1

Chapter 13. Presenting Demi-Regularities: The Case of Post Keynesian

Pricing

Paul Downward and Andrew Mearman

"…on a practical level, one must ask how …demi-regularities are found. When is

a demi-regularity not a demi-regularity?” (Mearman, 1998, p167)

1. Introduction

In chapter 6 of this book the authors argued that econometrics can play an

epistemological role in economic enquiry from a Critical Realist perspective. In contrast

to mainstream economics it was argued that Critical Realist empirical enquiry could draw

upon an eclectic range of research methods including quantitative techniques. As

conventionally defined econometric methods are only one form of empirical practice, it

was argued that quantitative methods including econometrics can help to codify the

empirical level, in presenting demi-regularities requiring further investigation. As such

they can play a part in a triangulation strategy seeking to legitimise causal claims from

retroduction.

In this chapter these arguments are illustrated by drawing upon applied work in Post

Keynesian pricing. In this sense the chapter offers a constructive dialogue between

Critical Realism and Post Keynesian economics. This dialogue proceeds as follows. In

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section 2 an historical example of the triangulation strategy referred to above is offered

that is suggestive of the merits of econometrics. The example is the work of Gardiner

Means on Administered Pricing. As well as exemplifying triangulation activity, the

discussion reveals the theme raised in chapter 6 that practice can inform philosophy.

Subsequent sections then present discussion of more contemporary material. Section 3

addresses the consistency of Critical Realism with other methodological positions that

have been embraced or espoused by Post Keynesian economics. In as much that many of

the arguments of chapter 6 offer a transcendence of some of the 'duals' of Critical Realism,

this section argues that one needs to transcend some of the differences that are presented

methodologically in Post Keynesian economics, to produce a consistent basis of

inference. Section 4 than presents more contemporary examples of triangulation in

practice. Examples are drawn from both referring to broader literature and from uniting

different methods of analysis in a specific context. Though not attempting to be

exhaustive, it is endeavoured to show that econometrics can be useful to research framed

within a Critical-Realist perspective.

2. Adminstered Prices as Retroduction

Gardiner Means’ work on Administered Prices is particularly relevant to the current

discussion for two reasons. On the one hand both Lee (1998) and Downward (1999)

identify Means as central to Post Keynesian pricing. On the other hand, though not

expressed as such, Means provides an historical example of triangulating methods of

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analysis which we can now understand as an attempt to present demi-regularities and

then produce a causal explanation of them through retroduction.

A central theme in Means' work was to investigate the real reasons why prices did not

behave in the way predicted by market-clearing economics. Consequently, Means was

concerned with the statistical behaviour of prices and in particular that some prices were

sticky in response to changes in the economic cycle. To analyse this issue Means

explored Bureau of Labor Statistics (BLS) wholesdale price data for the period 1926-

1933. In essence 617 product groupings were grouped into 10 product categories and

examined for their price behaviour. Means (1935) concluded that a bifurcated pattern of

behaviour emerged for different industries. Agriculture, and non-manufacturing sectors

were characterised by price flexibility, whereas manufacturing was not. In the language of

Critical Realism, one can argue that Means identified a contrastive demi-regularity with

reference to descriptive statistics.

To explain this behaviour Means argued that prices were set according to either

administrative control or markets. Consequently, one would expect to observe different

price behaviour, over the business cycle. In particular market prices would rise relative to

administered prices in a boom and fall relative to administrative prices in a recession.

Conversely, the opposite tendency would be observed when considering the level of

production. He argued that in large modern corporations prices are ‘administered’ rather

than set in the ‘auction’ conditions implied in neoclassical price theory. Administered

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prices are prices that are fixed by administrative fiat before transactions occur and are held

constant for periods of time and for sequential sets of transactions. Thus Means (1962)

illustrates that pricing is carried out in terms that are analogous to full/normal-cost pricing.

Prices are set by a mark up on costs, for a series of transactions, with markets

determining output rather than price. The mark up is based on uncertain expectations of

long-term profit. This implies that prices will not readily change with contingencies such

as changes in demand and hence output. Means termed this perspective the ‘flow

principle of output’. Once again, in the language of Critical Realism, one can argue that

this aspect of Means' work, conducted by detailed case-study, was to retroduce the actual

determinants, or causal processes of pricing.

It is clear therefore that by referring to a wide body of evidence Means' attempted to

explain, or make inferences, about why prices behaved as they did in the manner

espoused by Critical Realism and discussed in chapter 6. Results described in terms of an

association between empirical events – that is demi-regularities - are explained in terms of

historical and more qualitatively described causes. Crucially, however, in as much that

Means offers the above integrally related claims that form the basis of his inferences,

Means also constructed by eye a simple ‘regression’ analysis to calculate a relationship

between the magnitude of price changes and industrial concentration as a proxy for

administered pricing processes.1 The slope coefficient indicated that in a period of

declining prices generally, that is during the Great Depression, the magnitude of price

changes was positively associated with the degree of concentration in the industry.

