Posted To RWER Blog In Response To What Economic Modeling and Theory Needs 07/07/2018

AZ:  First, let me note that Steve Keen developed a system of differential equations model based on differentiating macro level accounting identities. Then he noted that this model had solutions which had a Great Moderation – a long period of stability, followed by a sudden collapse, just as happened in the GFC. On this basis he predicted the GFC. So I am not sure of the sense in which Salter’s model is new. However, the main point of my post is different.
In response to my post, many authors agree that a major paradigm shift is needed. They go on to say that they have ALREADY created the required new paradigm. However, they have not been able to get a consensus on their improved model. This is the MAIN point. Given a conventional model A, and a contender B, can we create consensus on methods for evaluating them both and assessing which model is better? Currently we have no such methodology – anybody can come in with a model C and say my model is better – there is no way to PROVE or to DISPROVE such an assertion. After explaining how the models of Lucas and Sargent were completely ridiculous, Solow goes on to say that these models do not pass “the smell test”. This then is the ONLY methodology available to the TOP experts in the field. Given two models smell both of them – the better model will smell better. If this is the best method available, it is no wonder the field is a mess.
We have witnessed many debates and arguments about good and bad models and alternatives, all on an ad-hoc basis. We need to move to a META-level – HOW do we decide on such arguments? Can we create a consensus on how models are to be evaluated and compared. The current implicit consensus is that you can make any model you like, if it has maximization and equilibrium is it a good model. If it produces match to real world observations that is even better, but it is not required. This is a hopelessly bad methodology.

Me:  Macro-economic theory is at the same point that the Copernican helio-centric hypothesis was after Gallileo used the invention of the telescope to see the moons of Jupiter but before Kepler discovered the ellipse and Leibniz and Newton invented calculus. As I have posted here before one of the primary signatures of a paradigm change is the discovery of a new tool or insight/re-discovery of an overlooked prior tool, that examined, presents new insights. That re-discovered tool is double entry bookkeeping and its new economic and monetary insight is that, the pricing, money and accounting systems being digital (that is equal amounts of money and prices, money and debt and debits and credits equal to zero) a 50% discount/rebate policy of equal amounts at the point of sale throughout the entire economic process and at its terminal ending point at retail sale….can be used to painlessly linearize price deflation throughout that same process and effectively double individual’s free and available incomes when the policy is finally executed at retail sale. These are its temporal universe effects not just a theory.

The meta level economic discovery is that the natural state of the temporal universe, despite a lot of interesting seeming scientific randomness due to space and time, is merely a large scale perception problem of its actual and deeper almost utterly integrated quantum state of process and flow, and that hence the various aspects of the natural philosophical concept of grace as in a dynamic, interactive and integrative process and flow are the guideposts for economic theory.


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