October 27, 2015

Fundamentally flawed

Comment on Roger Farmer on ‘Demand Creates its Own Supply’

Blog-Reference

You say “Keynesian economics begins with a basic definition.” This is true. The fact of the matter is, though, that this basic definition is provable false and, worse, that Keynesians have not got the point until this very day (2011b).

The final proof of widespread logical incapacity is that the most elementary accounting identities have been messed up. As a centerpiece of the General Theory Keynes formulated the foundational syllogism of macroeconomics. “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

This elementary two-liner is conceptually and logically defective because Keynes did not come to grips with profit (Tómasson and Bezemer, 2010, pp. 12-13, 16). The fault is in the premise ‘income = value of output’. This equality holds initially only in the limiting case of zero profit in both the consumption and investment good industry. Hence, Keynes formally dealt with a zero profit economy without being aware of it (2011b). This means in concrete terms that the multiplier formula is provable false.

The first logical blunder kicked off a chain reaction of mistakes, because when profit is not correctly defined, income is not correctly defined, and then saving is not correctly defined. By consequence, all I=S models are logically defective.

The root cause of all accounting errors/mistakes is a complete lack of understanding of what profit is. The conceptual error carries over to national accounting (2012).

You conclude “Here, finally, is the answer to the exchange between Jo and Noah. It is always true, in equilibrium, that savings is equal to investment.”

Definitively not! It is always true that Qm=Yd+I-Sm, that is, monetary profit is equal to distributed profit plus investment expenditure minus household sector's monetary saving. Saving and investment is never equal. This is a testable proposition.

To repeat: all I=S models are logically defective because they fail to consistently integrate profit. A short formal proof has been given on a parallel thread.*

Not only Jo and Noah got it wrong, but Roger, too. Not to forget, of course, Keynes and Hicks and Krugman (2014) and the rest of the logically feeble profession.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011a). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2011b). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. 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
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
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

* See the Uneasy Money blog or the summary ‘End of confusion’ on the AXEC blog

For more details of the big picture see cross-references I=S