April 13, 2013

Hanging in the air

Comment on Lars Syll on 'IS-LM is bad economics no matter what Krugman says'

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There seems to be consensus that it is alone IS-LM that concerns us here.

The main point is rather simple: the General Theory (GT) is a loose composition of formal and verbal arguments. The problem is that most of Keynes's verbal arguments cannot be derived from the foundational formalism. This is not to say that the verbal arguments are factually wrong, it means that, in the best case, they are hanging in the air. This does not diminish the value of the GT as a piece of political opinion making but certainly as a piece of theoretical economics.

In the GT the original formalism and the original interpretation (oK) do not match. In addition, the formalism is indefensible with regard to the treatment of income and profit. With IS-LM Hicks provided a second interpretation (H). The (oK)-interpretation and the (H)-interpretation do not match either. What is more, we have a new interpretation but the foundational formalism is still defective. That is, the (H)-interpretation is also hanging in the air.

Krugman has been reprimanded for not admitting that interpretations (oK) and (H) are incompatible. The salient point is, instead, that Krugman and Hicks before him have not realized that, to begin with, Keynes's formal foundations are indefensible with regard to the treatment of income and profit. This is the oversight that counts from the viewpoint of theory building.

In sum: Keynes, Hicks, and Krugman provide different interpretations of the same flawed formalism. In order to advance economics from a talk-show to a science, all three interpretations have to be rejected on purely formal grounds.

April 8, 2013

Flawed logic

Comment on 'IS-LM is bad economics no matter what Krugman says'

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Lars Syll and Paul Davidson argue (a) that IS-LM is bad economics and (b) that it has not much in common with Keynes's economic reasoning in the General Theory.

I agree on both points. My question is a more fundamental one. Does this clarification make the General Theory look much better?

Let me resume the point that I have made at length in: Why Post Keynesianism is Not Yet a Science, Economic Analysis and Policy, March 2013, pp. 95-106. There is no need to lose many words about equilibrium, ergodicity, or the finance motive because Keynes's formalism is logically defective. This is sufficient to refute it and with it all illegitimate IS-LM derivatives.

Hence we have to go one step further: it is not such simple that IS-LM is bad economics and Keynes is good economics; both are bad economics and for the same reason.

Keynes's profit theory is wrong. The correct relation reads Qret=I-S, i.e. retained profit is equal to the difference of investment and saving. Since retained profit for the economy as a whole is always different from zero we have an empirical proof that investment and saving is, as a corollary, never equal. The ex ante/ex post argument can be shown to be logically defective. Because the IS-schedule of IS-LM is formally unacceptable the whole argumentation built upon it is vacuous. Free association, interpreting IS-LM, or reading tea leafs is scientifically on the same level. What unites Keynes, Hicks, Krugman as well as his critics is the same logical flaw in the formal foundations.

Egmont Kakarot-Handtke