POST KEYNESOVSKÁ MIKROEKONOMIE – POLICY ISSUE
MICROECONOMICS AFTER KEYNES: POST KEYNESIAN ECONOMICS AND PUBLIC
POLICY
STEVEN PRESMAN
Introduction
• Post Keynesian economics is mainly a school of macroeconomic thought
• Post Keynesians have virtually ignored microeconomic policy issues such as immigration,
crime, and education
• problem is that Post Keynesian microeconomists tend to focus on methodological and
theoretical debates and to provide empirical evidence for the Post Keynesian theory of pricing,
ignoring the policy side of microeconomics
• explains how they can be applied to micro policy issues, and draws out some key policy
conclusions that differ markedly from those of neoclassical theory on two issues - health care
and productivity growth
The Post Keynesian Approach
• Five key notions distinguish Post Keynesian economics from neoclassical economics:
o (1) a recognition that the future is uncertain, rather than known with some probability
distribution;
1
, o (2) a view that individual decision making depends on social factors, such as habits
and emulation, rather than on individual rational choice;
o (3) a belief that economic analysis should examine economies that move through
historical time rather than economies that effortlessly reach some equilibrium;
o (4) a recognition that real world markets are not perfectly competitive;
o and (5) a focus on income effects rather than on substitution effects.
Uncertainty Versus Risk
• risk involved measurable probabilities while uncertainty involved unmeasurable and
unknowable probabilities
• past evidence is no guide when events happen infrequently or when dealing with situations
that extend far into the future.
• 'firms operate under uncertainty, and investment decisions must be based on "animal spirits"
or the state of confidence of business executives
• Davidson (1991, 1994, 1996) provides a more scientific defense of this view.
o Systems are ergodic if their structure remains stable over time.
▪ In this case, we can extrapolate from the past to the future.
o Non-ergodic systems experience structural change over time.
▪ It means that people cannot figure out what the future
• Arestis (1996) and Carabelli (1988) see uncertainty arising because we do not know what
others will do.
o firms face uncertainty about what other firms will do.
o such uncertainty leads to underinvestment and unemployment, and requires
government intervention to remedy this situation
• uncertainty at the microeconomic level means that we need government policies to improve
economic outcome
o they may save too little for retirement
o the consequences of working hard in school and getting a college education
o so spend too little for research and development.
• In each of these cases, overcoming uncertainty requires government intervention to improve
economic outcomes:
o a public pension system,
o public investment in education,
o and government R&D spending.
Social Versus Economic Rationality
• the individual behavior depends not just on gains, costs, and risk assessment, but also on the
behavior of other
o the winner is not the one who picks the most beautiful contestant but the one whom
others think is most beautiful.
o the important issue is identifying the habits and rules that drive individual behavior
▪ individual choice depends on lexicographic ordering
• People rank goods in a hierarchy based upon how they meet human
needs.
• As our incomes rise, we move to consume goods that are higher and
higher in the hierarchy.
2
, o First, people choose to consume necessities (such as food,
clothing, and shelter) that are required to survive.
▪ Once these needs have been met, they seek goods
that make day-to-day living easier, that provide
entertainment or diversions from the rat race, and so
forth.
o Next, there are goods like books and education that lead to
human betterment.
• Under lexicographic preferences, income effects are greater than
substitution effects since income moves people up the hierarchy of
goods.
o individual decisions are interdependent, a function of what others do.
• Game-theoretic models let us analyze human behavior when it depends on the behavior of
others.
o Individual decisions regarding whether to work or engage in crime may depend on
social factors such as one's friends and the mores in one's neighborhood.
o And school choice or voucher systems may not lead parents to select the "best school"
for their children for social reasons.
▪ Rather, parents tend to select the school other parents are selecting or the
school that is closest to home (Bridge and Blackman 1978).
▪ In these cases, public policy needs to focus on improving undesired outcomes.
• For example, national education standards that most citizens accept
and meet will be necessary for better education outcomes.
Historical Time Versus Equilibrium
• economies could not be described in terms of some equilibrium toward which the economy is
headed and that will be stable once achieved.
o Things change all the time - goods, production technologies and existing procedures
o addition, individual preferences, habits, and choices are always changing;
▪ again, due to these changes, a momentary equilibrium gets upset just as soon
as i tis reached.
▪ focus on how economies evolve over time.
▪ the time is irreversible
• Post Keynesians recognize that choices are path dependent and that our current choices
depend on what choices we made in the past
o For example, buying a car requires purchasing gasoline, car insurance, parking spaces,
and highway tolls in the future, while the decision to forgo buying a car requires the
purchase of mass transit and car rental services in the future.
o At times, the short-run rational decision leads to long-run outcomes that are not utility
maximizing.
o While buying a car may have been the best (that is, utility-maximizing) decision when
it was made at one point in time, this does not mean it is the best decision in the long
run, after gasoline prices soar unexpectedly or after we learn the environmental
consequences of these decision.
