Clower’s DDH and Feedback
For Clower, the primary concern in any optimization is to question whether the budget constraint is satisfied or not. In case the first optimization is not satisfied, a feedback is required so that realized income inputs are applied in a new optimization. Only then one is allowed to proceed to the next step. This dual-step process can be best described by the following flowchart:
As Leijonhufvud (1968) wisely observed, “when the economic system fails to behave in the manner of the Classical model, it is not due simply to the absence of the feedback mechanisms assumed by the Classics.” Almost 20 years later, Hall's no feedback approach is an example of how mainstream economists failed to learn or understand the implications of Clower's DDH!
Clower, R. W. (1965), "The Keynesian Counterrevolution: A Theoretical Appraisal," in The Theory of Interest Rates, ed. F.H. Hahn and F.P.R. Brechling, Macmillan, pp. 103-25.
Leijonhufvud, A. (1968), On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory, Oxford University Press.
Wu, Cheng (2017): "Does Clower’s Dual-Decision Hypothesis lead to the change in saving conclusion in Keynes’s General Theory?" https://mpra.ub.uni-muenchen.de/82840/
https://journals.econsciences.com/index.php/JEL/article/view/1497
Wu, Cheng (2018): "Clower’s Dual-Decision Hypothesis is economics". https://mpra.ub.uni-muenchen.de/84013/
https://journals.econsciences.com/index.php/TER/article/view/1611
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