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Mother Pelican
A Journal of Solidarity and Sustainability

Vol. 14, No. 2, February 2018
Luis T. Gutiérrez, Editor
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The Explosion of the Ceteris Paribus Assumption

Carmine Gorga

February 2018


This article is a critique of the ceteris paribus assumption that is common in economic analysis. It is shown that this assumption is never consistent with economic realities and renders most economic analyses invalid. The improper use of the ceteris paribus assumption is contrasted with more realistic analyses in Keynes' General Theory and Gorga's Economic Process, and compared to Raworth's Doughnut Economics. It is suggested that current issues of social and ecological justice cannot be resolved as long as economic analysis is constrained by the simplistic ceteris paribus assumption.


Apart from whatever meaning the word singularity has in mathematics, it is important to realize that there are singularities in the world of economic theory. Such singularities are The Economic Man (Homo Economicus), namely The Rational Economic Man, The Market, The Producer, and even Money. Their central characteristic is that of being “rational” entities. Thus, the world of singularities is the world of rationality; the converse does not apply: The world of rationality includes many singularities and much more as well. For more detailed analysis of this phenomenon, and some of its consequences, click here and here.

A singularity is a world of its own, which is assumed to be autonomous, and complete in its own. Therefore, any analysis based on this entity is doomed to fail, because in the real world there is more than one thing; there is more than one thing at a time. There are many things at once. The ceteris paribus (“everything else being equal”) of economists is an invention to cover this reality; actually, the necessity for the assumption of ceteris paribus is the veil that unmasks the unreality of the mainstream economic analysis.

To single out only one feature, namely the major deficiency of economic analysis, it is sufficient to recall the explicit assumption that the problem of unequal distribution of wealth has to be faced sometime in the future, presumably when economic growth has achieved a level of full maturity, whatever maturity should ever mean. And, then, the problem is supposed to be resolved, not by economists, but by politicians. Impossible. Too late. The distribution (of ownership) of wealth occurs at the very moment of creation of wealth.

What to say of this monumental deficiency of economic analysis? This must suffice: Justice delayed is justice denied. One more thing. The world of rationality, the world of singularities, in its absoluteness, does not allow for a second moment analysis. That is a contradiction in terms. The world of rationality, the world of singularities must assume that the analysis is complete. There is nothing left behind; there is no second moment; there is nothing else to discover. Ever.

The analysis cannot be completed in a “second” moment. There is no second moment in economics. In the synchronous world of economics, a second moment might—and often does—present us with a completely different phase of the economic cycle. Just think of the sudden collapse that occurs in a financial crisis; but, as abruptly does the situation change at the signing of an international treaty agreement; or at the discovery of an oil field. That is why the ceteris paribus assumption is not a worthy tool of analysis.

In fact, the moment the world of mainstream economic analysis admits to this deficiency, that is the moment in which such a world explodes into pieces. This is what it admits in that moment. It admits that, through singularities, it has never analyzed the entire economic reality. It admits that it can never analyze the entire economic reality.

Anyone who should find this indictment too broad, too all encompassing, will have to go to the world of heterodox economics to find the bill of particulars. And if anyone should find heterodox analysis too broad or too dispersed, this person can go to the world of Michael Emmett Brady for the discovery of consistency of errors, consistently repeated by Keynesian analysts during the last eighty years. See, especially Brady (2004).

Tout le monde has assumed that Keynes’ model of the economic system can be found on page 63 of the General Theory (Keynes, 1936); actually, Keynes presented it, not a mathematical model, but as a syllogism:

If Income = Consumption + Investment

And Saving = Income - Consumption

Then Saving = Investment.

This theoretical structure has been at the core of economic analysis for the last eighty years. For a full evaluation of this model, see Gorga, 2002, 2009, 2016, pp. 41-158.[1]

Brady demonstrates that a second model is expressed in Chapters 20 and 21 of the General Theory. This is the mathematical model on the basis of which Keynes wrote the General Theory; this is the model which is still being totally neglected by economists of any persuasion. This is the model that is built on the complementarity of demand and supply, the D-Z functions, namely the expected aggregate demand function and the expected aggregate supply function. Keynes did not think in linear fashion; he did not restrict his thought to the world of singularities.

For a synthetic understanding of the bare mechanics of Keynes’ model, see the following figure—but subtract from it the central part related to the Distribution of economic values of ownership rights over real and monetary wealth:

02.18.Page5.Gorga1.jpg
Figure 1 – The Economic Process

The difference between the two models is this: With the syllogistic model it is possible to analyze only one item at a time; with the mathematical model, it is possible to analyze two items. To briefly see the shortcomings of both models, it is necessary to remember that science cannot operate with only one observation, one point. It needs at least two points. It is only with three points that science is on firm ground. The determination of the third point has to be found in an autonomous, external phenomenon; if it is derived internally from two points, the analysis is probabilistic and ultimately circular, because the third point can be anywhere on the circumference determined by the radius with its two points.

