be provided):
i. p. 2: ‘Is it possible to imagine … a model with features such that real income and price levels depend on demand for money and wages, which increases the amount of money at any level of money wage, guarantee full employment?’
ii. p. 4: ‘entrepreneurs can only rely on household consumption [contributing to expected revenues], given the consistency of the consumption of the same households in the short term.’
iii. p. 5: ‘if business decisions, about future production levels, depend on whether or not the expectation conditions are met, changes in the decisions themselves can only result from changes expressed by the market.’
iv. p. 7: ‘economic variables have often been more flexible than socio-political variables, and it is therefore possible to imagine the full effect of wealth in a framework of full trend towards balances.’
v. p. 7: Keynes’s ‘conception of capitalist relations, in a world marked by potential imbalances in industrial relations, convinces him that capitalists consider the monetary wages irrelevant with respect to the change in the rate that determines the volume of investments; whether the interest on money or any other rate.’