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Typically, thus, manufacturing was associated with less responsive changes in prices to

the business cycle. In as much that one can identify means' work with a Critical-Realist

strategy of research, Means' approach illustrates the possibility that econometric work

can also be consistent with Critical Realist epistemology in adding weight to inferences

drawn using other research methods. The reminder of this chapter further illustrates the

potential of econometrics to help in this regard.

3.Critical Realist Epistemology: A constructive Dialogue with Post

Keynesian Economics

3.1 Methodological ConsistencyBefore discussing the empirical examples, however, some comments concerning the

consistency of Critical Realism with alternative methodological positions in the Post

Keynesian Literature are salient. This is important as this is motivated by chapter 6,

which offers a qualified perspective on Critical Realism and there has been debate in the

Post Keynesian literature on methodological matters generally, and Critical Realism and

econometrics.

As well as Critical Realism other strands of methodological argument in Post Keynesian

Economics are the ‘Babylonian’ approach developed by Sheila Dow (1985, 1990), and

the ‘Fundamental Uncertainty’ or ‘encompassing’ methodological approach, forcibly

restated in Paul Davidson's (1996) paper, 'Reality and Economic Theory'. Along with

Critical Realism these approaches contrast themselves with mainstream methodology in

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rejecting a closed-system ontology, yet there is debate over the compatibility of the

alternatives that are presented (see The Journal of Post Keynesian Economics, Fall

1999).

Dow’s (1985, 1990) ‘Babylonian’ perspective on the Post Keynesian approach argues

that theorists should embrace a variety of different insights into the phenomenon under

investigation. This is because an open-system ontology carries with it the notion that

uncertainty, based on the incomplete or partial understanding possible in an open

system, is endemic to both the researcher as well as the researched alike. In turn this

provides a rationale for, as well as reflects, the existence of multiple processes

underlying events and as a result legitimises a pluralist approach to theorising (which of

necessity involves abstraction and partiality). Nonetheless the thrust of theory from an

open-system perspective should be to focus on discovering these processes. Much of

this general perspective thus shares Lawson’s (1997) arguments.

As Dow (1994, p2) points out, an organicist ontology undermines the ‘dualist’ thinking

or epistemology endemic to the neoclassical research programme. Dualism implies that

knowledge can be provided through reference to ‘all encompassing, mutually exclusive

theoretical categories’ such as ‘fact’ and ‘theory’ or ‘truth’ and ‘falsehood’ or

‘macroeconomics’ and ‘microeconomics’. It follows that, according to Dow, the role of

empirical evidence is different for post Keynesians than, for example, neoclassicals. Dow

maintains that for post Keynesians evidence can be validly provided by a variety of

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sources such as questionnaire and historical sources. As Dow (1994) writes,

“...knowledge is acquired by gathering evidence and constructing argumentsin order to build up rational belief. These contributions to knowledge areincommensurate in the sense that they do not add up to a singleprobability statistic, i.e. they do not fit into closed-system theorising...thechoice of a range of methods depends on the nature of the problem and thecontext. But the choice is guided (and thus limited) by reason, conventionand vision; it is differences in these which account for different schools ofthought which have in common open-system theorising” (Dow, 1994, p7).

Crucially, according to Dow (1990) one can conceive of the realist nature of theory by

reference to two extremes within the ontological domain of world-realism (i.e. that a real

world objectively exists to be theorised about). These are that theory can either tend

towards being ‘event-truth’ realist or towards being ‘process-truth’ realist. In the former

case, correspondent to Lawson’s definition of empirical realism, theories are constructed

to correspond to reality in terms of predicting events. Theories of this nature refer to

events and may involve fictions, that is falsehood, as opposed to merely abstractions of

detail. Neoclassical economics can be characterised in this way because of its emphasis on

the formal deduction of events and the econometric testing of predictions concerning the

patterns of these events. Significantly this means that neoclassical economics can claim to

have a realist underpinning.

Process-truth realism, on the other hand, entails a concern that theories correspond to

reality in the sense of highlighting the real causal relations underlying events, with no

presupposition that events may be predicted or that there is a one-to-one correspondence

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between causes and events. This approach, of course, shares the emphasis of Lawson’s

open-system perspective. Indeed the central differences between Lawson and Dow’s

approaches, appear to arise in discussing the role of econometrics and assumptions in

theory. In other words as one moves towards concrete epistemological issues. While in

general both approaches present a role for a variety of insights in an investigation, in

contrast with Lawson (1995, 1997), and sharing the perspective offered in this chapter

and chapter 6, Dow (1990) clearly suggests a constructive role for econometrics.

