January 1, 2015

Testing is better than critique

Comment on Admin on 'Saving=Investment fallacy'


I certainly do not want to stop you from testing existing theories. Just the contrary, I explicitly encourage testing of the structural axiom set and its logical implications in my mission statement and elsewhere in my papers.

This brings me right back to our starting point. So, let us put methodological questions for a moment aside. You said that I=S is a fallacy. I agree. Not only this, I present the correct relation. It is this one.

This is the relation for the investment economy. It gets a bit more complex if foreign trade and government are included. But that is not the point at issue at the moment. The equation says that household sector saving and business sector investment are never equal. And this is sufficient in the first round to empirically refute the standard approach.

Now the rest is quite simple. You have the data. A cursory comparison of the data with the formula above will convince you that the formula is essentially correct. Then the crucial test has to be designed.

What will the outcome of this test be? The structural axiom set will be corroborated with a precision of two decimal places. This is how science works:

“Whether an axiom is or is not valid can be ascertained either through direct experimentation or by verification through the result of observations, or, if such a thing is impossible, the correctness of the axiom can be judged through the indirect method of verifying the laws which proceed from the axiom by observation or experimentation. (If the axiom is deemed to be incorrect it must be modified or instead a correct axiom must be found.)” (Morishima, 1984, p. 53)

This answers the first question of your comment: “How do you know (or prove) that your new set of axioms is better than the old set?” Then, obviously, there is no urgent need to discuss the rest.

In light of your comment, a better title of my previous contribution would have been: No more filibuster about economics, test the axioms!

Egmont Kakarot-Handtke

Morishima, M. (1984). The Good and Bad Use of Mathematics. In P. Wiles, and
G. Routh (Eds.), Economics in Disarray, 51–73. Oxford: Blackwell.