Comment on 'Saving=Investment fallacy'
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In its present state, economics is unsatisfactory. Most economists can agree with this. It is not surprising then that complaining and debunking have almost become a sub-discipline of economics. Not much can be said against this, except that it is a detour.
As Schumpeter already noted: “If we feel misgivings nevertheless, all we have to do is to start appropriate research. Anything else is pure filibustering.” (1994, p. 577)
Or, Blaug, in even stronger words: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (1998, p. 703)
The problem is that conventional economics has so many obvious defects that it is not at all clear where to start. Here, Keynes pointed the way: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)
And this leads back to the question that J. S. Mill posed at the very beginning of theoretical economics:
“What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (2006, p. 746)
And this leads even further back to the beginning of science: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle, Analytica)
The premises of Orthodoxy are uncertain and false and this fully explains its failure. What exactly are the premises?
“As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states. By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program. ‘Taken to be true’ means that the hard-core functions like axioms for a geometry, maintained for the duration of study of that geometry.” (Weintraub, 1985, p. 147)
Note well that these axioms have only been taken to be true and irrefutable by the adherents of Orthodoxy. They are by no means irrefutable for anybody else.
“If a professional group regards itself a having a message to deliver to others than its own members and makes any public claims in that respect, it thereby gives others the right to scrutinize the methods whereby that message was discovered, including the principles, or possibly prejudices, followed in choosing premises. They continue to do so. Cunningham in 1891 remarked that in the choice of premises ‘it is not always easy to tell when a professor of the dismal science is making a joke’ and I suspect that Cunningham meant that if the professor was not joking, then he was making a fool of himself.” (Viner, 1963, p. 12)
So, everyone who does not want to make a fool of himself has no choice but to come up with a new set of axioms (see 2014).
Egmont Kakarot-Handtke
References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. URL (1866).
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): 1–22. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL