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links for 2009-08-15

I am Not Now, Nor Have I Ever Been, Wedded to the Classical Efficient Markets Hypothesis

You know, every time I think Paul Davidson and his post-Keynesians ought to have more of economists' collective mindshare, he comes up with something truly dorky like this:

If You Are Looking for a Monument to John Hicks, Look Around You!: If Brad Delong had kept up with John Hick's more recent writings he would have read J.R. Hicks "ISLM : An Explanation", JOURNAL OF POST KEYNESIAN ECONOMICS, Winter 1980-81 issue, where Hicks indicates that over time he became completely dissatisfied with ISLM framework he developed in 1937. In this "ISLM:AN EXPLANATION" article Hicks completely recants on the ISLM apparatus and indicates that the ISLM framework has nothing to do with Keynes or reality. Too bad Brad is wedded to the classical efficient market hypothesis and has never been able to understand the ontological uncertainty involved in the concept of a nonergodic stochastic process that was the basis of Keynes's general thoery and which Hicks ultimately claimed that "nonergodic"system was the same as his own analysis.


Which of the following should I say?:

  • That Paul Davidson is the first person, ever, to have claimed that I am "wedded to the classical efficient markets hypothesis." Nobody has ever said that to me before. It is truly a nonergodic event...

  • I would have said that IS-LM has a great deal to do with reality: Hicks implicitly predicted back in 1937 that the enormous expansion in the supply of U.S. Treasury bonds we have seen over the past year would have next to no effect on interest rates. Supply-and-demand would say that if you increase the supply of government bonds by a lot, you lower their price--raise interest rates. Big win for Hicks and IS-LM. But Davidson doesn't see that...

  • That IS-LM is the first step you take if you start from the Fisherian quantity theory and attempt to incorporate the fact that the velocity of money is determined by the opportunity cost of holding money balances--voila, you then have an LM curve, and you need something to pin down where on the LM curve the economy is, and that "something" is your IS curve. If you are dealing with people rooted in the quantity theory, then IS-LM is the only one-step way you can get them to think about broadly "Keynesian" issues, and is thus useful for that purpose...

  • That IS-LM does not have "nothing to do with Keynes." It has a lot to do with Keynes in at least some of his moods and modes--and deals with issues that, in other moods and modes, Keynes thought of as side issues...

  • That I first read Hicks's "ISLM: An Explanation" in the late spring of 1980, after going to Olivier Blanchard's office with some questions about Axel Leijonhufvud and being handed a copy. Hicks's criticisms of IS-LM are that it is:

    • Not properly dynamic
    • If the LM curve is taken to be the quantity theory equation with velocity a function of the short-term nominal interest rate on government bonds, then a huge number of issues are thrown into the IS box and then nailed shut in there where they cannot be easily examined.
    • If the IS curve is taken to be the income-expenditure multiplier framework with investment a function of the real interest rate on actual risky government bonds, then a huge number of issues are thrown into the IS box and then nailed shut in there where they cannot be examined.
    • These are all fine and apposite criticisms, and they are very good reasons not to take IS-LM as the end of your analysis. But if you are trying to introduce the issues to people--like modern-day Chicago--who can't even crawl, it is a way for them to widge across the floor and make some progress.