September 18, 2015

How to start off at the right foot

Comment on Bill Mitchell on ‘When one false starting premise leads to progressive confusion’

Blog-Reference

You say “... a current article ... shows that if one starts from a wrong premise the conclusions will lead one astray no matter how noble the intentions are. Progressives have to get the basics of macroeconomics correct before they launch into critiques of this and that.” (See intro)

This, indeed, is the crucial point of all of theoretical economics and in turn becomes the precondition of economic policy. “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Successful economic policy critically depends on the correct economic theory and the whole theoretical superstructure ultimately hinges on a handful of foundational premises. As you say, wrong premises lead straight away to utter confusion (see also 2013).

In order to avoid the garbage-in-garbage-out fallacy the most important task of the economist is to see to it that his premises are true. And this is what the great methodologist and economist J. S. Mill has told his utterly disoriented fellows.

“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.” (Mill, 2006, p. 746)

Standard economics has been built upon wrong premises and it is pretty obvious by now that it is a failed approach. Every economic analysis must start with the definition of the objective structure of the monetary economy because it is this structure, a.k.a. reality, that determines the outcome of individual and collective human action (2014). The monetary economy is the meta-context of every partial analysis.

Standard economics starts with the behavioral assumption of constrained optimization and this means to get off at the wrong foot. MMT starts with the objective structure of the monetary economy. This, clearly, is the right foot. However, what is still missing is an explicit and formally consistent definition of the set of foundational propositions that constitutes the new approach.

This task is of overriding importance. As you say “You can see that if you start off with a false premise ... how quickly one descends into a flawed analysis.” Or, as J. S. Mill and the methodologists of all times have said: mind your axioms. The representative economist never got this crucial point.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
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, IN: Liberty Fund. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

Relates to 'Modern moronomic theory'
For the bigger picture see cross-references Axiomatization