“You don't save first and then create investment. In a modern monetary economy, investment comes first.” (Relearning Economics)
Wrong. Nothing comes first or second. The saving of the household sector is absolutely independent of the investment of the business sector.
Relearning Economics never understood the profit mechanism, and, as a logical consequence, how the economic system works. The key concept for the understanding of the economic system is the positive/negative balance. In legacy economics, the key concept is equilibrium, i.e., the absence of balances. This is the methodological ur-mistake, and the ultimate reason why both orthodox and heterodox economics are failed/fake science.
Relearning Economics is better than the silly I=S crowd, but it still gets the interrelationship of balances wrong. It is stuck with telling the usual mind-reading stories, i.e., what people think and expect when they save/invest. The usual result is that it all depends on what people expect, and expectations are the most fluffy component of human behavior. Strictly speaking, one can say nothing concrete about it.
Reminder: “By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can’t be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman)
All this has been known to scientists of all ages: “The bifurcation of motion into two fundamentally different types, one for natural motions of non-living objects and another for acts of human volition ... is obviously related to the issue of free will, and demonstrates the strong tendency of scientists in all ages to exempt human behavior from the natural laws of physics, and to regard motions resulting from human actions as original, in the sense that they need not be attributed to other motions.” (Brown)
Ultimately, this means that the behavior of the economic system can not be derived from individual human behavior. Methodologically, this means that the behavioral axioms of economics are scientifically unacceptable.
The inescapable Paradigm Shift consists of the move from false (subjective/behavioral) axioms and false (Keynesian) axioms to true (objective/systemic) axioms. From the scientific standpoint, this would mean firing all academic economists, but economics is only a cargo cult science. Therefore, they are not fired but politically reinforced with the fake Nobel for “economic sciences.” Note the silly plural.
The most important balance in economics is macroeconomic profit. It can not be explained with individualistic pseudo-psychology.
Macroeconomic profit Qm is measured with the axiomatically correct Profit Law/Balances Equation (I−Sm) (G−T) (X−M)−(Qm−Yd)≐0. The Law implies (I−Sm)>0 for early Capitalism and Qm≡(G−T)>0 for late Capitalism, i.e., the current economy runs on public deficit-spending/money-creation, i.e., on the growth of public debt.
In daily life, both fundamental causalities overlap. It is beyond the representative economist to untangle the historically complex growth trajectory and disassemble it into the interaction of its basic elements. Instead, the systemic complexity of the real thing is replaced with brain-dead stories about human behavior. A story always sells better than a theory.
For starters, here is the all-decisive interrelationship of balances: ⇓
(i) In the elementary production-consumption economy, there is no investment, and the Profit Law reduces to Qm≡−Sm, i.e., the saving of the household sector Sm causes the loss of the business sector. If repeated, this leads to economic breakdown. The time preference of savers does not lead to economic growth.
(ii) In the investment economy, the Profit Law reduces to Qm≡(I−Sm). If the household sector does not save, i.e., Sm=0, then the profit of the business sector is equal to investment expenditures, i.e., Qm=I. In this case, the business sector self-finances its investment. This reinforces growth. If the household sector's saving equals the business sector's investment, i.e., Sm=I, then the business sector's profit is 0. The self-reinforcement is gone.
Obviously, Relearning Economics misses profit and the systemic relationship between the fundamental balances, i.e., Qm≡(I−Sm). Therefore, it's not economics as Science but economics as a narrative for a low-IQ audience.
For more details, see
Cross-references: Refutation of I=S
axecorg.blogspot.com/2015/01…
Being proto-scientific garbage, Relearning Economics ends with a the-sun-goes-up insight: “The challenge for a capitalist economy is not encouraging more abstinence and delayed gratification. It is maintaining sufficient demand, productive investment, financial stability, and income growth to keep resources fully employed without generating unsustainable debt dynamics.” This is the pinnacle of political economics, 200 years after Adam Smith. Scientific progress looks different.