December 31, 2014

Uncertain about everything

Comment on 'The Ramsey-Keynes dispute'


Keynes had his fingers in many pies, mostly in those where “nothing is clear and everything is possible.” (1973, p. 292)

Let us become more specific. Keynes realized that something was wrong with classical economics. In this he was ahead of his fellow economists. But he went not far enough. As a matter of fact he accepted the premise that economics is about choice according to the famous definition:

“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935, p. 16)

Indeed, this directive sent economists, and Keynes among them, into scientific nirvana: “Economics studies human behavior.”

The outcome -- inevitable and fatal like Greek tragedy -- has been neatly summarized by NN: “... whether Ramsey or Keynes are closer to the truth may be as much a non issue as two witchhunters arguing over whether succubi or incubi are of more concern.” This metaphor is paradigmatic for the vacuousness of economic debates.

While distracted by non-issues, Keynes messed up the basics of economics with this syllogism: Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment. (Keynes, 1973, p. 63)

That is rather elementary mathematics. It cannot be said that formalization or the axiomatic-deductive method ruined Keynesianism. It is pure conceptual sloppiness (2014). Keynesians and the rest of the profession simply cannot tell the fundamental difference between income and profit (2011).

This, though, is exactly what is expected from an economist. Time, therefore, to relinquish the filibuster about human behavior, choice, rationality and the three-door anomaly to psychologists, sociologists, anthropologists, philosophers, theologians and other adherents of the so-called social sciences.

What can be learned from Keynes is:“Nothing is more difficult than to turn an entire discipline around, asking in effect to jettison its own history over the last 200 years.” (Blaug, 1990, p. 205)

Economics is not a science of behavior (Hudík, 2011). This, then, could be the new directive: Economics is the science which studies how the monetary economy works.

It will be a glorious day in the history of economic thought when the representative economist can summarize in a simple formula how the profit mechanism functions.

Egmont Kakarot-Handtke

Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT:
Edward Elgar.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of
Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN
Working Paper Series, 1966438: 1–15. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.
The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:
Macmillan. (1936).
Robbins, L. (1935). An Essay on the Nature and Significance of Economic Science.
London, Bombay, etc.: Macmillan, 2nd edition.