• Another way history matters is that our tastes are a function of how we evolved as a human
race, and so may not be optimal at present
3
, o Evolutionary psychology (see Pinker 1997, 2002; Barkow et al. 1992) traces the
origin of our preferences to what enabled our ancient ancestors to survive and
reproduce on the African savannah, and argues that these propensities are now part
of the psychological makeup of humans.
o hundreds of thousands of years ago survival required eating voraciously whenever
food was present, since one could never know where the next meal would come from.
▪ Our ancestors who gorged themselves on food when it was available were
more likely to survive.
▪ As such, these dispositions became part of the human genetic makeup.
o Today, with large agribusinesses and food distributors such as McDonald's, we have
eliminated the uncertainty about whether food will be available next week and next
month, but not our dispositions concerning food.
▪ Food producers have played upon our natural inclinations by increasing the
fat and sugar content in foods because these are the sorts of foods we crave
and tend to gorge ourselves on.
▪ The result is an epidemic of obesity, as individuals find themselves unable to
control their urge to eat as much as possible when food is present (Crister
2003.)
• A Post Keynesian policy solution to this problem would recognize such mismatches between
our world and the ancient world where human urges developed, and would seek to keep firms
from exploiting them.
o We have banned Joe Camel to reduce smoking;
o to deal with the problem of obesity we may also need to consign Ronald McDonald
to oblivion.
o Fat and sweet foods can likewise be banned from schools.
Oligopolistic Market Structure
• History is also important because institutional structures develop over time and, once in place,
are hard to reverse.
• Market structures are especially hard to change.
• This leads to the fourth main tenet of Post Keynesian economics - the proliferation of
oligopolies.
o Keynesian economics - the proliferation of oligopolies. Oligopolistic firms are not
price takers;
▪ rather, they are price maker
o Prices are administered;
▪ they are set by the firm after some good gets produced and is about to be
offered for sale.
▪ In determining this price, firms rely on rules and customs and habits;
• they use some form of markup or cost-plus pricing, where some
percentage gets added to the costs of production.
• This mark-up (and thus price) depend on the degree of monopoly in
the industry (Kalecki 1971), the firm's desired rate of return to
maintain growth and market share (Shapiro 1981), and the needs of
the firm to engage in R&D investment to promote firm growth in the
future so it can maintain its oligopolistic status or stay ahead of the
4
MICROECONOMICS AFTER KEYNES: POST KEYNESIAN ECONOMICS AND PUBLIC
POLICY
STEVEN PRESMAN
Introduction
• Post Keynesian economics is mainly a school of macroeconomic thought
• Post Keynesians have virtually ignored microeconomic policy issues such as immigration,
crime, and education
• problem is that Post Keynesian microeconomists tend to focus on methodological and
theoretical debates and to provide empirical evidence for the Post Keynesian theory of pricing,
ignoring the policy side of microeconomics
• explains how they can be applied to micro policy issues, and draws out some key policy
conclusions that differ markedly from those of neoclassical theory on two issues - health care
and productivity growth
The Post Keynesian Approach
• Five key notions distinguish Post Keynesian economics from neoclassical economics:
o (1) a recognition that the future is uncertain, rather than known with some probability
distribution;
1
, o (2) a view that individual decision making depends on social factors, such as habits
and emulation, rather than on individual rational choice;
o (3) a belief that economic analysis should examine economies that move through
historical time rather than economies that effortlessly reach some equilibrium;
o (4) a recognition that real world markets are not perfectly competitive;
o and (5) a focus on income effects rather than on substitution effects.
Uncertainty Versus Risk
• risk involved measurable probabilities while uncertainty involved unmeasurable and
unknowable probabilities
• past evidence is no guide when events happen infrequently or when dealing with situations
that extend far into the future.
• 'firms operate under uncertainty, and investment decisions must be based on "animal spirits"
or the state of confidence of business executives
• Davidson (1991, 1994, 1996) provides a more scientific defense of this view.
o Systems are ergodic if their structure remains stable over time.
▪ In this case, we can extrapolate from the past to the future.
o Non-ergodic systems experience structural change over time.
▪ It means that people cannot figure out what the future
• Arestis (1996) and Carabelli (1988) see uncertainty arising because we do not know what
others will do.
o firms face uncertainty about what other firms will do.
o such uncertainty leads to underinvestment and unemployment, and requires
government intervention to remedy this situation
• uncertainty at the microeconomic level means that we need government policies to improve
economic outcome
o they may save too little for retirement
o the consequences of working hard in school and getting a college education
o so spend too little for research and development.
• In each of these cases, overcoming uncertainty requires government intervention to improve
economic outcomes:
o a public pension system,
o public investment in education,
o and government R&D spending.
