Jesper Jespersen presents a treatise on the importance of the choice of methodology within macroeconomics. Given that no scientifically based macroeconomic policy recommendation should be established without an evaluation of the methods employed, this book gives a clear exposition of how proper macroeconomic analysis should be undertaken. Furthermore, it is convincingly argued that on of the lasting contributions of John Maynard Keynes was his emphasis on methodology; that macroeconomic consequence of uncertainty could not be analysed within the established general equilibrium framework. It is due to post-Keynesian economics supported by critical realism that the understanding of Keynes' methodology has been resurrected, which has eventually resulted in renewed debate on realistic macroeconomic policies to restore full employment without inflation. "Macroeconomic Methodology" is an inquiry into the question of how to conduct a proper scientific analysis of uncertainty within macroeconomics. It will be of great interest to scholars of the philosophy of social sciences and methodology, as well as post-Keynesian and heterodox economists.
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Editorial Reviews
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'Methodological practice is at the heart of divisions between schools of macroeconomic thought. Jesper Jespersen's book explains why and precisely how, and gives the reader the insight to choose between rival approaches. His own inspiration comes from Critical Realism and Popper's Three World analysis, with Keynes as the main exponent of a realist approach. The starting point of realist theory is a view of how the world is, rather than axioms, and the test is whether the theory can make, as Jespersen puts it, the round trip back to realityA", to give practical guidance to policy. This is only the focal point of a rich and attractive canvas. How I wish this book had been available when I taught methodology! And how I wish economists from all schools of thought would read it!' - Victoria Chick, University College London, UK 'This welcome volume by Jesper Jespersen offers an up-to-date realist approach to macroeconomics, drawing on recent developments in methodology, notably critical realism, as well as earlier Popperian ideas. He shows how economics in the Post-Keynesian tradition, using this approach, can address the important macro policy issues, and sets out a seven-point agenda for future theory development. This book provides an important launching-off point for addressing macroeconomic questions without the need for the abstractions as narrowly rational representative agents. Rather Jespersen explores the interdependencies between the macro and micro levels in real economic processes under conditions of uncertain knowledge.' - Sheila Dow, University of Stirling, UK
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Jesper Jespersen, Professor of Economics, Roskilde University, Denmark
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The auther is correct that the most important concept developed by Keynes was the connection between uncertainty and expectations of future change about technology,innovation,obsolesence of present fixed capital,etc., and the connection of uncertainty and expectations to long lived capital investment ,financial markets, speculative behavior,and the existence of involuntary unemployment.
Unfortunately,the author simply lacks the knowledge of the technical breakthroughs made by Keynes in his A Treatise on Probability in chapters 15,16,17,20,22,26, and 29(TP;1921.See also the same practically identical material that appeared much earlier in Keynes's 1908 Cambridge Fellowship Thesis). Jespersen completely overlooks the way that Keynes reformulated his TP analysis in chapter 21 of the GT to show how to integrate his analysis of the conventional coefficient of risk and weight,c, into an elasticity analysis that presented a completely worked out generalization of the neoclassical equation of exchange on pp.304-306 of the General Theory. Neoclassical economics is proven mathematically by Keynes to require that the elasticies e,ep subscript,and ed subscript must always equal 1Neoclassical economics is linear and additive. Only in the special case where there is no uncertainty and only risk will this occur.Keynes's argument,without the discussion of the technical elasticity conditions in chapter 21 of the GT ,was laid out very clearly in written English on pp.208-209 in section 4 of chapter 15 of the GT.All of this is skipped by Jespersen.The exact same argument was presented by Keynes in chapter 26 of the TP using a version of his lower-upper interval,non additive,non linear approach to probability .Keynes called this particular form of his general analysis his conventional coefficient of risk and weight,c.
Keynes's analysis is presented for the interested reader below:
Keynes presented a clearcut mathematical,technical analysis of ambiguity aversion using his conventional coefficient of risk and and weight( uncertainty),c,in chapter 26 of the TP. A very specific example of Keynes's nomlinear and non additive approach to probability in chapters 15,17,20,and 22 of the TP was worked out in great detail by Keynes in chapter 26 using his conventional coefficient of risk and weight ,c,formulation on p.315 and in Footnote 2 on p.315.Edgeworth, in his 1922 article on " The Philosophy of Chance " in Mind ,was certainly correct in asking for the help of the readers of that philosophy journal in order to figure out the what and the why's involved in the application of Keynes's c coefficient.Unfortunately it was never done in Mind or anywhere else . See my SSRN paper with Gorga that is currently in press at an economics journal.
