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Customer Review
Reviewed in the United States on September 18, 2009
This book has major errors in it regarding Keynes's application of his weight of the evidence variable w, where w was defined on the unit interval [0,1], from the A Treatise on Probability (1921) which he called uncertainty in the General Theory (1936).It is simple to see that uncertainty is a negative function of the weight of the evidence,w.Define U to equal uncertainty.Define w to equal the weight of the evidence.Let U=f(w).If w increases then U decreases and if w decreases then U increases.It is as simple as that.Keynes defined a w=0 to be a situation of ignorance or complete or total uncertainty in the TP,as opposed to a w=1 which would be a necessary and sufficient condition to use a unique probability distribution.Neoclassical economists assume both a w=1 and linear probability preferences .Davidson,like Shackle and the Post Keynesians,Institutionalists,and Cambridge Keynesian school, assumes a w=0.It is not possible to calculate any kind of probability relation,be it cardinal,ordinal,or interval,if w=0.This situation arises in a dynamic economic context over time when one is considering scientific invention that leads to the promise of predictable, positive technological change,innovation, and advance in future kinds of capital goods, as well as creating a severe, potential threat to businessmen, due to the decay and obsolescence of their current stock of capital goods which would occur if these future breakthroughs did occur.The problem is that the timing and the particular forms or types of successful technological breakthroughs can't be predicted.This is obviously a non stationary process.Now non stationarity is a necessary condition for non ergodicity.But non stationary processes can certainly be ergodic.Davidson is simply confused here.Keynes recognized that the world was made up of both ergodic and non ergodic processes.Unfortunately,Davidson applies his non ergodicity assumption to the wrong market.Davidson applies it to financial markets.There is a long 400-500 year history that demonstrates repeatedly, time and time again, that past and current speculation always leads to some kind of future economic problem.
Keynes recognized that financial markets ,for the last 400-500 years since the introduction of modern,fractional reserve banking,exhibited the same speculative pattern over and over and over and over again.This pattern was recognized 3,000 years ago by the ancient Hebrew,Israelite Old Testa- ment prophets,with respect to markets for land and property,as well as by Jesus Christ in the New Testament,Aristotle and Plato in Greece,Augustine and Aquinas,and by Adam Smith.The purpose of the 7th year and 50th year Jubilee year celebrations,which were never instituted by Israel's leaders,was to break the back of the speculative cycles in land and property that led to poverty and destitution among Israel's people.
THe pattern is already at work right now.Obama,Bernanke,and Geithner have bailed out the Wall Street speculator crowd again, just as they were bailed out in the early to late 1980's by Paul Volcker and late 1990's-early 2000's by Alan Greenspan .The result is that another bubble in the stock markets is being created.These financiual bubbles are ergodic because the same pattern repeats again and again.New types of financial assets and financing are created by the banking industry.In the 1920's,for example,these new financial assets were balloon payments for houses and margin account financing for stocks.The creation of these new types of assets is called securitization.The next step is debt leveraging.This allows speculators and speculating bankers to maximize their speculative debt financing.The growing bubble is fed by herding and copycat behavior that automatically leads to the creation of a larger and larger bubble.The next stage occurs as the bubble leads to a mania ,which leads to a panic,which inevitably leads to a crash,which always leads to an economic downturn,recession,or depression of some sort.These kinds of events are stationary because they keep repeating over and over again.Their ultimate collapse can be predicted with a probabiity approaching 1.However,they are not Normally distributed.One can't use the Normal distribution to describe the time series data in financial markets .The underlying processes are given by the Cauchy distribution.Davidson vaguely realizes that they are not normally distributed,but fails egregiously to recognize that they are Cauchy.Davidson has failed to take into account the vast,overwhelming empirical evidence that has accumulated over the last 50 years establishing the correctness of Mandelbrot's pathbreaking work on financial markets.
Mandelbrot ,like Keynes before him,recognized that the speculation problem kept reoccurring over and over again.Only the timing of when the bubble will deflate is not known.
Smith and Keynes,like the Old and New Testament prophets,knew how to stop these highly repetitive events from taking place.Both Smith and Keynes realized that a policy of low interest rates for productive entrepreneurs combined with a policy of credit restiction would put a stop to the financial market's constant generation of bubbles.
