Home > Uncategorized > The gross substitution axiom

The gross substitution axiom

from Lars Syll

Economics is perhaps more than any other social science model-oriented. There are many reasons for this — the history of the discipline, having ideals coming from the natural sciences (especially physics), the search for universality (explaining as much as possible with as little as possible), rigour, precision, etc.

Mainstream economists want to explain social phenomena, structures and patterns, based on the assumption that the agents are acting in an optimizing (rational) way to satisfy given, stable and well-defined goals.

The procedure is analytical. The whole is broken down into its constituent parts so as to be able to explain (reduce) the aggregate (macro) as the result of the interaction of its parts (micro).

Building their economic models, modern mainstream economists ground their models on a set of core assumptions — describing the agents as ‘rational’ actors — and a set of auxiliary assumptions. Based on these two sets of assumptions, they try to explain and predict both individual (micro) and — most importantly — social phenomena (macro).  

gsThe core assumptions typically consist of complete-ness, transitivity,  non-satiation, optimisation, consistency, gross substitutability, etc., etc.

The auxiliary assumptions spatio-temporally specify the kind of social interaction between ‘rational actors’ that take place in the model.

So, the models basically consist of a generalspecification of what (axiomatically) constitutes optimizing rational agents and a more specific description of the kind of situations in which these rational actors act (making the auxiliary assumptions serve as a kind of specification/restriction of the intended domain of application for the set of core assumptions and its deductively derived theorems). The list of assumptions can never be complete​ since there will always be unspecified background assumptions and some (often) silent omissions (like closure, transaction costs, etc., regularly based on some negligibility and applicability considerations).

The hope is that the ‘thin’ list of assumptions shall be sufficient to explain and predict ‘thick’ phenomena in the real, complex, world.

Empirically it has, however, turned out that this hope is almost never fulfilled. The core — and many of the auxiliary — assumptions turn out to have preciously little to do with the real (non-model) world we happen to live in. And that goes for the gross substitution axiom as well:

The gross substitution axiom assumes that if the demand for good x goes up, its relative price will rise, inducing demand to spill over to the now relatively cheaper substitute good y. For an economist to deny this ‘universal truth’ of gross substitutability between objects of demand is revolutionary heresy – and as in the days of the Inquisition, the modern-day College of Cardinals of mainstream economics destroys all non-believers, if not by burning them at the stake, then by banishing them from the mainstream professional journals …

If the elasticity of substitution between liquid assets and the products of industry is significantly different from zero (if the gross substitution axiom is ubiquitously true), then even if savers attempt to use non-reproducible assets for storing their increments of wealth, this increase in demand will increase the price of non-producibles. This relative price rise in non-producibles will, under the gross substitution axiom, induce savers to substitute reproducible durables for non-producibles in their wealth holdings and therefore non-producibles will not be, in Hahn’s terminology, ‘ultimate resting places for savings’. The gross substitution axiom therefore restores Say’s Law and denies the logical possibility of involuntary unemployment.

Paul Davidson

  1. September 7, 2018 at 1:19 am

    So, as Al Gore memorably noted in An Inconvenient Truth, we might consider substituting our home planet Earth with a pile of gold bars.

    I presume this gobbledegook (no offense intended Lars) is intended for those whose brains have been scrambled by indoctrination in the branch of mathematics known as neoclassical theory. Because it wouldn’t mean much to the uninitiated.

  2. Frank Salter
    September 7, 2018 at 8:54 am

    The gross substitution assumption is only an axiom in some universe of mathematical reasoning. It is not a first principle in reality.

    Economic thinking conflates important concepts which leads to error.

  3. Helen Sakho
    September 7, 2018 at 11:22 pm

    Let us get real. All HELL has broken on EARTH. More of the same is on the way.

    So, let us ask our students the following:
    Which mass graves are to be swapped at the next round of economic negotiations?
    Who is to be held responsible?
    What is the meaning of a conscience deficit?
    What is the opportunity cost of knowing that it is the LAST TIME you will ever hear the voice of your child or father? In other words, redesign the value theory of MONEY.
    In practical terms, how much gold or money or food, water or wine would you pay?
    Explain mathematically what would pay for any of the above?

    I would like to see their answers.

  4. Edward Ross
    September 8, 2018 at 12:39 am

    Good question dear Helen , but I am afraid the general response could be well described by Lars Syll’s monkeys, with emphasis on the last monkey, say nought. Or worse ignore these challenging comments while they concentrate on pushing their own barrow.

    This brings me back to Dave Taylor’s post SEPTEMBER 2:2016 @5;29 pm.

    “Where it not probable that the authors whose views are posted on this site(with few exceptions, notably Merign Knibbs) do not actually read the responses to them.”

    Before going further, I wish to make it clear that I have a deep respect for the many academics who have devoted a great deal of time and effort to reform and relate the economic conversation to the real world of real people. In spite of that I believe that Dave Taylor makes a very important point , and that is in my humble opinion, is that if we ignore criticism we are not balancing our personnel opinion against alternative ideas. Again in my humble opinion this refusal to enter into meaningful conversation with other participants is what demonstrates mainstream neoliberal economic rationalist economics as a tool of the wealthy elite.

    Next I give an example of how not reading responses to ones posts, results in authors, mudding the waters and regurgitating false claims.

    An example of Dave Taylor;s concern is that of Mark Mark Weisbrot September 2,2018
    For example his quote;

    The Trump administration claim that workers long night is over, as evidenced by the current headline unemployment rate of 3.9 precent.”
    The point here is that this claim was refuted as recently as 22, 2018 with the official USA unemployment rate: the missing 15.9 million .Thus one has to ask was Mark Weisbrot’s omission of the missing 15.9 million a deliberate act to support the Trump administration and mislead the public, or was it preoccupation with other matters. Either way as I see it these distortions of the truth, do not promote meaningful conversations to rectify the inequality between the elite and the disadvantaged. Furthermore when the public compares their experiences and observes these false claims , is it any wonder that they have lost confidence in politicians and their economic advisors. Ted

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