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Contemporary Post Keynesian Analysis

Edited by L. Randall Wray and Mathew Forstater

Original articles by leading scholars of post Keynesian economics make up this authoritative collection. Current topics of the greatest interest are covered, such as: perspectives on current economic policy; post Keynesian approaches to monetary theory and policy; economic development, growth and inflation; Kaleckian perspectives on distribution; economic methodology; and history of heterodox economic theory. The contributors explore a variety of prevailing issues including: wage bargaining and monetary policy in the EMU; the meaning of money in the internet age; stability conditions for small open economies; and economic policies of sustainable development in countries transitioning to a market economy. Other enduring matters are examined through the lens of economic theorists – Kaleckian dynamics and evolutionary life cycles; a comparison between Keynes’s and Hayek’s economic theories; and an analysis of the power of the firm based on the work of Joan Robinson, to name a few.
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Chapter 15: A Keynesian Critique of Recent Applications of Risk-Sensitive Control Theory in Macroeconomics

James Juniper


James Juniper* INTRODUCTION Recent decades of research in decision theory have witnessed a variety of departures from the constraints of expected utility theory. In part, these have been motivated by the desire to explain the finding that decision-makers routinely violate the independence axiom (Allais, 1953).1 Typically, the abandonment of this axiom entails replacing the linear system of weighting expected utilities of each outcome in a lottery by their respective probabilities with a non-linear weighting system derived from a cumulative distribution defined over a partitioning of the state space (Chew, 1989; Dekel, 1986; Tversky and Wakker, 1995).2 Research on ambiguity or uncertainty aversion is also motivated by the Ellsberg paradoxes (Ellsberg, 1961), which are associated with lotteries over unknown probabilities. Consider bets over draws from an urn containing 30 red balls and 60 others that are black and yellow. Fishburn (1987, p. 782), in his summary of Ellsberg’s findings, indicates that most people are observed to ‘prefer to bet on red rather than black, and to bet on black or yellow rather than red or yellow’. In Savage’s model, the first preference suggests that the probability measure over red is preferred to the probability measure over black, whereas the second preference suggests the opposite. Under suitable conditions some of the generalizations of expected utility theory can accommodate uncertainty or ambiguity aversion. In Savage’s (1954) subjective decision-making framework, the ‘sure-thing’ principle plays the same role as the independence axiom in the expected utility approach. Uncertainty aversion can be introduced...

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