· we use some key properties that will be documented here
· this chapter on methodology explains the validity of the method
· for the data and structural models we refer to ‘existing economics’.
The approach of this book is to use logic in order to circumvent the uncertainty of parameter estimates. Though the book doesn’t give full statistics, it is conjectured that the theorems capture the stylized facts. A proposition - as a statement on reality - can be regarded as a mathematical theorem about/within a model of stylized facts. When there is a tautology, we attain truth by definition.
Our first proposition establishes conditions under which both unemployment and full employment are possible. This relates to the partial arguments of economists about the labour market. Our second proposition gives the integral argument, or general theory, how (un-) employment situations are managed. The employment regime can be chosen by conscious choice, or there is lack of knowledge. Lack of knowledge forks into two cases. With full employment, the situation is dubbed ‘chance’. With unemployment, it is called a co-ordination failure.
It is useful to state that our point of departure was not mathematical economics itself. This book has been written against the backdrop of the voluminous studies Central Planning Bureau (1992a&b) and Colignatus (1992). It is from this experience that these two propositions have been selected as being of foremost importance. We want to focus on main mechanisms that block full employment and prosperous growth in modern welfare states. It is thought that the two propositions, in a sense simple but in another sense complex, help to clarify a fruitful direction for both analysis and policy improvement.
To be sure: this approach does not imply a rejection of time series econometrics ! I am an econometrician myself. Below I will e.g. develop a definition of ‘risk’ that deals with uncertainties - and in my view the 95% confidence interval should be replaced by an interval based on a well specified loss function. So I am supportive of uncertainty approaches. However, econometric models also contain definitions and institutional equations, and it is my conjecture that these have not gotten the attention required. In particular the regime switch of 1950-1970 to 1970-2005 will be difficult to determine by time series methods. Studying marginal changes within a regime will not uncover results about the switch. It would be wrong if time series analysts would only accept time series as data, and not such regime states. The Definition & Reality methodology then can help us out. [68]
Governments that become interested in the present analysis will no doubt require that it is tested against the data of their own country. This is advisable indeed. However, the claims of this book are primarily mathematical certainties, and additional empirical data will mainly provide didactic assurance. Since country parameters are different, practical policy must rely on the structural models of course, and data will be needed for detail decisions. But at an abstract level, the developments would be similar.
Book VI
Structural models
Chapter 23 gives a textbook macro-economic model so that we better appreciate the point of reference of ‘existing economics’. Chapter 24 clarifies heterogeneity and nonlinear taxation. There is nothing new here yet either. The subsequent chapters then take up the same subject matter, and gradually add elements and interpretations that support the novel analysis.