July 31, 2016

The unfinished Keynes

Comment on Paul Davidson on ‘The Keynes Solution’

Blog-Reference

It is trivial but worth repeating: political economics and theoretical economics are different things and have to be strictly kept apart. The core problem of economics as a science is, of course, that by its very nature it is closely entangled with politics. The biggest threat to theoretical economics is that it gets hijacked by those with a political agenda. It does not matter whether this agenda is good or bad in predefined moral terms. Science is committed to its own criteria or it ceases to be science.

But are we not all inescapably involved in the struggle between good and bad/evil? Politics, religion, and philosophy say so. But even if this were true, it cannot serve as a justification to hijack science or to let it be hijacked. What has to be recognized is that science is about true/false and not about good/bad or like/dislike. This distinction is part of the demarcation problem, which is the fundamental problem of methodology (Popper, 1980, p. 34).

Keynes had a political agenda, and this was his first priority. Let us agree for the moment that his attempt to alleviate unemployment was good and right without any qualification. Hence we all can accept Keynes's agenda ― except for one point: Keynes used theoretical economics for political purposes. This is unacceptable.

“A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (Mill, 2006, p. 950)

Having taken politics out of the way, the next question is about the scientific content of the General Theory. Here we can ― in very general terms ― side with Allais: “... mais son [Keynes's] insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” (1993, p. 70) In other words, Keynes saw the problems but could not solve them due to a lack of logical consequence.

“For, if anything, Keynes was the most intuitive of men.” (Moggridge, 1976, p. 33)

“It is well known that John Maynard was born anew every morning; for this reason, his colleagues at Bretton Woods commented that he was too intelligent to be consistent.” (Valentino, 1988, p. 239)

“But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281)

With his comment on Hayek “... a remorseless logician can end up in Bedlam. (Moggridge, 1976, p. 36) he won the everlasting sympathies of all who have their own troubles with logic.

In more specific terms we can definitively declare that the formal foundations of Keynesianism are logically defective since the General Theory. Keynes’s fundamental equations of macroeconomics, i.e. Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment, are indefensible. That is why Keynesianism is a failure (2011; 2014b).

The deeper reason is that Keynes ― just like his predecessors and fellows ― did not come to grips 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, pp. 12-13, 16), see also (2014a; 2015)

It is no contradiction to acknowledge that Keynes was one of the good guys of political economics and not to accept the General Theory as a valid contribution to theoretical economics. Yet good intentions are not a scientific criterion, only material and formal consistency count. So what is left?

Keynes’s economic policy ideas were not exactly innovative. “Public works to relieve the unemployed is an idea as old as the Bible; ...” (Blaug, 1998, p. 662)

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. What else could Keynesian Revolution mean than a paradigm shift? Keynes pointed the way but could not follow it himself.*

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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
Kakarot-Handtke, E. (2015). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan.
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne, Sydney: Hutchison, 10th edition.
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
Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, pages 238–249. Cambridge, New York, NY, etc.: Cambridge University Press.

* See ‘Finalizing the Keynesian Revolution’.