Academic journal article European Research Studies

The Determinants of New Orders of Non-Defence Capital Goods and Its Relationship to Business Fixed Investment Expenditures: 1992 to 2010

Academic journal article European Research Studies

The Determinants of New Orders of Non-Defence Capital Goods and Its Relationship to Business Fixed Investment Expenditures: 1992 to 2010

Article excerpt

1. Introduction

Downward (2003) identifies a tension in Post Keynesian economics between philosophical pronouncement and practice over the role of econometrics. Critical realists, for example, Lawson, maintain that there will be a plurality of partial regularities and processes underlying events that are not predictable or are not universal event-regularities, thereby rendering econometric inference inherently problematic. This view is shared by Davidson who argues that Post Keynesians embrace a non-ergodic and transmutable-reality view of the world in which probabilities, and thus econometric inference, are not reliable guides to the future. Only Dow's 'Babylonian' approach allows for the possibility of some limited econometric testing. Herein lies the rub for Post Keynesian economics, how to reconcile its philosophical rejection of 'empirical realism' with a practical need for empirical analysis.

Kalecki (1965), too, was aware of the tension between the philosophical foundations of Post Keynesian/Marxist economics (historical materialism) and econometrics. Econometric models are based on functional relationships over time between econometric variables which are assumed to be given and not subject to change. Historical materialism considers the development of society as the interaction between the spheres of productive forces and productive relations (the base), and the spheres of natural resources and of government, culture, science and technology (the superstructure). The base and the superstructure interact with each other. Econometric modeling can only be properly applied in the sphere of productive forces if the relationships between the economic variables remain stable. But Kalecki recognised that the complexity of the relationships between the base, natural resources and the superstructure as these impact on the economic variables in the sphere of productive forces raises doubts over the legitimacy of econometric modeling.

Kalecki's historical materialist vision of the development of society would, therefore, appear to have lead him to the same negative conclusion on the role of econometrics as Lawson and Davidson. But he goes on to argue that...'the two approaches [historical materialism and econometrics] do not seem to be irreconcilable' (ibid:233). He emphasises (ibid: 236) that the basic postulate of historical materialism is that autonomous changes in the superstructure are of lesser importance as compared with the effect upon it of productive forces and changes in productive relations.

An econometric model of productive forces can only be justified under two conditions (ibid:236):

* there are no autonomous changes in the spheres other than strictly economic conditions or if they do not affect significantly the pattern of economic development; and

* there is no significant feedback effect involved in the impact of economic development upon the other spheres of the system.

He defines a function f which stands for the aggregate of the relationships between and within the base and the superstructure. He assumes f to be invariable, an assumption he recognises as 'rather far-reaching' (ibid:234), but is justifiable as a useful tool of analysis if its limitations are kept in mind. Kalecki (ibid: 236) accepts that the basic assumption of the econometric model that the function f which stands for all the relationships between the economic variables past and present is not subject to change cannot be maintained, but concludes nevertheless (ibid:237): It may be therefore concluded that f is normally a function of such a type that small changes in its shape do not lead to major changes in the economic variables (authors' emphasis).

For Kalecki, therefore, the impact of the superstructure on the spheres of production forces and productive relations is an empirical issue. However, there is one critical aspect of econometric modelling that he insists must be inviolate (ibid:234) What is, however, totally inadmissible is to construct an econometric model of future economic development postulating tacitly non-existent productive relations. …

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