You argue “The real rate of interest would fall, because the capital/labour ratio is higher than before, so firms would want to invest less, so you would need a lower interest rate to equilibrate desired saving and investment.”
Obviously, you have not yet realized that there is no such thing as an equilibration of saving and investment — neither ex-ante nor ex-post. This is simply an age-old figment of the imagination of scientifically no so competent economists.
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)
Actually, the defect in Keynes’s two-liner is in the premise income = value of output. This equality holds — see the formal proof in (2011) — only in the case of zero profit in both the consumption and investment good industry. Is it necessary to add that zero profit models never had and never will have a counterpart in the real world?
Keynes’ conceptual problems started with profit. “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12)
This failure kicked off the chain reaction of errors/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, including IS-LM, are methodologically defective. Since Keynes’ day, though, the representative economist merely parroted the elementary logical blunder (2014a).
The macroeconomic Profit Law for the investment economy reads Qm=Yd+I−Sm (2014b, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure. As everybody can see, saving is NEVER equal to investment and there is no mechanism that makes them equal.
The Profit Law gets a bit more complex when foreign trade and government is included. Most important: the Profit Law contains nothing but measurable variables, which means that its empirical fit can be readily established. So there is no need at all for any further filibuster about the slope of a nonentity.
Kakarot-Handtke, E. (2011). Keynes’ Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2014a). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2014b). 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.
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
REPLY Short proof of the nonexistence of an IS curve, comment on Tel of Dec 24
You ask “Where do those profits go? The person who makes the profit must choose to either save it, or spend it on consumption (just like any other income).”
Your error/mistake consists in regarding profit ‘just like any other income’. This error/ mistake you share with the vast majority of economists. The majority, though, counts for nothing in science, only formal and material consistency counts. So, here the shortest possible proof that no such thing as an IS curve exists.
The most elementary economy is the pure consumption economy and it consists of the business and the household sector. For a start, the business sector produces and sells one consumption good.
First period: the business sector pays 100 monetary units [thousand/million/billion, euro/dollar/yen] to the household sector and the household sector spends exactly this amount on the consumption good. There is no saving of the household sector. The business sector’s profit is zero and the price of the consumption good is equal to unit wage costs. For more details see the graphic here.
Second period: the household sector saves 10 monetary units (S=10) and spends 90 units. Now, the business sector makes a loss (Q=−10). The market clearing price is lower than unit wage costs.
Accounting result: saving=loss or S+Q=0. The complementary notion to saving is not investment but loss. And the complementary notion to dissaving is profit. Because of this I=S never holds. By consequence, the whole discussion about whether the interest rate or the income mechanism establishes the equality/equilibrium of saving and investment is as vacuous as the discussion about how many angels could dance on a pinpoint.
Profit can be distributed. The process of the emergence of profit and the distribution of profit, though, has to be thoroughly kept apart. For details see the working paper ‘The Emergence of Profit and Interest in the Monetary Circuit’.
The inclusion of distributed and retained profit does not alter the fact that there never has been nor ever will be an equality/equilibrium of saving and investment (except in the minds of logically retarded economists). See also the blog post ‘I=S: Mark of the Incompetent’ or ‘How the intelligent non-economist can refute every economist hands down’.
REPLY Worthless Canadian blather, comment on Nick Rowe of Dec 24 on Dec 25
You comment on my reply to Tel with “But maybe this is what you are trying to say” and refer to another comment of yours on Steve Keen.
You are doubly mistaken. First, I was not trying to say something but I gave a formal proof. This proof is clear and impeccable and for those who find it too brief references have been given.
The proof leaves no room for interpretation: IS curves do not exist and because of this, your post ‘Upward-sloping IS curves’ is a senseless exercise. To apply I=S 80+ years after Keynes demonstrated his logical incompetence is a clear sign that there is no intelligent life in the economics parallel universe.
I=S is defective because Keynesians never understood what profit is (2011) and this is the worst thing that can happen to an economist.
The reference to your comment on Steve Keen is entirely beside the point. The fact of the matter is that Keen’s profit definition is also provably false, which I have shown in a short working paper (2013).#1
So, what I not only was trying to say but in fact proved was that the concept of an IS curve is pure analytical junk.#2
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
#1 See also ‘Yes, Orthodoxy is incoherent but, unfortunately, Heterodoxy also’
#2 See also ‘How economists became the scientific laughing stock’
REPLY Pavlovian blather (I), comment on Oliver of Dec 25 on Dec 27
You say “In this case, the market just hasn’t cleared.” Obviously, you did not get the point. As the graphic clearly shows there are two conditions in the first period: market clearing and budget balancing. In the second period, only the condition of budget balancing is lifted. The market is cleared in both periods by assumption in order to focus on the effect of saving/dissaving. Therefore, there is definitively no inventory investment because X=O. See also the 2nd graphic in ‘How the intelligent non-economist can refute every economist hands down’.
You say “Circuit theory disproves S=I not.” For the rectification of circuit theory see the working paper ‘The Emergence of Profit and Interest in the Monetary Circuit’.
You repeat arguments that have long been refuted. Read more, think more, blog less.
REPLY Pavlovian blather (II), comment on Tel of Dec 25 on Dec 27
You say “Take note that any standard transaction contains at least FOUR entries: a debit and a credit for the money movement, and also a debit and a credit for the stock movement. We might do more elaborate things, but you must always have at a very minimum a money movement coupled with a stock movement.”
WOW, big news, yes, there are four entries. Because I need only two for the point at issue I have left the other entries out. Of course, I have dealt with them elsewhere as you can glean from my papers on SSRN. See in particular ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’.
The fact of the matter is that economists even messed up the elementary mathematics of accounting. The proof is in I=S. Time to realize that proper accounting yields Q=−S for the most elementary case and Q=Yd+I−S otherwise.
You say “You also presume that 'saving' means stuffing cash into socks and just about everyone admits that if you have a situation where people systematically take the medium of exchange out of circulation and stuff their socks, yes you must get deflation.”
I presume nothing about the relationship between saving and hoarding in my post. Again, this point has been dealt with elsewhere.
You say “but my intent is to outline at least the basic concept of savings.” Again, this point has already been dealt with in the working paper ‘Settling the Theory of Saving’.
Your bean factory example is beside the point because you overlook that the condition in my post is explicitly X=O, that is, market clearing. Time to realize that the inventory argument has already been brain-dead in the 1930s. Because of this, the examples you dream up are indeed continued worthless blather.
Let us return to the point at issue: To uphold the concept of an IS curve is a sure indicator of severe logical incompetence. You just delivered one more corroboration.
Now repeat after me: there never has been nor ever will be such a thing as an equality/ equilibrium of household sector saving and business sector investment.