ABSTRACT
Keynes’ criticism, which gave rise to much of the modern form of macroeconomic theory, attacked the macroeconomic consequences of the neoclassical theory. He contemplated the microeconomic foundation and his criticism of Say’s law was sensible, not with respect to what Say actually discussed, but its interpretation by neoclassical theoreticians, which raised the problem of dimensionality of the commodity space. Our discussion of the temporary equilibrium model also focused on the problem of risk and the agents’ apprehension of risk. We saw that as long as the state space is constant and that the agents do not interfere in their market behaviour we will probably converge to a long-run general equilibrium. Keynes introduced the concept of uncertainty which had of course a huge effect on the concept of expectations. In General Theory chapter 12 he discusses the longterm expectations and came to the conclusion that investments in inert capital which is expected to yield profits during a substantial future period but which today is just a cost and of no current worth, are based on expectations which in their turn are based on some historical experiences but mostly on current conditions, both with respect to the market and also with respect to the current sentiment of the investor. Thus when we speak of long-run matters these are always basically grounded on the current situation and the state of confidence of the investor, as well as are short-run decisions.1 This very idea is a basic problem of the general mainstream economic theory and the subsequent attitude towards risk and uncertainty, which we will discuss in later chapters, particularly Chapter 6. In neoclassical theory the only relevant aspect of money is its use as a medium of exchange and as a medium of measurement. However we are then dealing with relative prices of the equilibrium price vector unique for that particular equilibrium and thus money in the daily sense is irrelevant. The process of establishing a unique market price vector at a certain moment may occur on the financial market and such markets as overseas transport but not on ordinary consumer markets. Prices and quantities change but more like the equimarginal principle which leads to a basically out of equilibrium dynamics. With respect to future markets the neoclassical theory, given its axiomatic structure, is not particularly interesting since the future price vectors are fixed given interest rate and the risk structure, which is given. Thus the interest rate must be set by the invisible hand as well, thus the individual can be represented in analogy with Debreu’s definition of the agent, concerning current exchange, as (≾ i, ei). We can of course add different perceptions of the risk structure in accordance with Radner (1982) but that will imply other difficulties which we partly discussed in relation to the temporary equilibrium theory (≾ i, ei, τi). However we are not left in total despair since our discussion at the end of the preceding chapter particularly on the equimarginal principle and also our discussion of the content and character of the neoclassical axioms with the subsequent modifications have provided us with some useful concepts for the macroscopic analysis. True that we never can claim a global relevance of our theoretical conclusions of the same kind as the neoclassical general equilibrium analysis but
given some inertia we should be able to have some reasonable results, which holds locally and temporally. However none of the extensions of the neoclassical analysis provide us with any clue how to analyse money. During the latest decades more or less starting with the Black and Scholes model, economists have more systematically analysed the concepts of risk and uncertainty and the developments of Black and Scholes as the Heston model (Heston 1993) has turned the risk/uncertainty concept into a kind of measuring the aggregate perception of uncertainty by systematic analysis of the volatility structure, but this is a completely different attitude compared to the neoclassical theory. We suppose that given precise instruments the agents optimize their behaviour with respect to apprehended yield and volatility. This can certainly be brought in accordance with the neoclassical theory given the correlate of revealed preference, but we drop that and in principle follow Keynes (1973 [1936]: 154) where he claims:
For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public.