Of a different emphasis, Davidson's (1996) methodological approach begins with a

critique of neoclassical economics, New Keynesian economics, and indeed Behavioural

economics. He argues that they invoke an assumption of ergodicity, which is

inappropriate to a world characterised by fundamental uncertainty.2 Notwithstanding any

references to stochastic assumptions, Davidson argues that the ergodicity assumption

implies that the past, present and future of a system are predetermined. This legitimises

the emphasis upon predictability required for a deductive emphasis in theory and an

emphasis on numerically defined probabilities in making inferences through statistical or

econometric analysis. In contrast Davidson (1996) argues that post Keynesians are

interested in a non-ergodic and transmutable-reality view of the world where,

"…probabilistic risks must be distinguished from uncertainty whereexisting probabilities are not reliable guides to future performance.Probabilistic risk may characterise routine, repeatable economic decisionswhere it is reasonable to presume an immutable (ergodic) reality.Keynes…however, rejected the ergodic axiom as applicable to all economicexpectatons…involving non-routine matters that are 'very uncertain'…'(Davidson, 1996, pp492-493).

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Examples of this perspective, for Davidson, include Keynes' General theory and post

Keynesian monetary theory; post-1974 Hicks; Shackle's analysis of crucial decisions and

Old Institutionalist theory. The implication is that the future is created through the act of

choice. It follows that statistical inference will be of no use in cases of uncertainty. In

rejecting the econometric method, Davidson appears to fall closer to the Critical Realist

position than Dow.

Yet, Davidson's arguments have prompted attention from Critical Realists and can be

subject to criticism from an institutionalist perspective. The key issue at stake lies in the

conceptualisation of decision making under the conditions of uncertainty postulated by

Davidson. As Dow (1995) argues, if uncertainty is associated with absolute ignorance of

the underlying structure of the choice situtation then logically this is infeasible.

‘...absolute ignorance is incompatible with knowledge of absolute uncertainty’ (p124).

This implies that both the researcher investigating agent choice, as well as agents

themselves, cannot conceptualise their situations other than in a purely subjective way.

There is a divorce between the environment and the agent in socio/economic systems.

Many behavioural and institutionalist economists have emphasised the fallacy of this

perspective which stands in contrast to Davidson's allegiance to them. Hodgson (1988),

thus argues,

“...the force and impact of the behaviouralist argument...(is that)… thenotions of equilibrium and global rationality in neoclassical economics areintimately related” (Hodgson, 1988, p80. My emphasis).

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These notions are both rejected simultaneously. Systemically speaking global rationality

implies equilibrium. Conversely, it follows from the behavioural and institutionalist

perspective that procedural revisions to decisions do not imply equilibrium (See Loasby,

1995, Foss, 1997). This means that there can be no ergodicity in a world populated by

boundedly rational agents. Boundedly rational agents both create and react to the future

environment. In this respect it is problematic to link notions of bounded rationality and

ergodicity. Theory that attempts to do this is flawed and Davidson's (1996) conclusion is

thus supported. However, one can question Davidson's line of argument. In rejecting

bounded rationality and focussing on non-ergodicity, this produces a view of the

economic environment that is conceptually distinct from agent behavior and choice.

Further in concentrating on the ergodicity axiom, Davidson (1996) fails to note that,

epistemologically speaking, global rationality furnishes the desired result of ergodicity

through the neoclassical conception of agency.3 It is an integral part of a (albeit closed)

system of analysis based on mode of inference relying on deductive logic. As a result,

Davidson produces a technically defined - cartesian dual - nonergodicity that does not

appear to require reference to bounded rationality - a non-neoclassical conception of

agency. The danger with this position is that a definition of the social system as an arena

of choice gets lost. It follows that in as much that there is no effective choice in a world

where everything is predetermined, in a technically defined non-ergodic world, no choice

can be made. By definition everything is a ‘surprise’ and ‘uniquely originated’ - terms

entirely consistent with Shackle's arguments. However, the question is, how can one

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argue that the subject of analysis, the theoretical framework with which the world is

understood, both interact with, and hence help to shape, the material world or object of

analysis? In other words how is extreme subjectivity avoided?

This has to be achieved by drawing upon some notion of how the external world affects

choice and that agents hold (some) knowledge of the world. Drawing upon Shackle's

(1958, 1988) conception of 'practical conscience' that puts bounds on behaviour,

Davidson (1996) argues that agents can form 'sensible expectations' drawn from

institutional behaviour. Yet Runde (1993) and Lewis and Runde (1999) suggest that this

appeal produces an internal inconsistency because Davidson’s (1996) conception of

knowledge and ignorance is based on an ontological dual of ergodic and non-ergodic events

and hence the ontological character of sensible expectations is undeveloped. In contrast a

link to Critical Realist ontology would over come these problems in linking social

institutions with the causal mechanisms that structure if not fully determine events. In

other words this allows for specific decision making structures, partially existent

independently of the individual, to form a part of economic inferences and choices.

