CARDIM DE CARVALHO’S CONTRIBUTION TO THE UNDERSTANDING OF DECISION MAKING IN CONTEMPORANEOUS FINANCIAL MARKETS

ABSTRACT According to the post-Keynesian approach, uncertainty is inherent to the loci in which investors decide the portfolio allocation of their wealth (or the wealth they manage) in a monetary economy. In financial assets’ markets, to deal with uncertainty, agents use instruments that evolved with time and encompass two elements of the decision-making process: (i) which premises will be considered to make a decision, the focus of Keynes’ General Theory; (ii) the sequel between the premises and the very decision, the focus of Keynes’ Treatise on Probability. The aim of this paper is twofold. The first one is to summarize the contribution of Fernando Cardim de Carvalho to the understanding of the decision-making under uncertainty. The second one is to analyse the decision-making instruments used in contempo-raneous financial assets’ markets in light of his contribution that is especially suitable for this goal due to his acquaintance with the Treatise.

Insights on deflation theory

ABSTRACT Irving Fisher offered a ‘tentative’ debt-deflation theory of great depressions rather than a fully consistent theory of his ‘creed’: “I say ‘creed’ because, for brevity, it is purposely expressed dogmatically and without proof. [...] it is quite tentative” (Fisher 1933, p. 337). The paper argues that prominent authors who strived to explain his ideas within the Walrasian apparatus could not deliver a consistent theory of deflation with protracted depression. This is basically because destabilizing market forces cannot dominate in that conceptual framework. By contrast, owing to the way competitive forces operate under fundamental uncertainty, Keynes’ General Theory escapes the contradiction.

“GENERAL THEORY” OF J.M. KEYNES: 80 YEARS AFTER

The Keynes' "General Theory", published 80 years ago, overthrew the neoclassical orthodoxy and created a new understanding of how market economy works. The main idea of the "General Theory" is that the amount of employment depends on the level of effective demand. Keynes believed that much economic activity is governed by "animal spirits" because of the existence of inescapable uncertainty about the future. In Keynes' view these "animal spirits" are the main cause for economic fluctuations. The uncertainty and "animalspirits"make investments unstable. He made distinction between risk (which is measurable) and uncertainty (which is not). This is the reason why Keynes opposed the excessive mathematicization of economics. His another important impact on economics was to switch the focus of economic analysis from the long run to the short term. The message of "General Theory" was that government should manage demand to limit economic fluctuations. The role Keynes gave the state was essentially to reduce uncertainty and to make economy more predictable.

HIGH LEVELS OF UNEMPLOYMENT IN THE MERCANTILIST ERA

This article draws attention to the high levels of unemployment in the mercantilist era, a parallel to conditions in the less developed countries at the present time. Understandably, distinguished economists of the twentieth century, writing before the publication of Keynes’ General Theory, tended to underestimate this problem. Actual causes of the high levels of unemployment are examined, including the fluctuating impacts of merchant entrepreneurs, agricultural revolutions, political unrest, and warfare, as well as nutritional deficiencies, which contributed directly to unemployment.