September 26, 2016

How Keynes got macro wrong and Allais got it right

Comment on Lars Syll on ‘Good advice to aspiring economists’

Blog-Reference and Blog-Reference on Sep 28 and Blog-Reference on Nov 28

Keynes based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder in 80 years (2014).

Keynes defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

This two-liner is defective because Keynes never came 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, p. 12)

Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of macroeconomics is false, in particular ALL I=S/IS-LM models (2011; 2013).

Allais clearly identified Keynes major fault: “... 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 because of his logical insufficiency.

The correct relationship is given by Qre=I-S (Allais, 1993, p. 69) Legend: Qre: retained profit, S: saving, I investment expenditure.

It is pretty obvious from this equation that I and S are NEVER equal, neither ex ante nor ex post. The argument that I=S is merely an accounting identity proves only that, as a general rule, economists are too stupid to understand the elementary mathematics of accounting (2012). Allais understood it.

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. 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. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. 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. 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

Related 'Wikipedia and the promotion of economists’ idiotism' and 'Macro for dummies'