The world of mainstream economic analysis is flawed. It cannot be cured from the inside. It is the whole world of mainstream economic analysis that must go. To insist on the point, the world of singularities is a non-existing world; it is a world invented by theoreticians—by linear thinkers—to make their analysis feasible. But whatever they put in their analysis, that is what they derive from that analysis: a non-existing world.

The deficiencies of the ceteris paribus assumption become much more evident when observed through the lenses of Concordian economic analysis, an effort carried consistently forward during the last fifty years and lately adjoined by the world of Doughnut Economics. The world of Concordian economics can be largely reconstructed from Figure 1 above and Figure 2 below. As it can be seen from Figure 1, in Concordian economics everything is organically and logically related to everything else; it all happens at once. Even in the purchase of a chocolate bar you find these three items: the chocolate, the money, and the sales slip as proof of ownership.

The following Figure 2 describes the dynamics of the economic process in an extended form. We start from natural resources and, at the same time, from money created by the monetary authority, Natural resources, in economics, are transformed into Consumer Goods, Capital Goods and Goods Hoarded; and these goods are exchanged for money. (For the exchange to occur, both transactors have to be legal owners of the goods as well as the money that they exchange.) The cycle repeats itself over and over again—and creates the following pattern, which catches the economic system as a whole, frozen at any one instant in time:

02.18.Page5.Gorga2.jpg
Figure 2 – Flows of Values

Closing together the two halves of this figure, one obtains a cyclotron—or a doughnut. This is an end result that Raworth (2017a) reaches directly, and calls her work Doughnut Economics.

The difference between the two theoretical structures is mostly verbal, as it can be seen from the following responses from Concordian economics to the seven basic propositions with which its creator, Kathe Raworth (2017b), expressed the core of Doughnut Economics:

1. Change the goal: from GDP growth to the Doughnut

“…GDP is a false goal waiting to be ousted. The 21st century calls for a far more ambitious and global economic goal: meeting the needs of all within the means of the planet. Draw that goal on the page and – odd though it sounds – it comes out looking like a doughnut… from endless growth to thriving in balance” (italics in original).

Also observing a doughnut (or a cyclotron), Concordian economics serves the community; it does not impose its values on the community. Hence, it dispenses with maximizing GDP as a goal. Concordian economics shows the internal need to harmonize the potential of all factors that enter into the economic process. Too much stress on any one factor, and instead of an organic sphere, which is one of the goals of Concordian economics, we build any one of the monstrous teragons shown by non-linear math and fractal geometry. Note: The transformation of a doughnut into a sphere requires the transition from a two-dimensional to a tridimensional analysis.

2. See the big picture: from self-contained market to embedded economy

“Exactly 70 years ago in April 1947, an ambitious band of economists crafted a neoliberal story of the economy and, since Thatcher and Reagan came to power in the 1980s, it has dominated the international stage. Its narrative… has helped to push many societies towards social and ecological collapse. It’s time to write a new economic story fit for this century – one that sees the economy’s dependence upon society and the living world…”

The Market, as an independent entity, does not exist in Concordian economics—it especially does not exist without natural resources. By the same token, the Government by itself does not exist in Concordian economics. Concordian economics makes room for both entities by assigning to each the specific organic functions that each performs and must perform, As Raworth points out, the economy does indeed depend “upon society and the living world.” In Concordian economics, society is represented by the rules and regulation that determine the distribution of ownership rights; and the living world is represented by natural resources, without which economics is inconceivable.

3. Nurture human nature: from rational economic man to social adaptable humans

“The character at the heart of 20th century economics—‘rational economic man’—presents a pitiful portrait of humanity: he stands alone, with money in his hand, a calculator in his head, ego in his heart, and nature at his feet… human nature is far richer than this, as emerging sketches of our new self-portrait reveal: we are reciprocating, interdependent, approximating people deeply embedded within the living world…”

The economic man does not exist in Concordian economics; in economics there is the rational man—as well as the irrational man. We are not enclosed within ourselves; we are not atoms. Human beings are indeed “reciprocating, interdependent, approximating people deeply embedded within the living world.”

4. Get savvy with systems: from mechanical equilibrium to dynamic complexity

“Economics has long suffered from physics envy: awed by the genius of Isaac Newton and his insights into the physical laws of motion, 19th century economists became fixated on discovering economic laws of motion. But these simply don’t exist… That’s why 21st-century economists embrace complexity and evolutionary thinking instead…”

With Concordian economics one joins the world of modern scientists and engineers, a world in which economists know (or should know) how to use fractal geometry, non-linear math, and chaos theory—in addition to history, and many other mental disciplines.

5. Design to distribute: from ‘growth will even it up again’ to distributive by design

“In the 20th century economic theory whispered a powerful message when it comes to inequality… growth will eventually even things up. But extreme inequality… is not an economic law or necessity: it is a design failure. Twenty-first century economists recognize… the wealth that lies in controlling land, enterprise, and the power to create money.”