Critical Realism thus explicitly embraces the idea of an interdependent system.

One can link these differences to rhetorical strategy and Davidson's desire to attack

mainstream economics in its own vernacular (Davidson, 1999; Lewis and Runde, 1999). It

is clear that, as Arestis et al (1999) and Downward and Lee (2001) argue, the broad sweep

of the approaches is to accept that the real economy is an open-system in which

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economic structures evolve through complex interrelations between reflexive economic

agents and causal structures. The approaches thus share the view that there is no

compelling a priori reason why any empirical regularities might be observed.

Yet, at another level, as Mearman (2002) argues all of the methodological positions in

Post Keynesian economics share a tendency towards negative definitions of open-

systems. Not withstanding the comments above, they are defined dualistically in terms of

a more familiar concept, i.e. closed systems. As chapters 5 and 6, and the comments

above argue, such duals can be transcended by recognising that closures external to

thought can be termed “real”. Humans usually create real social closures through

institutions. This is not to say that institutions create complete closure; rather, they

merely increase stability and repetitiveness in terms of series of events. Significantly, this

hints at a concept of “quasi closure,” for example discussed in chapters 4 and 5, lying

between complete closure, which is taken to mean complete event regularities, akin to

experimental conditions, and complete openness, which is often taken to mean, simply,

disorganized flux. It follows that to the extent that the alternative positions do embrace

the notion that in the real economy economic structures evolve through complex

interrelations between reflexive economic agents and causal structures, they are not

inconsistent with the arguments underpinning the approach to empirical inference

discussed in chapter 6. It follows that the comments aimed specifically at Critical-Realism

carry over to the broader methodological sweep of Post Keynesian Economics. These

matters aside, thus, one can now exemplify the constructive role of econometrics from the

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Post Keynesian literature on pricing.

3.2 Empirical Examples from UK ManufacturingPricing has formed a useful test bed for applied Post Keynesian economics. As noted

earlier in the discussion of Gardiner Means, much is at stake in debating the issue of price

flexibility. Flexible price adjustment in response to excess demand lies at the core of

neoclassical economics in general equilibrium theory and its core propositions about

welfare. Price flexibility is rejected by Post Keynesian economics. This is a direct

challenge to the neoclassical theoretical edifice. Post Keynesian pricing theory draws

together seminal elements of research that challenges neoclassical economics. This

includes Gardiner Means but also the work of Hall and Hitch (1939) Andrews (1949a, b,

1964) and Kalecki (1954) and emphasises that in manufacturing prices are set by a mark

up on some measure of average costs with no explicit role for demand (see also Lee, 1998;

Downward, 1999). What follows, thus, is a discussion of the empirical evidence that can

be said to underpin these ideas as much as a discussion of the usefulness of econometrics

to Critical-Realist research.

To begin with, in econometric terms debate over pricing behaviour has concerned two key

issues.4 These are the extent to which prices are related to full/normal or actual unit costs

(full/normal costs refers to some measure of trend or long run costs) and the extent to

which demand exerts a direct effect on mark ups and prices. These issues have been

usually addressed in the form of the following general linear model.

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iiiiuDemandCostriceP +++= χβα

where;

i = Index of observationu = Random error term

Precise measures of variables have differed. Prices have been measured as wholesale or

producer price indices. Average costs (costs) have been restricted to indices measuring

labour costs and/or material, fuel and other costs. Further, either their current or current

and lagged values have been included to capture actual costs or full/normal costs - those

associated with a longer period of production - respectively. In the latter case some

contrived measure of full/normal costs has also been used in which the researcher

recalculates average costs based on some trend measure of output rather than its actual

value per period. Demand has also been measured in different ways. Some authors have

argued for an essentially monopolistic view of price determination. In this case

levels/changes of demand have been associated with levels/changes in prices. Typically

output is used to measure demand here. Some authors have used a perfectly competitive

market-price determination model that relates price changes to the level of excess demand.

Others have combined some form of cost variable with an excess demand proxy for

demand pressure.

Updating Downward (1999, 2002), Table 1 presents a summary of the main studies for

the UK grouped broadly according to the way in which costs were measured, although the

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third column reports the only study adopting a pure excess demand investigation into

pricing.

Table 1A Selective Summary of Econometric Studies of UK Pricing

1.Normal Cost

Specification12.Actual CostSpecification

3.Neoclassical

Specification2

Neild (1963)3 excess demandno effect (excess demand forlabour used to proxy excess

demand for output).

Neild (1963) excess demand – noeffect.

McCallum (1970)4 ‘accords wellwith the evidence’. McCallum

comments on Rushdy and Lundthat price change is a function of

excess demand only.

Rushdy and Lund (1967)4current and lagged excess

demand - no effect.

Rushdy and Lund (1967)3 currentand lagged excess demand -

significant effect.Coutts, Godley and

Nordhaus (1978) excessdemand a small butinsignificant effect

(deviations of output aroundtrend used to proxy excess

demand).

