I=S is provably false but the representative economist never got the point. To some degree, this is understandable because the deeper conceptual problem is that the representative economist does not even know what profit is because, as the Palgrave Dictionairy summarizes “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)
In simple words, this means that all economic models are defective — except those that come explicitly to grips with the foundational economic concept of profit. None are known from Orthodoxy and Heterodoxy. And this, in turn, means that all economic policy advice lacks sound scientific foundations.
The I=S blunder is not a single or isolated event but a rather typical outcome of proto-scientific thinking and widespread misapprehension of scientific methodology.#1
The following economists are representatives of the general intellectual malaise which manifests itself in the longstanding I=S debate. The list could be easily extended.#2
- Keynes Keynes’s Missing Axioms,
- Hicks/Krugman Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It,
- Rowe IS-LM is dead and waiting to be buried,
- Farmer Fundamentally flawed,
- Syll Is Keynes acceptable?,
- Glasner End of confusion and Quod erat demonstrandum,
- JKH Tricky business,
- Radford No culpa, only stultitia,
- DeLong Sales talk vs. Science,
- Douglas Unaccountable,
- Mitchell Modern moronomic theory,
- Keen Mental messies and loose losers,
- Wren-Lewis The subtle distinction between storytelling and science.
For a crash course in profit theory see The Profit Law.
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
#1 The axiomatically correct relationship between monetary profit Qm, distributed profit Yd, investment expenditures I and monetary saving Sm is given with Qm≡Yd+I−Sm.
#2 For details of the big picture see cross-references Refutation of I=S
Preceding Fundamentally flawed.