One can summarize this book as a worthwhile read for the non specialist who does not need to be able to follow the advances made by Keynes in the TP on the weight of the evidence index and in the GT on uncertainty,where uncertainty can be mild ,moderate,severe ,acute or total, or by Mandelbrot's work,since the early 1960's concerning speculation in financial markets as a private, stationary market process that can be controlled .Davidson's view of the speculative nature of financial markets as being nonstationary and non predictable, based on the past behavior of financial markets for the last 500 years ,is simply wrong and had nothing to do with Keynes's views.
Davidson is correct in his criticisms of the neoclassical school's use of a particular distribution,the normal distribution,in financial markets.Unfortunately,he is unable to specify correctly why this is erroneous.It has little to do with non ergodicity and everything to do with the fact that w,the weight of the evidence that represents the amount and quality of the evidence that underlies probability calculations is usually < 1.Only if w=1 can one specific probability distribution be singled out as the correct one to apply in the future to data from the past that is being analyzed today.
Keynes recognized that financial markets ,for the last 400-500 years since the introduction of modern,fractional reserve banking,exhibited the same speculative pattern over and over and over and over again.This pattern was recognized 3,000 years ago by the ancient Hebrew,Israelite Old Testa- ment prophets,with respect to markets for land and property,as well as by Jesus Christ in the New Testament,Aristotle and Plato in Greece,Augustine and Aquinas,and by Adam Smith.The purpose of the 7th year and 50th year Jubilee year celebrations,which were never instituted by Israel's leaders,was to break the back of the speculative cycles in land and property that led to poverty and destitution among Israel's people.
THe pattern is already at work right now.Obama,Bernanke,and Geithner have bailed out the Wall Street speculator crowd again, just as they were bailed out in the early to late 1980's by Paul Volcker and late 1990's-early 2000's by Alan Greenspan .The result is that another bubble in the stock markets is being created.These financiual bubbles are ergodic because the same pattern repeats again and again.New types of financial assets and financing are created by the banking industry.In the 1920's,for example,these new financial assets were balloon payments for houses and margin account financing for stocks.The creation of these new types of assets is called securitization.The next step is debt leveraging.This allows speculators and speculating bankers to maximize their speculative debt financing.The growing bubble is fed by herding and copycat behavior that automatically leads to the creation of a larger and larger bubble.The next stage occurs as the bubble leads to a mania ,which leads to a panic,which inevitably leads to a crash,which always leads to an economic downturn,recession,or depression of some sort.These kinds of events are stationary because they keep repeating over and over again.Their ultimate collapse can be predicted with a probabiity approaching 1.However,they are not Normally distributed.One can't use the Normal distribution to describe the time series data in financial markets .The underlying processes are given by the Cauchy distribution.Davidson vaguely realizes that they are not normally distributed,but fails egregiously to recognize that they are Cauchy.Davidson has failed to take into account the vast,overwhelming empirical evidence that has accumulated over the last 50 years establishing the correctness of Mandelbrot's pathbreaking work on financial markets.
Mandelbrot ,like Keynes before him,recognized that the speculation problem kept reoccurring over and over again.Only the timing of when the bubble will deflate is not known.
Smith and Keynes,like the Old and New Testament prophets,knew how to stop these highly repetitive events from taking place.Both Smith and Keynes realized that a policy of low interest rates for productive entrepreneurs combined with a policy of credit restiction would put a stop to the financial market's constant generation of bubbles.
One can summarize this book as a worthwhile read for the non specialist who does not need to be able to follow the advances made by Keynes in the TP on the weight of the evidence index and in the GT on uncertainty,where uncertainty can be mild ,moderate,severe ,acute or total, or by Mandelbrot's work,since the early 1960's concerning speculation in financial markets as a private, stationary market process that can be controlled .Davidson's view of the speculative nature of financial markets as being nonstationary and non predictable, based on the past behavior of financial markets for the last 500 years ,is simply wrong and had nothing to do with Keynes's views.
Davidson is correct in his criticisms of the neoclassical school's use of a particular distribution,the normal distribution,in financial markets.Unfortunately,he is unable to specify correctly why this is erroneous.It has little to do with non ergodicity and everything to do with the fact that w,the weight of the evidence that represents the amount and quality of the evidence that underlies probability calculations is usually < 1.Only if w=1 can one specific probability distribution be singled out as the correct one to apply in the future to data from the past that is being analyzed today.