Sawyer (1983)5 weak effects ofdemand (the level of demand

proxied by output).

Sylos-Labini (1979) no effectof demand on prices

(capacity utilisation used toproxy demand)

Smith (1982) respecifiesCoutts, Godley and

Nordhaus’ normal costs andfinds demand now

significant

Geroski (1992)5 supports Sawyer

Downward (2002) reconfirmsNeild.

Downward (1995) supports Sawyer

Notes:1. Normal cost transformations are applied to labour costs only except for Sylos-

Labini. The distinction between normal costs and actual costs may be weak inthat lagged (i.e. averaged) values of the latter, used for example by Sawyer andGeroski, may be an indication of the former hypothesis. As Rushdy and Lundargue, however, transformations of costs prior to regressions may effectivelyrule out demand effects.

2. Termed neoclassical because it adopts a specification where price levels/changesare a function of cumulative levels/current levels of excess demand only.

3. The preferred specification when a number were utilised.4. These studies used Neild’s data - hence basis of excess demand proxy.5. Were disaggregated studies and noted important heterogeneity’s in behaviour though

generally weak and insignificant demand effects.

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First examination of the table reveals some interesting features. One can clearly note that

econometric work has not produced the 'covering law' aspired to in the neoclassical

methodological aspirations. There is evidence, at least, in favour of all of the

specifications. This is most apparent in considering the first row of the table. Here, a

number of studies were undertaken using the same data set. The first entry refers to

Neild's (1963) seminal econometric study of pricing in the UK aimed at providing a

'dynamic interpretation of 'full cost pricing'" (p4) for the National Institute of Economic

and Social Research. Neild's work generated the data for the studies. He employs three

variants of a standard dynamic equation in analysing the data;

P W M M M Pt t t t t t= + + + + +− − −β β β β β β1 2 3 4 1 5 2 6 1

Where:

P = PricesW = Unit wage costsM = Unit material costst = Time

The common regressors to each variant are the material input price and lagged own price.

The variation in the equations arises from the inclusion of three different forms of wage

cost. Actual unit labour costs are used as well as two forms of normal unit labour costs.

To test for the presence of demand effects on prices, Neild includes perfectly competitive

measure of demand proxied by the cumulative value of the excess demand for labour. This

is based on the logic that as price changes are governed by the level of excess demand,

price levels would be governed by the sum of excess demand. Neild's basic conclusion is

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that the terms add nothing to the model as the coefficient's signs are negative and the

preferred specifications were versions of mark-up pricing.

Neild's work is criticised by Rushdy and Lund (1967) who argued that the full/normal

cost measures - obtained by dividing unit labour costs by trend productivity -

incorporates direct demand pressure on prices into the measure of costs. Rushdy and

Lund thus estimate their equations using actual costs and changes in the variables to

remove the problems of ‘common trends’ in the data. They conclude on the basis of a

large number of alternative specifications that demand does have an influence on prices.

In direct contrast, McCallum (1970) estimates a competitive pricing model. Price changes

are related to future and current excess demands for labour. It is hypothesised that a lag

occurs between product demand and labour demand so that current excess demand for

output is picked up in a later excess demand for labour. Lagged price changes are included

too. The model estimated is.

11 −+ ƒ++=ƒ tttt PddP χγβ

Where:P = Pricesd = Excess demand for labourt = Time∂ = Change in variable.

McCallum concludes that,

'The "pure excess demand" hypothesis is shown to accord very well withthe empirical evidence utilised by both Neild and Rushdy and Lund'[McCallum (1970)p147].

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It appears that one can defend any hypothesis from the data. On this basis, one can quite

easily understand the concerns of Critical Realists that the application of statistical

methods is a rather futile exercise that artificially forces open-system reality through a

closed-system lens to produce results that demonstrate little agreement. They are

inherently flawed.

Two important factors, however, mitigate against this argument. The first is that the

qualitative emphasis of the research clearly lies towards supporting a version of mark-up

pricing with weak direct effects of demand. This would seem consistent with the ability

of econometrics to present demi-regularities. The second is that the studies alluded to

above were at the cutting edge of econometrics over thirty years ago. Downward (2002)

revisited the data using modern time-series econometric methods incorporating vector

autoregressions and cointegration and reached the conclusion that Neild's original findings

were supported which further tips the balance in favour of a version of mark-up pricing.

Rather than abandoning econometric work, this suggests that econometrics can play a

useful role in codifying the empirical level from which retroduction can begin. However,

this may require more than the appeal to one isolated study or technique.

