> I would like to add that I am not trying to defend NCE, but rather
> think of
> an argument that would save the NCE's core assumption - the price-
> demand
> relationship - against empirical evidence. Introducing an
> unobserved but
> inferred factor (expectation) does the trick, and AFIK NCE hacks
> use that
> trick a lot. The "only" drawback of this approach is that it
> transforms NCE
> statements from empirical propositions into tautologies true by
> definition.
The core of NCE is "rational choice" theory. This comes in more than one form. One of these uses "transactions costs" to explain such phenomena as pollution and the capitalist organization of production (Coase). An implication is that whatever is is "efficient".
You don't and can't observe anyone behaving in accordance with this theory because no one does, could or should. NCE economists use a variety of psychopathological means to deny either that this is true or that, if true, it matters to the core's "scientific" status. One of these means is "postmodernism" (see Roy Weintraub, How Economics Became a Mathematical Science).
Keynes's economics is based on a very different idea of "rationality" and assumes that human feeling, thinking, willing and acting in general and in capitalism in particular are, on average, significantly irrational.
He explicitly embraces this heresy in "My Early Beliefs", one of two papers posthumously "published by his Executors in order to carry out an express desire in his will that these papers, and these alone of his unpublished writings, should be printed." (Collected Writings, vol. X, p. 388)
There he claims that "the view that human nature is reasonable" "was disastrously mistaken". In fact there are "insane and irrrational springs of wickedness in most men" so that "civilisation was a thin and precarious crust erected by the personality and will of a very few, and only maintained by rules and conventions skilfully put across and guilefully preserved." (vol. X, p. 447)
In capitalism this irrationality takes the forrm of "a dependence upon an intense appeal to the money-making and money-loving instincts of individuals as the main motive force of the economic machine" (vol. IX, p. 293), a "main motive force" that is "a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease." (vol. IX, p. 329)
This understanding of capitalist motivation as irrational underpins his analysis of behaviour in financial markets, in particular it underpins his analysis of the "conventional" basis of expectations in those markets, the most important "convention" being the one pointed to by Doug. Keynes claims that:
"The vast majority of those who are concerned with the buying and selling of securities know almost nothing whatever about what they are doing. They do not possess even the rudiments of what is required for a valid judgment, and are the prey of hopes and fears easily aroused by transient events and as easily dispelled. This is one of the odd characteristics of the capitalist system under which we live, which, when we are dealing with the real world, is not to be overlooked." (vol. VI, p. 323)
This allows for rational "speculation" where "speculation" is defined as "the activity of forecasting the psychology of the market". (vol. VII, p. 158) On Keynes's assumptions about this psychology, "it may often profit the wisest to anticipate mob psychology rather than the real trend of events, and to ape unreason proleptically." (vol. VI, p. 323)
Ted