The distribution of ownership of income and wealth occupies a central position in the structure of Concordian economics and it is recognized as a phenomenon that occurs at the very moment of creation of income and wealth.

6. Create to regenerate: from ‘growth will clean it up again’ to regenerative by design

“Economic theory has long portrayed a clean environment as a luxury good, affordable only for the well-off... But as with inequality there is no such economic law: environmental degradation is the result of degenerative industrial design. This century calls for economic thinking that unleashes the potential of regenerative design in order to create a circular, not linear, economy...”

The structure of Concordian economics is organic, non-linear, scalable.

7. Be Agnostic about Growth: from growth-addicted to growth-agnostic

“…today we have economies that need to grow, whether or not they make us thrive. What we need are economies that make us thrive, whether or not they grow. That radical flip in perspective invites us to become agnostic about growth and to explore how our economies—which are currently financially, politically and socially addicted to growth—could learn to live with or without it.”

In Concordian economics there is no such thing as monetary growth disjointed from growth in the real economy and the legal economy. Hence, money cannot and should not grow to infinity.

Kate Raworth concludes her introduction to Doughnut Economics by saying: “The task for economic thinkers in the decades ahead will be to bring these seven ways of thinking together in practice, and to add to them. We have barely set out on this adventure in rethinking economics. Please join the crew.”

Notes

1. The Economic Process (Gorga, 2002, 2009, 2016) presents a full treatment of the logical deficiencies of Keynes’ General Theory (1936) and an outline of the structure of Concordian economics. Full disclosure: Quite apart from numerous positive evaluations, the book is hobbled by two negative reviews, one because the reviewer (Broski, 2003) could not find hoarding in the economic system; the other because the reviewer (Davidson, 2003) openly admitted he was lost in the logic of the exposition of the book. All reviews of this writer's work, and many evaluations, can be found at A New Economic Atlas. While the first review has to be evaluated against the discovery of the enormity of many current hoarding accumulations (see, e.g., The Paradise Papers), the second has to be evaluated against this more complex backdrop. The book was published in April and annotated in the December 2002 issue of the Journal of Economic Literature. The reason for the negative review by Paul Davidson the following year was given in two statements, one of which cannot be found in the General Theory (I=S), and the other (I=H) which cannot be found in the Economic Process. The errors in these two statements are so glaring, this writer was sure someone would eventually single them out. But no one did. So, three years later, he pointed them out to the editors of JEL. They evidently agreed, because they suggested that a letter be sent directly to Professor Davidson. That was done; but an answer is yet to be received. In the meantime, the book was annotated again in the December 2017 issue of JEL (p. 1642), with these introductory remarks: “Expanded third edition presents the transformation of economic theory into Concordian economics, shifting the understanding of the economic system from a mechanical, Newtonian entity to a more dynamic, relational process.”

References

Brady, M.E. 2004. Essays on J. M. Keynes and… Bloomington, IN: xLibris.

Broski, M. 2003. The Economic Process: An Instantaneous Non-Newtonian Picture. Carmine Gorga. J. Markets and Morality 6 (1), 297-98.

Davidson, P. 2003. The Economic Process: An Instantaneous Non-Newtonian Picture. By Carmine Gorga. Journal of Economic Literature , 41 (4), 1284-1285.

Gorga, C. 2002, 2009. The Economic Process: An Instantaneous Non-Newtonian Picture . Lanham, Md. and Oxford: University Press of America. Third Edition by The Somist Institute, 2016a.

Keynes, J. M. 1936, The General Theory of Employment, Interest, and Money . New York: Harcourt.

Raworth, K. 2017a. Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist . White River Junction, VT: Chelsea Green Publishing.

Raworth, K. 2017b. “Seven Ways to Transform 21st-Century Economics — and Economists.” Available at Evonomics.


ABOUT THE AUTHOR

Carmine Gorga, PhD, is president of The Somist Institute and a former Fulbright Scholar. He is the recipient of a Council of Europe Scholarship for his dissertation on “The Political Thought of Luis D. Brandeis.” By inserting Hoarding into Keynes’ model of the economic system and using age-old principles of logic and epistemology, in a book and a series of papers Dr. Gorga has transformed the linear world of economic theory into a relational discipline in which everything is related to everything else—internally as well as externally. He was assisted in this endeavor by many people, notably for 27 years by Professor Franco Modigliani, a Nobel laureate in economics at MIT. The resulting work, The Economic Process: An Instantaneous Non-Newtonian Picture, was published in 2002 by the University Press of America and has been reissued in a third edition by The Somist Institute in 2016. For reviews, click here. During the last few years, Dr. Gorga has concentrated his attention on the requirements for the unification of economic theory, policy, and practice calling this unity Concordian economics. He is also integrating this work into political science, which he calls Somism, and culture in general, which he calls Relationalism. For some evaluations of his work, please click here.


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