Jason Smith — Ceteris paribus and method of nascent science

Jason Smith reacts to Arnold Kling's comments on method in economics. If interested in philosophy of science and philosophy of economics, worth a read. 

In epistemology there are essentially four criteria of truth:  consistency (syntactical truth), correspondence (semantic truth), usefulness (pragmatic truth) and elegance (aesthetic truth). There are other types of truth such as moral truth (justice) and poetic truth (insight), but these usually do not relate directly to explanation based on description.

These criteria are not mutually exclusive but rather complementary. A well-developed explanation should be internally consistent, representational of facts and events, capable of application, and economical in expression.

Jason makes a case for usefulness (pragmatic truth) being foundational and speculates that this is possibly an effect of evolution. Usefulness for survival directs the process through natural selection and multilevel selection, testing options, and selecting in and selecting out based on success and failure. This a characteristic of complex adaptive systems that exhibit reflexivity and emergence. Intelligence is an emergent property that is based on reflexivity.

Usefulness is how you bootstrap yourself into doing real science -- there's a scientific method and a scientific method for nascent science. And economics should be considered a nascent science. It is qualitatively different than an established science like physics.
Physics wasn't always an established science; in the 1500s and 1600s it was nascent. 

The useful things were the heliocentric solar system (it was easier to calculate where planets would be, which we only really cared about for religious and astrological reasons), Galileo's understanding of projectile motion (to aim cannons), and Huygen's optics. Basically: religious and military utility. These were organized with a theoretical framework by Newton and physics as a science, not just a nascent science, started. 

In medicine, we had a large collection of useful treatments (e.g. the ideas behind triage developed in the French Revolution), sterilization (pasteurization before pasteur), public health (Cholera in London) before the germ theory of disease. Medicine didn't really become a science until the 1900s.

In economics, both macro and micro, we probably have a few of the "useful" concepts in our possession. Supply and demand. Okun's law. The quantity theory of money is probably useful in some form (though not necessarily as it exists now). We probably need a few more.

A mature science has a framework in terms of which scientists operate to do "normal" science. The road to development of a science as high-level explanation begins with observations rather than starting from a framework. Presuppositions about a subject matter do not yet constitute a framework.

A framework is a set of relationships from which different models can be generated based on different assumptions. Potentially testable hypotheses can then be generated from explanations that are also predictive. To scientific a hypothesis must be falsifiable in some sense, although not in the strictly empirical sense, e.g, of positivism. But science must be distinguishable from speculation through some kind of observation.

A "nascent" science must develop a framework in which a theoretical approach can be set in which to do science rather than speculate. The historical development as been from lore and myth, to philosophy and theology, to nascent science to modern science, the first instance of which was natural science and the second, life science. Economics and social science, as well as psychology and cognitive science are still nascent as sciences, lacking frameworks.

Information Transfer Economics
Ceteris paribus and method of nascent science
Jason Smith

Arnold Kling — One-Sentence Tax Reform

Here is my own one-sentence proposal:

If A and B earn the same income, but A saves and B spends more, then A should not have to pay higher lifetime taxes.

Read it at Library of Economics and Liberty

One-Sentence Tax Reform

by Arnold Kling
(h/t Mark Thoma)

Euthanize the rentier. — John Maynard Keynes

Kling seems to think that saving in necessary for investment, and that it is investment (production, supply) that creates demand (consumption), so that saving initiates the supply side cycle.

Keynes knew that investment produces saving, in that saving is income not spent (residual), with income being workers' share of investment in exchange for their labor. Keynes, who disproved Say's law, the basis of supply side, also realized that investment is a response to effective demand, which is income dependent, and household income is the largest share of firm investment.

Banks don't lend out deposits, and there is no stock of "loanable funds." Saving creates demand leakage that reduces consumption, so that the potential output of an economy is not consumed unless government and the foreign sector make up the shortfall. Moreover, saving at the micro level leads to the paradox of thrift at the macro level.

Randy Wray:

...The problem is that because the “classical” analysis has no role for money to play, it cannot explain unemployment, nor can it find a solution to the two “outstanding faults of the economic society in which we live”, “its failure to provide for full employment and it arbitrary and inequitable distribution of wealth and income.” (Keynes 1964, p. 372) 

Both of these problems are linked to the existence of money. If government refuses to spend by crediting bank accounts on the necessary scale to raise effective demand to the full employment level, then unemployment results. Further, because money’s own rate sets the standard that must be achieved by all other assets, if interest rates are too high then private spending is too low to achieve full employment. Finally, a high interest rate rewards “no genuine sacrifice” but keeps capital scarce, resulting in “high stakes” and a “rentier aspect of capitalism”. (Keynes 1964, pp. 374; 376) Lower interest rates would euthanize the rentier, establish a “basic rate of reward” for owners of capital, so that “if adequate demand is adequate, average skill and average good fortune will be enough.” (Keynes 1964, pp. 378, 381) 

In this view, it is mostly fiscal policy that exerts control over the quantity of money, while monetary policy controls the “basic reward” to owners of assets.

L. Randall Wray, "Keynes's Approach to Money: What can be recovered?"

Minsky would add that high rates transfer wealth to rentiers, but if rates are low, there is also the danger that savings will instead go to leveraged financial speculation. This results in boom-bust credit cycles.

Therefore, rather than taxing income, which reduces consumption by leaking away demand, the preferred option is to tax economic rent, which is by definition non-productive and parasitical on the production-distribution-consumption cycle. The preferred course is to tax neither income from work that is rent-free nor real investment by entrepreneurs. Gains from financial "investment" through exchanging already existing financial assets that does not involve new real investment would be considered to be economic rent subject to taxation.