January 1, 2015

Confused confusers

Comment on 'Saving=Investment fallacy'

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You write: “Saving=Investment” is axiomatic in macroeconomics as it is taught in basic textbooks, found in advanced research and assumed in national statistics. Yet it is a fallacy which can be traced to Keynes (1936, p. 63) where he defined saving as “the excess of income over consumption” in a framework of equilibrium circular flow of national income.”

You put the finger exactly on the critical error/mistake. To see this clearly, however, one has to take the decisive analytical step. Keynes's problem started with profit.

“His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson and Bezemer, 2010, pp. 12-13, 16)

Now comes the chain reaction of errors/mistakes: When profit is not correctly defined, income is not correctly defined, and then saving is not correctly defined. It is with profit where the confusion about saving “equals” investment starts. The conceptual mess has been verbally papered over with ex ante/ex post (see also inventory investment) and the representative economist has swallowed all this hook, line and sinker.

For the formally correct solution see my recent paper (2014). It should be mentioned that there is monetary and nonmonetary profit and correspondingly monetary and nonmonetary saving. Here we deal exclusively with monetary profit and saving.

Because neither Keynes nor the Post-Neo-New Keynesians have solved the profit puzzle and with it the saving-investment puzzle, they are out of science (2013).

The profit theory of Keynes, Kalecki, or Keen, for example, is as far away from reality as any mainstream profit theory, surely therefore, both Heterodoxy and Orthodoxy “fail to capture the essence of a capitalist market economy.” (Obrinsky, 1981, p. 495)

Economists owe the world the true economic theory, that is, a theory that satisfies the scientific standards of material and formal consistency and that explains how the economy works.

Formal consistency requires to start with an objective set of axioms and then to proceed in the logically correct way. I=S is the widely visible monument of confused thinking and lack of genuine scientific instinct of both Orthodoxy and Heterodoxy.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2013). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics, 3(4): 491–502. URL
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL


Here is the correct equation that relates profit Q, distributed profit Yd, investment expenditure I, and household sector saving S.

For equilibrium as a nonentity see here.