Friday, September 12, 2008

Uncertainty makes the difference (os)

Market forces or governmental intervention: while not searching for the right answer concerning this question, however I found an interesting passage in a text of Paul Davidsons: Uncertainty in economics, which comes up with an explanation in favour of governmental intervention. Mainly it is just a sort of a non-neutrality discussion, but backed by the question whether or not we live in a immutable (ergodic) or transmutable (non-ergodic) environment.

So if we divide the world in two possible types: ergodic and non-ergodic and assume that a non-ergodic reality is a system in which uncertainty prevails, than against this background we can raise the question whether or not fiscal intervention is desirable or not?

According now to Paul Davidson in this situation the state should act, because the state can influence intelligently the outcome and the development of the world, respectively the country. Through that, the state can improve the performance of the economy compared to a situation of a competitive market system. This is, because of the absence of lack of (effective) demand, the government produces a Keynes-productive-efficiency gain which outweigh any allocative inefficiency evoked by the interference of relative prices. Additionally there is a Schumpeterian-creative-destruction-efficiency gain, caused by the governmental induced full-employment situation, for entrepreneurs to generate a higher output by the same means.

This result we have to compare to an ergodic (i.e. immutable) world: in this world governmental intervention would merely disturb the allocative price system, but would not improve the economic system because it is limited by its predetermined production parameters. So in an ergodic world, demand policy would be worse off compared to the free market forces but in a non-ergodic world state intervention is, according to Davidson, preferable.

(Source: Davidson, Paul: Uncertainty in economics. In: Dow, Sheila and John Hillard (edt.): Keynes, Knowledge and Uncertainty. 1995.