Comment on Barkley Rosser on ‘On Missing Minsky’
Blog-Reference
Since Adam Smith economists have told rather enthralling stories about speculations, manias, follies, frauds, and breakdowns. The audience likes this kind of stuff. However, when it comes to how all this fits into economic theory things become a bit awkward. Of course, we have some 'modls' — Minsky, Diamond-Dybvig, Keynes come to mind — but we could also think of other 'modls' — more agent-based or equilibrium with friction perhaps. On closer inspection, though, economists have no clue at all.
Keynes messed up the basics of macro with this faulty syllogism: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
From I=S all variants of IS-LM models are derived including Krugman's neo-IS-LM which allegedly explains the post-crash Keynes period. Let there be no ambiguity, all these models have always been conceptually and formally defective (2011).
Minsky built upon Keynes but not on I=S: “The simple equation ‘profit equals investment’ is the fundamental relation for a macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure.” (Minsky, 2008, p. 161)
Here profit comes in but neither Minsky, Keynes, Krugman, nor Keen, nor the rest of the profession can tell the fundamental difference between income and profit (2014).
The fact of the matter is that the representative economist fails to capture the essence of the market economy. This does not matter much as long as he has models and stories about crashing Ponzi schemes and bank panics. Yes, eventually we will miss them all — these inimitable proto-scientific storytellers.
To have any number of incoherent models is not such a good thing as most economists tend to think. What is needed is the true theory: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)
The true theory of financial crises presupposes the correct profit theory which is missing since Adam Smith. After this disqualifying performance, nobody should expect that some Walrasian or Keynesian bearer of hope will come up with the correct model anytime soon.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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.
Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, Chicago, San Francisco: McGraw Hill, 2nd edition.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.