The foundation of Neoclassical economics is merely the mathematical development of a theoretical approach first proposed by Jeremy Bentham in 1787 in direct opposition to Adam Smith's 1776 Wealth of Nations aproach.Bentham claimed that all individuals have the capability to calculate the odds and outcomes and act on the expected value (the probability times the outcome) in a rational way.This can be expressed by the following ,where p is the probability of success and A is the outcome:
Maximize pA.
The modern version of this is to Maximize pU(A),where p is a subjective probability that is additive,linear,precise,and exact.U(A) is a Von Neumann-Morgenstern Utility function.The goal is to
Maximize pU(A).
The modern name for Benthamite Utilitarianism in neoclassical economics is SEU theory(Subjective Expected Utility).Therefore,a microeconomic foundation based on Utility Maximization is just Benthamite Utilitarianism updated with modern mathematical techniques.Modern macro is all SEU theory.
Keynes rejected Benthamite Utilitarianism as a very special case that would only hold under the special assumptions of the subjectivist,Bayesian model-that all probabilities were additive,linear,precise,single number answers that obeyed the mathematical laws of the probabiity calculus.
Keynes specifies his conventional coefficient of risk and weight,c, model in chapter 26 of the TP on p.314 and fotnote 2 on p.314,as a counter weight to the Benthamite Utilitarian approach.
Essentially, Keynes's generalized model is given by
c=2pw/(1+q)(1+w),
where w is Keynes's weight of the evidence variable that measures the completeness of the relevant, available evidence upon which the probabilities p and q are calculated.(Benthamite Utilitarians assume that the value of w is always 1.)w is an index defined on the unit interval between 0 and 1,p is the probability of success,and q is the probability of failure.p+q sum to 1 if they are additive.This requires that w=1.Keynes's c coefficient can be rewritten as
c=p [1/(1+q)][2w/(1+w)].
Now multiply by A or U(A).One obtains
cA= p[1/(1+q)][2w/(1+w)]A.
The goal is to maximuze cA or cU(A).The weight 1/(1+q) deals with non linearity.The weight 2w/(1+w) deals with non additivity.Modern Macroeconomics amounts to nothing more than the claim that c=p or cA (cU(A)= pA (pU(A)) .
It is now straightforward to see that the neoclassical microfoundations of macroeconomics assumes that all probabilities are additive and linear.This is nothing but a special case of Keynes's generalized decision rule to maximize cA,or cU(A),as opposed to the Benthamite Utilitarian pA or neoclassical pU(A).It is now clear that Keynes had created general theories of macroeconomics,probability,and decision making between 1921 and 1936.Keynes's accomplishments,once understood,make him the only rival to Einstein for the title of the greatest scientist of the 20th century. Economists have only a very vague,hazy,cloudy understanding of Keynes 's distinction between risk and uncertainty.It is no different in Jespersen's case . It is this distinction that has to be grasped first before any economist has any hope of understanding what Keynes means in the GT.
The conclusion is very straightforward. SEU theorists use the rule to Maximize pU(A).Keynes used the rule to maximize cU(A).Keynes's rule is of the same kind or type of rule used by the overwhelmingly ambiguity averse decision makers that populate the real world in the past and today in the present.Keynes's analysis of uncertainty is clearly related to non additivity and nonlinearity.It is only an anomaly in a world of linearity and additivity of neoclassical economics that exists for neoclassical SEU theorists.
I can't recommend Jespersen's book.Keynes's analysis has nothing to do with either Karl Popper or Critical Realism.The student will come away dazed and confused.He will have no idea about what Keynes really meant and actually did in the GT and TP.
Unfortunately,the author simply lacks the knowledge of the technical breakthroughs made by Keynes in his A Treatise on Probability in chapters 15,16,17,20,22,26, and 29(TP;1921.See also the same practically identical material that appeared much earlier in Keynes's 1908 Cambridge Fellowship Thesis). Jespersen completely overlooks the way that Keynes reformulated his TP analysis in chapter 21 of the GT to show how to integrate his analysis of the conventional coefficient of risk and weight,c, into an elasticity analysis that presented a completely worked out generalization of the neoclassical equation of exchange on pp.304-306 of the General Theory. Neoclassical economics is proven mathematically by Keynes to require that the elasticies e,ep subscript,and ed subscript must always equal 1Neoclassical economics is linear and additive. Only in the special case where there is no uncertainty and only risk will this occur.Keynes's argument,without the discussion of the technical elasticity conditions in chapter 21 of the GT ,was laid out very clearly in written English on pp.208-209 in section 4 of chapter 15 of the GT.All of this is skipped by Jespersen.The exact same argument was presented by Keynes in chapter 26 of the TP using a version of his lower-upper interval,non additive,non linear approach to probability .Keynes called this particular form of his general analysis his conventional coefficient of risk and weight,c.
