July 16, 2013

Anything goes — for a while (II)

Comment on Fred Zaman on 'Rethinking Keynes’ non-Euclidian theory of the economy'


The analytical starting point determines the course of a theoretical investigation and ultimately the productiveness of an approach. The Classics took production and accumulation as their point of departure, the Neoclassicals exchange. Exchange implies behavioral assumptions and notions like rationality, optimization, and equilibrium. This approach has led into a blind alley. Why?

“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.” (Keynes, 1973, p. xxi)

To change a theory, therefore, means to change its premises or, in Keynes’ words, to ‘throw over’ the axioms. One can take this figuratively or literally. I take it literally and this means that the subjective-behavioral axioms of standard economics are fully replaced by objective-structural axioms. In Keynes' metaphor: we move from Euclidean to non-Euclidean axioms. To recall, Keynes preserved part of the foundational assumptions of orthodoxy. This halfway construction is unsatisfactory.

(2a) Axiomatization is indispensable because the methodological anything-goes mentality among economists is the proximate reason for the proto-scientific condition of theoretical economics. Because of conceptual sloppiness, neither orthodoxy nor heterodoxy has a clear idea of the fundamental economic concepts income and profit. Doing economics without a clear idea of income and profit is like doing physics without a clear idea of force and mass  it cannot yield practical results, and it has not.

(2b) I have demonstrated that Keynes' formal basis is a limiting case of the structural axiom set. This means that there is no contradiction between the two formalisms, the latter is only more general (see Set and Subset, 2011, Sec. 20).

(2c) This implies that the concept of saving is also more general. Total saving is given axiomatically as monetary and nonmonetary saving. Monetary saving is identical with Keynes' definition. Nonmonetary saving is identical with Friedman's notion (see Primary and Secondary Markets, 2011, Sec. 4.2). The structural axiomatic approach consistently integrates Keynes and Friedman, although only with regard to consumption/saving.

(2d) The relation between monetary saving, liquidity and interest rate has been dealt with in (2011, Sec. 9). The structural axiom set formally underpins Keynes' conception of liquidity preference. The commonplace quantity theory is refuted.

(2e) A summary of the structural-systemic axiomatic theory of saving has been given in Settling the Theory of Saving (2013). The classical notion of saving/time preference, which reappears in DSGE, is refuted.

(2f) The structural axiom set consists exclusively of measurable variables and yields testable propositions.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011a). Keynes’ Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2011b). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011c). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–26. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. 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. (1936).