June 21, 2015

More than two centuries of waffling in the dark

Comment on Nick Edmonds on ‘Keenonomics, aggregate demand/change of debt, and some misleading critique’

Blog-Reference

Nick Edmonds quotes me correctly: “…the business sector’s investment expenditures are never equal to the household sector’s saving..” and then asks: “Does anyone say they are generally equal?”

Yes, and this is well known among economists.

“As is well known, and taking over that argument from Smith, both Ricardo and Malthus in England and Say and Sismondi on the Continent always identified decisions to save with decisions to invest. Since they all considered as a fact that ‘what is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too’ (Smith, 1776, vol. I, pp. 337–8), the question of a possible divergence between saving and investment was never asked.” (Bridel, 1987, p. 1)

Nick Edmonds is ignorant of the history of economic thought. Worse, he does not understand the significance of the question at issue. The I-equals-S assertion is not only more than 200 years old but there has always been an uneasy feeling that there must be something deeply wrong with the whole idea.

“For the best part of the last two centuries, this equality (and the ways by which it comes to be established) has been at the heart of long and protracted debates. Indeed, two of the most fruitful periods in the history of economic thought were entirely devoted to this riddle which, still today, is far from being satisfactorily solved. For all the participants in the ‘general glut controversy’ as well as for Keynes and all the leading economists of the interwar period, the saving–investment problem was the key to macroeconomic stability.” (Bridel, 1987, p. 1)

Some observes correctly noted that nothing had been solved and that the participants could not even rise above the level of senseless filibustering.

“Throughout the 1920s and 1930s the focus was increasingly on the role of the equality of saving and investment, but the semantic squabbles that dominated much of the debate (the distinctions between "ex ante," and "ex post," "planned" and "realized" saving and investment, the discussion of whether the equality of saving and investment was an identity or an equilibrium condition) reflected a deeper confusion. It was just not clear how shifts in saving and investment affected output.” (Blanchard, 2000, p. 1378)

Ok, this was in the old days. We have made tremendous progress recently. Nobody talks any more about the equality of saving and investment — except perhaps Paul Krugman.

“An excess of desired investment over desired savings can lead to economic expansion, which drives up income. And since some of the rise in income will be saved – and assuming that investment demand doesn’t rise by as much – a sufficiently large rise in GDP can restore equality between desired savings and desired investment at the new interest rate.” (Krugman, 2011)

This is what Adam Smith told us already. The answer to the self-debunking question “Does anyone say they are generally equal?” should be pretty obvious by now.

What I have clearly stated is that all variants of IS stories are provable false and this includes Krugman's IS-LM versions and Wren-Lewis's inventory story and Edmonds definitorial shell game (2014), (Wren-Lewis, 2012), (E.K-H, 2014).*

The irrevocable conclusion is that I-equals-S has always been and still is the epitome of utter confusion and scientific incompetence. And here we can agree: this is all pretty standard stuff in economics.

Which brings us to the crucial question.

“In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

With Qre=I-S the issue has been decided. How could Paul Krugman, Simon Wren-Lewis, Nick Edmonds, and not to forget Severin Reissl, be prompted to adhere to the standards of the more advanced sciences?

Egmont Kakarot-Handtke


References
Blanchard, O. (2000). What Do We Know about Macroeconomics that Fisher and Wicksell Did Not? Quarterly Journal of Economics, 115(4): 1375–1409. URL
Bridel, P. (1987). Saving equals Investment. In J. Eatwell, M. Milgate, and P. Newman (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–5. Palgrave Macmillan, 1st edition. URL
E.K-H (2014). The subtle distinction between storytelling and science. Blogpost. 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
Krugman, P. (2011). IS-LMentary. New York Times, The Opinion Pages, Online, October 9. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Wren-Lewis, S. (2012). Savings Equals Investment? Blog post. URL

* See the I=S cross-references for blog posts and the formal proof