In addition, it is important to recognise that the legitimacy of retroduction is enhanced by

this prospect. Firstly, the econometric work alluded to above was, originally motivated

by a desire to check on the full-cost process of pricing first postulated by qualitative

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investigation, i.e. Hall and Hitch's work. In this sense the econometric analysis provides a

means of adding legitimacy to those claims as well as passively providing a basis from

which causal research can begin. Second, as Downward (1994, 1999) notes the causal

research in itself is not straight forward to intepret but is characterised by terminological

imprecision and methodological imprecision. For example three broad clusters can be

established from the literature. These include studies considering how firms pursue single

or multiple pecuniary goals, such as profits or market share, through a process of

personal or institutional adjustment to initial full cost prices in the light of demand

pressure. Second, studies which recognise that firms also have non-pecuniary objectives.

They address, as a general issue, multiple goal pursuit in firms. As with the first cluster,

firms' goal pursuit through price adjustment is described as stemming from personal and

informal considerations as well as 'objective' institutional procedures. Finally, there are

studies, which are concerned primarily with the pursuit of pecuniary goals such as profits

but with the emphasis on 'objective' or institutionally based incremental decision making

processes for adjusting prices. At a general level only one can say that there is agreement

on the pricing processes that firms follow. This level implies that firms price using a mark

up on full costs with potential that mark ups may change by a variety of organisational

mechanisms, however, they are less likely to do so if demand changes. In this case, thus

the econometric work can act as a check on the reliability of the attempts to distil a causal

analysis from qualitative data as discussed in chapter 6.

As well as demonstrating the value of econometric work within the context of a broad

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literature, it is also possible to illustrate its value in connection with a particular context,

that is piece of research. Of course, no research project is conducted in isolation and will

be embedded in a wider literature, which will influence the inferences that are drawn. This

is, in fact, the case with the research below. Nonetheless, it can be shown that the

purported validity of conclusions can be enhanced by analysing data in a number of ways

rather than employing one technique of analysis as if often the case in neoclassical

economics.

In Downward (2001) both descriptive and statistical analysis of a sample of data drawn

from UK manufacturing firms is undertaken to assess the relevance of the Post Keynesian

perspective on pricing. To address these issues data were obtained on broad dimensions

of firm behaviour capturing aspects of the firms' pricing objectives, organisation, their

market environment as well as characteristics of the firms' such as their size, products and

cost behaviour. Consequently, questions probed at what level in the hierarchy pricing

decisions were made and whether or not prescribed procedures were followed.

Information was also gathered on the pricing formula employed, such as variants of mark-

up processes and whether price lists and discounts were employed. The short-run and

long-run emphasis of a variety of pricing objectives was obtained. Also differences in

product type and degree of market competition explored. Finally firms' pricing responses

to a number of changes to cost and market conditions was investigated.

In general, responses were codified on a five-point interval scale measuring if the

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periodicity of firms being organised or behaving in a particular way, or the extent to which

respondents agreed that their company was characterised in that way. In simple terms,

thus, the research had a quantitative emphasis and was not based on constructing

qualitative scenarios.

This is not because this was felt to be an unimportant issue. Indeed qualitative work

could have formed part of the research prior to quantitative efforts. As alluded to above

this was because the study intended to extend the wealth of existent literature on pricing.

This said, even if this was not the case, it was argued in chapter 6 that the descriptive

analysis of statistics was presented as fully acceptable with Critical Realism. Analysing

the data further using multivariate and econometric techniques thus provides an

interesting illustration of how such findings can be triangulated.

In the descriptive analysis of the data, the results are sympathetic to the idea that pricing

is governed by a Mark-up pricing formula, as part of a wider set of organisational

decision-making rules, with explicit account taken of feedback from the environment (that

is competitive pressure). For example, 48.3 per cent of firms initially use budgets in

setting prices often or very often. 64.1 per cent of firms and 63.7 per cent of firms

respectively use price lists and a mark-up rule on average costs to set prices often or very

often.

However, it is clear that pricing decisions are not simply pre-planned. 53.2 per cent of

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firms often or very often make pricing decisions with contingencies in mind and only 25.7

per cent of firms report that contact between pricing personnel is dictated by pre-planned

schedule. Moreover, 74.3 per cent of firms take into account the state of market demand

when setting prices, 81.4 per cent of firms set prices to maintain goodwill often or very

often and 50.4 per cent of firms follow their competitors in setting price often or very

often. In addition, 72.5 per cent of firms agree or strongly agree that price competition is

stronger than non-price competition and 88.4 per cent of firms believe that price

competition is strong or very strong in their industry.

The strategic importance of pricing is also evidenced by the fact that the firms typically

compete with 5 to 9 actual and potential competitors. The results also suggest that once

competition is accounted for firms reluctantly change their prices from those initially set.

65.5 per cent of firms set prices to encourage price stability in the market implying price

stability is explicitly desired by firms. Only 39.1 per cent of firms change prices from

those initially planned often or very often, while 81.4 per cent of firms actively pursue

goodwill in setting prices often or very often. Setting prices with long-term stability in

mind is thus a characteristic of the survey.