Social Versus Economic Rationality
• the individual behavior depends not just on gains, costs, and risk assessment, but also on the
behavior of other
o the winner is not the one who picks the most beautiful contestant but the one whom
others think is most beautiful.
o the important issue is identifying the habits and rules that drive individual behavior
▪ individual choice depends on lexicographic ordering
• People rank goods in a hierarchy based upon how they meet human
needs.
• As our incomes rise, we move to consume goods that are higher and
higher in the hierarchy.
2
, o First, people choose to consume necessities (such as food,
clothing, and shelter) that are required to survive.
▪ Once these needs have been met, they seek goods
that make day-to-day living easier, that provide
entertainment or diversions from the rat race, and so
forth.
o Next, there are goods like books and education that lead to
human betterment.
• Under lexicographic preferences, income effects are greater than
substitution effects since income moves people up the hierarchy of
goods.
o individual decisions are interdependent, a function of what others do.
• Game-theoretic models let us analyze human behavior when it depends on the behavior of
others.
o Individual decisions regarding whether to work or engage in crime may depend on
social factors such as one's friends and the mores in one's neighborhood.
o And school choice or voucher systems may not lead parents to select the "best school"
for their children for social reasons.
▪ Rather, parents tend to select the school other parents are selecting or the
school that is closest to home (Bridge and Blackman 1978).
▪ In these cases, public policy needs to focus on improving undesired outcomes.
• For example, national education standards that most citizens accept
and meet will be necessary for better education outcomes.
Historical Time Versus Equilibrium
• economies could not be described in terms of some equilibrium toward which the economy is
headed and that will be stable once achieved.
o Things change all the time - goods, production technologies and existing procedures
o addition, individual preferences, habits, and choices are always changing;
▪ again, due to these changes, a momentary equilibrium gets upset just as soon
as i tis reached.
▪ focus on how economies evolve over time.
▪ the time is irreversible
• Post Keynesians recognize that choices are path dependent and that our current choices
depend on what choices we made in the past
o For example, buying a car requires purchasing gasoline, car insurance, parking spaces,
and highway tolls in the future, while the decision to forgo buying a car requires the
purchase of mass transit and car rental services in the future.
o At times, the short-run rational decision leads to long-run outcomes that are not utility
maximizing.
o While buying a car may have been the best (that is, utility-maximizing) decision when
it was made at one point in time, this does not mean it is the best decision in the long
run, after gasoline prices soar unexpectedly or after we learn the environmental
consequences of these decision.
• Another way history matters is that our tastes are a function of how we evolved as a human
race, and so may not be optimal at present
3
, o Evolutionary psychology (see Pinker 1997, 2002; Barkow et al. 1992) traces the
origin of our preferences to what enabled our ancient ancestors to survive and
reproduce on the African savannah, and argues that these propensities are now part
of the psychological makeup of humans.
o hundreds of thousands of years ago survival required eating voraciously whenever
food was present, since one could never know where the next meal would come from.
▪ Our ancestors who gorged themselves on food when it was available were
more likely to survive.
▪ As such, these dispositions became part of the human genetic makeup.
o Today, with large agribusinesses and food distributors such as McDonald's, we have
eliminated the uncertainty about whether food will be available next week and next
month, but not our dispositions concerning food.
▪ Food producers have played upon our natural inclinations by increasing the
fat and sugar content in foods because these are the sorts of foods we crave
and tend to gorge ourselves on.
▪ The result is an epidemic of obesity, as individuals find themselves unable to
control their urge to eat as much as possible when food is present (Crister
2003.)
• A Post Keynesian policy solution to this problem would recognize such mismatches between
our world and the ancient world where human urges developed, and would seek to keep firms
from exploiting them.
o We have banned Joe Camel to reduce smoking;
o to deal with the problem of obesity we may also need to consign Ronald McDonald
to oblivion.
o Fat and sweet foods can likewise be banned from schools.
Oligopolistic Market Structure
• History is also important because institutional structures develop over time and, once in place,
are hard to reverse.
• Market structures are especially hard to change.
• This leads to the fourth main tenet of Post Keynesian economics - the proliferation of
oligopolies.
o Keynesian economics - the proliferation of oligopolies. Oligopolistic firms are not
price takers;
▪ rather, they are price maker
o Prices are administered;
▪ they are set by the firm after some good gets produced and is about to be
offered for sale.
▪ In determining this price, firms rely on rules and customs and habits;
• they use some form of markup or cost-plus pricing, where some
percentage gets added to the costs of production.
• This mark-up (and thus price) depend on the degree of monopoly in
the industry (Kalecki 1971), the firm's desired rate of return to
maintain growth and market share (Shapiro 1981), and the needs of
the firm to engage in R&D investment to promote firm growth in the
future so it can maintain its oligopolistic status or stay ahead of the
4
