PKT message, Notes On Method

Recent exchanges on (a) Say's Law, (b) Monetary Theory, and (c) Expectations have underscored the absence of any agreed point of departure for reasoning on theoretical economics insofar as method is concerned. Therefore, I thought it might be useful if I were to give a bird's-eye view of my own practice in this respect, as exemplified by my long-standing approach to Monetary Theory.

First. I agree with Keynes that The Theory of Economics is "an apparatus of the mind, a technique of thinking" which, while it does not apply directly to real-world economic issues, yet "helps its possessor to draw correct conclusions" with respect thereto.

Second. As a general proposition, (a) rational expectations theorists, (b) positivists, and (c) econometricians would second this view - it is only with respect to the requisite technical attributes of such "apparatus" that intractable differences arise.

Third. Here, I agree with (a) and share John Stuart Mill's and Keynes's disdain for (b) and (c), respectively - insofar as (a) is concerned, I believe it remains to be shown that it "helps its possessor to draw correct conclusions" about real-world issues.

Fourth. If it is to be helpful in this respect, an axiomatic approach to Monetary Theory must integrate essential aspects of real-world monetary relations into a set of axioms that are complete, coherent, and consistent with respect to the purpose at hand.

Fifth. As for the essential purpose at hand, I take it to be the manner in which monetary relations permit suppliers of factor services to provide inputs to the production process at one end in exchange for IOUs redeemable in final output at the other end.

Sixth. This view represents an extension into the monetary field of a generalized versions of Quesnay's Tableau Economique - and, as such, was first articulated, albeit implicitly rather than explicitly, by Jean Baptiste Say.

Seventh. In his Theory of Economic Development, Schumpeter attempted to translate this classical axiomatic approach into non-axiomatic general equilibrium format - a dead-end approach which Keynes took in, and made fashionable with, his General Theory.

Eighth. In my view, what Charles Goodhart regards as clear retrogression in Monetary Theory between the early 1930s and the present reflects the persistence with which modern would-be monetary theorists have stuck to this dead-end track - for, as Francis Bacon cautioned some four centuries ago:

"Though all the wits of all the ages should meet together and combine and transmit their labors, yet will no great progress ever be made in science by means of anticipations; because radical errors in the first concoction of the mind are not to be cured by the excellence of functions and subsequent remedies."

Gunnar