The results also showed that firms are more likely to change their mark ups than to

change their discount structures, costing bases and price lists. Moreover, firms are more

likely to change prices through their price lists rather than their costing base or discount

structure. While mark ups may be ‘flexible’, therefore, this is defined in connection to

23

longer-term price adjustment than rapid reactive price adjustment. This argument is borne

out in considering the likely pricing responses of firms to changes in costs and demand.

Table 2 shows that the responses show a marked similarity to the literature generally.

Price changes are more likely to follow cost changes, but, in general, manufacturing firms

prefer not to change prices.

Table 2. Firms’ Pricing ResponsesWhen setting pricesFirms….

RESPONSE (%)

Increase prices whencosts increase

(ICIP)

15.8 35.9 42.6 4.2 0.7

Decrease prices whencosts decrease

(DCDP)

5.3 7.4 33.5 34.5 17.3

Increase prices whendemand increases

(IDIP)

3.2 16.2 44.4 26.1 9.9

Decrease prices whendemand decreases

(DDDP)

1.8 14.1 47.5 25.4 10.6

24

In general, the results suggest that firms do not seek to change prices and that as a result,

sluggish price adjustment is normal behaviour for firms.

It is clear at this juncture, and referring to the previous discussion of the literature that the

descriptive results that are broadly supportive of Post Keynesian pricing theory.

However, even in the brief synopsis of the research presented here, one can see that there

are complicated interrelations at work. A natural question to ask is 'does the Post

Keynesian emphasis on the mark-up pricing process present a useful retroduction'?

To answer this question consideration could be given to further steps of analysis. In the

research being discussed a further two-stage empirical strategy was adopted. The first

stage involved using factor analysis to help to understand a complex system. As

discussed in chapter 6, while drawing upon an additive structure, this type of analysis

addresses the issue of multicollinearity by attempting to decompose phenomena into

relatively autonomous sub-components. A factor analysis is concerned with identifying

the linear combination of variables that accounts for most of the variance in the data. The

combinations - or factors - that are identified can be seen as sets of variables best

summarising the data. The second stage involved regressing the pricing response of firms

to, say, changes in costs or demand upon these components. The objective of the exercise

was to try to link the firms’ responses to changes in the environment to causes residing in

firms' objectives, price setting procedures, organisation and environment.

25

Being indicative of the complicated system at work, the factor analysis extracted 25

factors from 80 variables which suggests that the overall data is not easily summarised.

Yet, many of the factors were readily interpretable. Clear examples of these were factors

that linked together firms' long run or short run pricing objectives, their absolute size,

aspects of mark up pricing formulae, cost behaviour and so on. As discussed below,

however, very few figured consistently in the regression analysis which is an important

result.

Table 3. Explaining Firms' pricing Responses 5

DEP VARIABLE COST DEMAND

ICIP DCDP IDIP DDDP

IND VARIABLE/FACTORSPRICOMP 0.145

(2.688)0.11

(2.07)WSALEDIS 0.126

(2.405)0.13

(2.432)CHNGMK 0.136

(2.595)0.197

(3.455)CONTING 0.194

(3.905)0.246

(3.588)BREUSCH-PAGAN 94.3009* 53.35* 36.0798 32.8805R2 0.148 0.196 0.194 0.131ADJUSTED R2 0.065 0.118 0.116 0.046F[25, 258] 1.79 2.52 2.48 1.55P(F) 0.0136 0.00015 0.0002 0.049

By way of example, table 3 reports the results associated with trying to explain the

behaviour that an increase/decrease in costs would lead to an increase/decrease in price

(ICIP/DCDP), and that an increase/decrease in demand would lead to an increase/decrease

in price (IDIP/DDDP). Only coefficients, which apply to each scenario for both demand

and cost changes, are reported. The intention is to highlight what is revealed to be

'persistent' tendencies in behaviour.

26

The results suggest that firms are more likely to increase/decrease their prices following an

increase/decrease in costs if they modify their mark-up pricing formula. This is because

CHNGMK is a significant factor. It summarises variables measuring changes in costing

bases and mark up formulae. The other significant factor in both of these cases,

CONTING, indicates that changes in price following cost changes are associated with

variables measuring contingent circumstances. The implication of these results is that the

consistent factors associated with changes in price following changes in costs reflect the

mark-up formula and contingent circumstances.

Referring to the equations for IDIP and DDDP, that is seeking to identify factors

associated with firms increasing or decreasing their prices in response to increases or

decreases in demand respectively, the significant factors are PRICOMP and WSALEDIS.

The former factor summarises variables expressing the degree of price competition facing

firms. The latter factor summarises variables referring to discounted products in wholesale

markets. The implication is that prices are adjusted to demand conditions to a degree in

cases of price competition.

