October 28, 2015

I=S: Mark of the Incompetent

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


I=S is provable 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 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 pivotal economic concept profit. None are known from Orthodoxy and Heterodoxy. And this in turn means that all economic advice lacks a sound scientific foundation.

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.*

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.**

— Keynes, see Keynes’s Missing Axioms, working paper
— Hicks/Krugman, see Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We       Know It, working paper
— Rowe, see IS-LM is dead and waiting to be buried, post
— Farmer, see Fundamentally flawed, post
— Syll, see Is Keynes acceptable?, post
— Glasner, see End of confusion, post, and Quod erat demonstrandum, post
— JKH, see Tricky business, post
— Radford, see No culpa, only stultitia, post
— DeLong, see Sales talk vs. Science, post
— Douglas, see Unaccountable, post
— Mitchell, see Modern moronomic theory, post
— Keen, see Mental messies and loose losers, post
— Wren-Lewis, see The subtle distinction between storytelling and science, post.

For a crash course in profit theory see The Profit Law, post.

Egmont Kakarot-Handtke

Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL

* The correct relationship between monetary profit Qm, distributed profit Yd, investment expenditures I and monetary saving Sm is given here.
** For more details of the big picture see cross-references I=S

Preceding post 'Fundamentally flawed'