Keynes's analysis is presented for the interested reader below:
Keynes presented a clearcut mathematical,technical analysis of ambiguity aversion using his conventional coefficient of risk and and weight( uncertainty),c,in chapter 26 of the TP. A very specific example of Keynes's nomlinear and non additive approach to probability in chapters 15,17,20,and 22 of the TP was worked out in great detail by Keynes in chapter 26 using his conventional coefficient of risk and weight ,c,formulation on p.315 and in Footnote 2 on p.315.Edgeworth, in his 1922 article on " The Philosophy of Chance " in Mind ,was certainly correct in asking for the help of the readers of that philosophy journal in order to figure out the what and the why's involved in the application of Keynes's c coefficient.Unfortunately it was never done in Mind or anywhere else . See my SSRN paper with Gorga that is currently in press at an economics journal.
The foundation of Neoclassical economics is merely the mathematical development of a theoretical approach first proposed by Jeremy Bentham in 1787 in direct opposition to Adam Smith's 1776 Wealth of Nations aproach.Bentham claimed that all individuals have the capability to calculate the odds and outcomes and act on the expected value (the probability times the outcome) in a rational way.This can be expressed by the following ,where p is the probability of success and A is the outcome:
Maximize pA.
The modern version of this is to Maximize pU(A),where p is a subjective probability that is additive,linear,precise,and exact.U(A) is a Von Neumann-Morgenstern Utility function.The goal is to
Maximize pU(A).
The modern name for Benthamite Utilitarianism in neoclassical economics is SEU theory(Subjective Expected Utility).Therefore,a microeconomic foundation based on Utility Maximization is just Benthamite Utilitarianism updated with modern mathematical techniques.Modern macro is all SEU theory.
Keynes rejected Benthamite Utilitarianism as a very special case that would only hold under the special assumptions of the subjectivist,Bayesian model-that all probabilities were additive,linear,precise,single number answers that obeyed the mathematical laws of the probabiity calculus.
Keynes specifies his conventional coefficient of risk and weight,c, model in chapter 26 of the TP on p.314 and fotnote 2 on p.314,as a counter weight to the Benthamite Utilitarian approach.
Essentially, Keynes's generalized model is given by
c=2pw/(1+q)(1+w),
where w is Keynes's weight of the evidence variable that measures the completeness of the relevant, available evidence upon which the probabilities p and q are calculated.(Benthamite Utilitarians assume that the value of w is always 1.)w is an index defined on the unit interval between 0 and 1,p is the probability of success,and q is the probability of failure.p+q sum to 1 if they are additive.This requires that w=1.Keynes's c coefficient can be rewritten as
c=p [1/(1+q)][2w/(1+w)].
Now multiply by A or U(A).One obtains
cA= p[1/(1+q)][2w/(1+w)]A.
The goal is to maximuze cA or cU(A).The weight 1/(1+q) deals with non linearity.The weight 2w/(1+w) deals with non additivity.Modern Macroeconomics amounts to nothing more than the claim that c=p or cA (cU(A)= pA (pU(A)) .
It is now straightforward to see that the neoclassical microfoundations of macroeconomics assumes that all probabilities are additive and linear.This is nothing but a special case of Keynes's generalized decision rule to maximize cA,or cU(A),as opposed to the Benthamite Utilitarian pA or neoclassical pU(A).It is now clear that Keynes had created general theories of macroeconomics,probability,and decision making between 1921 and 1936.Keynes's accomplishments,once understood,make him the only rival to Einstein for the title of the greatest scientist of the 20th century. Economists have only a very vague,hazy,cloudy understanding of Keynes 's distinction between risk and uncertainty.It is no different in Jespersen's case . It is this distinction that has to be grasped first before any economist has any hope of understanding what Keynes means in the GT.
The conclusion is very straightforward. SEU theorists use the rule to Maximize pU(A).Keynes used the rule to maximize cU(A).Keynes's rule is of the same kind or type of rule used by the overwhelmingly ambiguity averse decision makers that populate the real world in the past and today in the present.Keynes's analysis of uncertainty is clearly related to non additivity and nonlinearity.It is only an anomaly in a world of linearity and additivity of neoclassical economics that exists for neoclassical SEU theorists.
I can't recommend Jespersen's book.Keynes's analysis has nothing to do with either Karl Popper or Critical Realism.The student will come away dazed and confused.He will have no idea about what Keynes really meant and actually did in the GT and TP.
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