In each case, the R2 , adjusted R2 and F-statistics are also presented. The F-statistics all

have [25, 258] degrees of freedom. These statistics suggest that the regressions are

significant but that they generally explain between 15 and 30 per cent of the relevant

dependent variable. Low values of these statistics are, of course, to be expected with

27

cross-section data. However, it also suggests, as already alluded to, that price adjustment

may often reflect unsystematic influences. Starred statistics indicate significance at the 5

per cent level.6

In short it is argued that the research reveals that to the limited extent that firms change

their prices in line with changes to their environments, a strong element of contingency

exists. Moreover, the systematic tendencies that might underpin such price changes have

a strong Post Keynesian emphasis. Central features include changes to the mark-up

formulae and adjusting prices in line with competitor's prices.

Drawing upon the discussion of chapter 6, therefore, the above example shows how in

practice the reliability of specific empirical claims can be checked with reference to other

claims. While descriptive analysis might themselves be suggestive of the causal

mechanisms, the effects of their action can be assessed, and hence the purported causal

mechanism supported, with reference to more quantitative analysis aimed at codifying the

empirical level. Based on the research reported above one can argue that both the process

of price-setting and the behaviour of prices that follows can be understood in Post

Keynesian terms. In this sense the traditional Post Keynesian emphasis - or retroduction

- on mark-up models has some legitimacy.

28

Conclusion

This chapter illustrates some of the main arguments presented in chapter 6, that

econometrics can play an epistemological role in economic enquiry from a Critical Realist

perspective. In particular the focus is upon how Critical Realist empirical enquiry could

draw upon an eclectic range of research methods including quantitative techniques, which

can play a part in a triangulation strategy seeking to legitimise causal claims from

retroduction. In this chapter these arguments are illustrated by drawing upon applied

work in Post Keynesian pricing.

To facilitate this discussion the chapter begins by considering an historical example of

triangulation to illustrate that economic practice can inform philosophy. To move

towards an up-to-date illustration drawing upon the Post Keynesian literature, the

chapter also considers the compatibility of Critical Realism with other Post Keynesian

methodological pronouncements and suggests that the arguments of chapter 6 could apply

more generally. The chapter then concludes by presenting two contemporary examples of

triangulation. One draws broadly on applied work from both an econometric and non-

econometric nature. The other unites different data analysis techniques within one

particular project. It is argued that these examples reveal the robustness of the Post

Keynesian emphasis - or retroduction - that manufacturing pricing behaviour can be

29

understood in terms of mark-up pricing processes with mark-ups adjusted in line with

competition.

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1 It is worth noting that Means was one of the first economists to construct concentration indices. In thissense he is a forerunner of ‘Industrial Economics’. For more on this see Lee (1998).2 Davidson distinguishes between 'type 1' immutable-reality models and 'type 2' immutable-realitymodels. Examples of the former case are: Classical perfect certainty models; Actuarial certainty equivalents,such as rational expectations, models; New classical models and some new Keynesian models. In the caseof 'type 2' immutable-reality models, Davidson argues that the future is perceived to be unknown, in thesense that there are limitations with agents' computational abilities, but that behaviour will converge, inthe long run, onto the immutable path. Example are: Bounded rationality theory; Knight's theory ofuncertainty; Savage's expected utility theory; Some Austrian theories; Some new Keynesian models suchas co-ordination failure, and chaos, sunspot and bubble theories. 3 As noted above, neoclassical economists do have a form of realist analysis. Causal relations arepostulated, albeit in an (erroneously) analagous fashion to the relations produced by scientists in acontrolled experiment. The ontology of the neoclassicist is thus not simply Humean in appealing toatomistic events. This is an important issue. Hume’s problem of induction is a logical one that suggeststhat if reality comprises unconnected events then there is no logical necessity for the repetition of anyparticular sequence of events in the future. Without the possibility of causal connections between events itis logically possible that any explanation based on specific sequences of events may be incorrect. As Harreand Madden (1975) point out, the problem of induction is really an ontological issue. Accordingly, appealto an ontology of causal mechanisms, if correctly identified, removes this problem. It is in this respect thatthe current paper is concerned with epistemological, rather than purely ontological, issues. Appeal to causalmechanisms underlying events shifts the issue away from pure logic towards epistemology and inferenceand ways in which we can gain reliable knowledge. It also suggests that in indentifying a mechanism itwould be logically possible to generalise that explanation to other examples of the same thing. Theproblem with the neoclassical approach, thus, is a lack of concern for the dangers of inference in an open-system by treating it as closed.4 There has, of course been many other studies of pricing in the UK associated with industrial economics.The studies referred to focus specifically on the pricing process and not influences from variables measuringthe wider market structure.5 In these tables the constant in the regressions is not presented.6 Where necessary the results were corrected for heteroscedasticity according to White’s transformation. TheBreusch-Pagan statistic is reported in each case. There were 25 degrees of freedom associated with the test.