Comment Stanley Fisher on ‘Reflections on Macroeconomics Then and Now’
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Stanley Fischer starts the meaty part of his talk with: “I will start by briefly sketching the structure of a basic macro model. The building blocks of this model are similar to those used in many macro models, including FRB/US, the Fed staff's large-scale model, and a variety of DSGE models used at the Fed and other central banks and by academic researchers.
The structure of the model starts with the standard textbook equation for aggregate demand for domestically produced goods, namely:
1. AD = C + I + G + NX;
2. Next is the wage-price block, which is based on a wage or price Phillips curve.” (See intro)
We can stop already here because this is definitively the false start. In order to see where things went wrong one has to return to the very beginnings of macroeconomics. Keynes defined the formal foundations of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
This elementary syllogism is conceptually and logically defective because Keynes never came 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 (2011; 2014). Neither the proponents nor the opponents of mainstream macro got this point to this day. Stanley Fischer is only one among the many.
When the foundational economic concept of profit is inconsistently defined then the whole theoretical superstructure is a flawed construction without any scientific value whatsoever. No policy recommendation can be drawn from such a model. Because of this, the macro policy discussions from Keynes/Hicks/Samuelson/Friedman onward have been surrealistic. All participants lacked the correct profit theory and this continues to this day.
First of all, Keynes’ fundamental equations of macroeconomics have to be fully replaced.#1 This yields (i) the correct Profit Law (2014, eq. (18)), and (ii), the correct Employment Law/ Phillips Curve (2012, eq. (33)).
Because the first two building blocks of Fischer’s ‘basic macro model’ are false the whole thing is worthless. During his long career, Fischer obviously did not get the point. He never understood the pivotal phenomenon of economics and, clearly, when one does not understand profit one cannot understand how the economy works.
Already J. S. Mill tried to excuse economics as ‘separate science’. Its distinctive features are (i) the foundational concepts profit/income are inconsistent for more than 200 years, (ii) the FRB/US, the Fed and other central banks, as well as academic researchers blindly apply false models, and (iii), evident scientific incompetence is not punished but rewarded.
As an urgent first step, economics has to be excluded from the sciences, and both orthodox and heterodox economists have to be thrown out of the scientific community.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
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
#1 Finalizing the Keynesian Revolution and Toward the true economic axioms.
