October 21, 2015

Keynes and the logical brilliance of Bedlam

Comment on David Glasner on ‘Keynes and Accounting Identities’

Blog-Reference

It is the very definition of a non-scientist to transform every objective problem into an ad-hominem story and thereby to make it definitively insoluble. This works because most people are fond of stories, which allow for good/bad moralizing or like/dislike blather, but not so much of scientifically valid theories, which allow only for clear cut true/false judgments.

Accordingly, David Glasner frames the issue of accounting identities thus: “Keynes, who besides being one of the most intelligent people of the 20th century was also so ferociously logical (and these two qualities do not necessarily overlap) that he was almost certainly incapable of making a logical mistake or of forgetting accounting identities.” (See intro)

This distraction works because now we are entangled in the question of whether Keynes or his opponent Hawtrey was more intelligent/brilliant. To be sure, the correct answer had been given long ago by Nobel laureate Allais but because it had been delivered in French it never came to the attention of the representative economist: “L’intuition de Keynes lui a fait sentir où se trouvaient les difficultés, mais son insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” (1993, p. 70) Roughly: Keynes intuition led him to the real difficulties but his logical insufficiency prevented the solution.

This is a polite way of saying that logical consistency was not exactly one of Keynes's strong points. But, in the final analysis, this does not matter much because Keynes was first and foremost a political economists and not a scientist. In politics the effectiveness of an argument counts and, as a rule, the intended audience could not care less about logical and material consistency.

In sum, Hahn’s characterization is more to the point: “I consider that Keynes had no real grasp of formal economic theorizing (and also disliked it), and that he consequently left many gaping holes in his theory. I none the less hold that his insights were several orders more profound and realistic than those of his recent critics.” (1982, pp. x-xi)

To characterize Keynes as ‘ferociously logical’ is plainly against what Keynes himself thought about the whole issue “... a remorseless logician can end up in Bedlam.” (quoted in Moggridge, 1976, p. 36)

The final proof of Keynes's logical incapacity is that he messed up the most elementary accounting identities. As a centerpiece of the General Theory he 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 (2011a; 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. Krugman, for one, has not got the point until this very day and underpins his economic policy advice with a recent variant of IS-LM (2014). This does not matter either, because Krugman, too, is merely a political economist and not a scientist.

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).

Walras’s original model had also been a zero profit economy. Clearly, Walrasianism and Keynesianism is squarely at odds with reality. Yet, economists are busily occupied with shoptalk about the Bedlam models of their brilliant masterminds until this very day.

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Hahn, F. H. (1982). Money and Inflation. Oxford: Blackwell.
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.
Moggridge, D. E. (1976). Keynes. 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