Problems with Post Keynesian Price Theory: A Marxist Perspective

Notes

1. Several Post Keynesians have noted the “wildly optimistic” views of many of their colleagues in the mid-1970s regarding the possibility of their economics displacing Neoclassical Economics as the mainstream economics (see, e.g., Davidson 2003–4; Dunn 2000).

2. Although a founder member and editor of the Journal of Post Keynesian Economics, Paul Davidson, has called for a “small tent” definition of Post Keynesianism, which would also exclude Kaleckians to further increase the coherence of the school (see Davidson 2003–4; 2005), I see no analogous basis for the exclusion of Kaleckians from the Post Keynesian price theory fold as there is with Sraffians. Indeed, as will become clear below, it is the Kaleckians who provide the principal elements of what has come to be accepted as the Post Keynesian theory of price.

3. See Rotheim (1981).

4. The Post Keynesian view of the emergence of money being a pre-condition for the emergence of price is perhaps most closely identified with the so-called neo-Chartalists sub-school.

5. Kaldor makes the point that although Keynes often wrote as if he conceived of money as including interest-bearing assets, his liquidity preference theory only makes sense when money is conceived of as cash and non-interest-bearing financial assets (see Kaldor 1980, 294–96).

6. Most Post Keynesians, following Davidson (1978), have seen the important characteristics of money which make it money as zero elasticity of production and substitution. Zero elasticity of production means that money is not something that is producible through the exertion of labor, and zero elasticity of substitution means that money is not readily replaceable by something that is producible through the exertion of labor. However, a number of Post Keynesians have in more recent years been arguing for dropping these two characteristics of money in the context of the adoption of the endogenous money argument (see later) and the implied substitutability of money, even as bank interest-bearing liabilities, by an array of other financial assets (see Cottrell (1994) for summary of the arguments between Post Keynesians on this matter).

7. Prime costs are seen as those which change with changes in the level of output, and mostly comprise costs of intermediate physical inputs and wages. Normal costs are costs of production pertaining to a given level of output (productive capacity), and comprise prime as well as indirect and overhead costs—which do not change with the level of output.

8. Details of the divisions among Post Keynesians with respect to costs and the markup can be found in Lavoie (2001; 2006).

9. Post Keynesians adhering to the administered price approach see the major factor explaining changes in the magnitudes of prices as changes in the markup (see, e.g., Lee 1994; Shapiro and Sawyer 2003).

10. In his questions to Post Keynesians, Ian Steedman (1992) too notes their failure to consider price formation in any single industry in the context of price formation in all industries making up the economic system.

11. It is pertinent to note Marx's criticism of the Ricardian economist Samuel Bailey for similarly reducing value to money price and seeing the existence of value as contingent on the existence of money (see Marx 1972, 145–47).

12. See Nicholas (2011, Chapter 2) for an elaboration of this point.

13. This is not to say that money as a medium of exchange did not appear prior to widespread exchange and production for the market. It most certainly did. Rather, it is to make the point that these conditions are necessary for money to be widely accepted as general exchangeability.

14. In a critical review of the (Post Keynesian) neo-Chartalist interpretation of money, Rochon and Vernengo (2003, 64) point out that the Dutch guilder, British pound, and US dollar were not accepted in international commerce because of their international acceptability in the payment of taxes.

15. This is most starkly evidenced by the recent sudden and dramatic non-convertibility of many bank deposits in Cyprus.

16. This is particularly true of the neo-Chartalist approach that even sees money's unit of account function as its most important and defining function (see, e.g., Wray 2001).

17. See also Steedman (1992) on this point.

18. Claudio Sardoni (2008), citing the authority of Keynes, argues for the acceptance of the concept of equilibrium in Post Keynesian theory on the basis that the world we live in is fundamentally stable. However, he fails to explain how this concept would be consistent with the Post Keynesian view of the economy from the perspective of the individual entrepreneur, i.e., where prices are formed by individual producers setting prices in pursuit of individual goals.

19. Curiously, Steedman (1992) emphasizes this point in his questions for Kaleckians (Post Keynesians) arguing that Kaleckians should adopt a more general equilibrium framework to show the interdependence of output and input prices, but without any mention of the circuitous nature of such an explanation, i.e., prices explaining prices. The reason for this silence is, of course, because the Sraffian approach which Steedman subscribes to adopts a similarly circuitous explanation of price, albeit in a general equilibrium setting (see Nicholas 2011).

20. I have argued elsewhere (see Nicholas 2011, Chapter 7), in the traditions of Marx, Ricardo, and Sraffa, that there appears to be no real theoretical justification for seeing the formation of prices in the raw material sector as differing in any fundamental sense from the formation of prices in manufacturing.

21. Although the neo-Chartalist view of money diverges from the majority Post Keynesian view in the sense that money is seen as acquiring its value with the payment of taxes, it too sees money as acquiring worth independently of the reproduction of commodities.

22. It is pertinent to note here that many Post Keynesians defend themselves from certain of the criticisms advanced in this article by arguing that they are adopting “a theory of pricing” and not “a theory of prices” (see, e.g., Sawyer 1992) without any recognition that “a theory of pricing” is little more than looking at prices through the eyes of the entrepreneur.