The Ergodic Presumption Is the Essential Foundation of Classical Efficient Market Theory

To grasp Keynes’s theory, one must first consider the contrasting framework, accepted down to our day by most economists, which Keynes rejected. In that view, everything is fine as long as prices and wages are flexible. If prices can adjust to changes in business expectations, why should there ever be a serious problem? Davidson contends that this way of thinking rests on a flawed assumption. Advocates of the standard model imagine that accurate markets exist, not only for present transactions, but for future contracts as well.

The assumption of accurate futures markets in turn rests on a hypothesis, which Davidson deems the crucial principle of neoclassical economics.

Since drawing a sample from the future is not possible, efficient market theorists presume that probabilities calculated from already existing past and current market data are equivalent to drawing a sample from markets that will exist in the future . . . the presumption that data samples from the past are equivalent to data samples from the future is called the ergodic axiom. Those who invoke this ergodic assertion argue that economics can be a “hard science” like physics or astronomy only if the ergodic axiom is part of the economist’s model. . . . The ergodic presumption is the essential foundation of classical efficient market theory.

Readers will not be surprised to learn that Samuelson, who evidently ranks high on the list of Davidson ’s villains, fervently endorses the ergodic axiom. 

Keynes saw the fallacy in this assumption. The future is in fact radically uncertain.

The classical ergodic axiom, which assumes that the future is known and can be calculated as the statistical shadow of the past, was one of the most important classical assumptions that Keynes rejected. . . . For decisions that involved potential large spending outflows or possible large income inflows that span a significant length of time, [Keynes argued that] people “know” that they do not know what the future will be. They do know that for these important decisions, making a mistake about the future can be very costly . . . 

Keynes, the author of A Treatise on Probability, was well equipped to make this fundamental point. 

Davidson is right that Keynes has here scored heavily against neoclassical economics. But the uncertainty of the future hardly suffices to establish the validity of the Keynesian system. For one thing, Austrian economics also emphasizes the uncertainty of the future. It is constantly stressed by Mises, who goes so far as to claim that the uncertainty of the future is a praxeological law, deduced from the action axiom. Davidson never so much as mentions the Austrian School in this book. For him, only the efficient-market economists, with their false ergodic assumption, and their Keynesian rivals count.  

—David Gordon, review of The Keynes Solution: The Path to Global Economic Prosperity, by Paul Davidson, The Mises Review 15, no. 3 (Fall 2009), under “The Discussion of Chapter 19 of the General Theory,” https://mises.org/library/keynes-solution-path-global-economic-prosperity-paul-davidson (accessed May 12, 2021).