March 27, 2015

Forget Krugman, forget Keynes, forget economists

Comment on Lars Syll on ‘Why Paul Krugman is no real Keynesian’


Keynes wrote in his General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

It can be rigorously demonstrated that this two-liner contains an elementary mistake (2011). By consequence, all models that contain I=S are worthless. This holds for all variants of IS-LM and therefore also for Krugman's model (2014).

Because of defective logic, both Krugman and Keynes are out of science. There is nothing to choose.

Constructive Heterodoxy cannot build upon the accustomed concepts but has to dig deeper (2015). This leads to the testable Employment Law for the investment economy.

This equation helps to answer Keynes' pivotal question: Is the economy self-adjusting? The answer is no. This follows from the factor cost ratio ρFC, which formally represents the price mechanism. This variable is defined as the quotient of average wage rate W, price Pc and productivity Rc in the consumption good industry.

The fact of the matter is that a fall of the average wage rate relative to the price reduces employment L under the condition of market clearing in the product market (all other variables fix for the moment). The fatal defect of the price mechanism is that the right (= full employment) factor cost ratio does not come about spontaneously. Just the contrary. If unemployment effects a flexible fall in the average wage rate then unemployment increases. Thus, stickiness is not the problem. There is a positive feedback loop built right into the structural core of the economic system.

The claim that the market system is basically an equilibrium system that regulates itself with a tendency to full employment is entirely unfounded (methodologically it is a quite ordinary petitio principii). Politicians who rely on the advice of representative economists to get out of recession or depression are bound to fail.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–15. URL
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. 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.