Comment on Simon Wren-Lewis on ‘Whatever happened to the General Theory’
Blog-Reference and Blog-Reference on Feb 4
Keynes’ lasting scientific contribution relates to methodology. He spoke it out loud so that every fellow economist could hear it: Throw over the classical axioms and put theoretical economics on new foundations: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)
With the revolutionary shift in mathematics and physics from Euclidean to non-Euclidean axiomatics (Hilbert, Einstein) before his eyes, Keynes called his fellow economists to arms: “Something similar is required to-day in economics.” (1973, p. 16)
Consequently, Keynes formulated the foundational syllogism of the General Theory as follows: “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 and therefore “discarded the draft chapter dealing with it” (Tómasson et al., 2010, p. 12). As a result, all I=S models including the Keynesian multiplier are false (2014).
To see the enormity of intellectual failure one has to let this sink in: Keynes had no idea of the fundamental concepts of his discipline, viz. profit and income. This did not hinder him to push his economic policy agenda. As a matter of fact, Keynes’s policy proposals never had a sound theoretical foundation but were at best commonsensical.
After-Keynesians, including Wren-Lewis, did not realize until this day that there is something fundamentally wrong with Keynes’s two-liner and I=S but still hallucinate about ex-ante/ex-post.#1
In the neoclassical synthesis of Samuelson, Keynes’s new non-Euclidean axioms and the old Euclidean axioms of marginalism were cobbled together. Textbooks consisted of two well-balanced halves: micro and macro. Needless to emphasize that both halves did not fit together.
The inconsistency was never resolved but gradually all returned to the pre-Keynesian formal foundations of marginalism. As Krugman put it on his blog “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” These two concepts “were already central to economic thought in the previous century.” (Woodford, 1999, p. 2)
Now, it can be shown that the axiomatic foundations of the neoclassical paradigm are methodologically inadmissible.#2 Needless to emphasize that the promoters of NCCR, including Wren-Lewis, never got the point.
So we have two indicators of the logical incapacity of present-day economists: Keynesians are for more than 80 years in the dark. Sorta-kinda neoclassicals are for more than 150 years in the dark.
Because they have disqualified themselves neither Keynesians nor neoclassicals can be taken seriously. Marginalism has been a dead research program from the very start and things have not improved until DSGE. Just the contrary.
As Keynes said, the fault is in the premises.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2014). 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
Woodford, M. (1999). Revolution and Evolution in Twentieth-Century Macroeconomics. Mimeo, 1–32. URL
#1 I=S: Mark of the Incompetent
#2 Addendum to ‘Musings on Whether We Consciously Know More or Less than What Is in Our Models’
