Fundamentals of economics

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Chapter 2 in The Behavioral Economics of John Maynard Keynes, 2022, pp 26-62 from Edward Elgar Publishing

Abstract: Whether economics is an axiomatic science - in which economic behavior can be deduced from abstract, unproven axioms--or a real science–where theory has to relate to the economy we live in is the most fundamental methodological distinction between Keynes, Behavioral Economics respectively, and the neoclassical model. This distinction has direct consequences for the accepted methods to build the knowledge base, such as observations, experiments, interviews, etc. Keynes' microeconomic reasoning allows for multiple equilibria, which are balances of forces without reference to their quality. In contrast, the neoclassical model deduces from its axioms that the economy achieves the unique optimal equilibrium in which macroeconomic stimulation cannot improve welfare by assumption. The equilibrium concepts, the economy's nature as static (steady), predictable, and inherently stable markets versus dynamic and endogenously unstable, affect the critical distinction between risk and uncertainty, between foresight and the unforeseeable future. Do we live in an economy where meaningful probabilities can be applied to calculate outcomes, or is the economic future uncertain and endogenously determined? That markets clear by price variations seems logical based on the market diagram with known, well-ordered supply and demand functions, but the outcome may be different if the functions are unknown. As Chamberlin, the pioneer of experiments in economics, showed, for markets without an auctioneer, non-renegotiations of prices, and sequential decisions, the equilibrium may not be achieved.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2022
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