September 13, 2016

Keynesianism: The triumph of blathering over thinking

Comment on Lars Syll on ‘Dark age of macroeconomics’

Blog-Reference

Walrasianism in all shapes and forms (DSGE, RBC, AD/AS etc.) argues from unacceptable microfoundations, and Keynesianism in all shapes and forms argues from false macrofoundations. To get out of failed economics requires nothing less than a paradigm shift to true macrofoundations. For the road map see here.

Keynes based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized Keynes’s 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)

Let this sink in, 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).

The correct profit equation reads: Qm  Yd+I-Sm (2014, p. 8, eq. (18)). Legend Qm: monetary profit, Yd: distributed profit, Sm: monetary saving, I: investment expenditure. It is pretty obvious from this equation that I and S are NEVER equal, neither ex ante nor ex post, and this has NOTHING to do with the question of how investment is financed. The argument that I=S is merely an accounting identity proves only that economists are too stupid to understand the elementary mathematics of accounting (2012).

The profit equation gets a bit longer when import/export and government is included.

Bottom line: Saving Sm and investment I develop INDEPENDENTLY. There is NO such thing as an interest mechanism which equalizes I and S. It is neither true that saving ‘causes’ investment as the Classicals claimed nor that investment determines saving via the multiplier as Keynes claimed. The perpetual difference between investment I and saving Sm is the main determinant of profit Qm. BOTH, the Classicals and Keynes got the profit theory wrong. Nothing is more disqualifying for an economist.*

Egmont Kakarot-Handtke


References
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

* See also post ‘I=S: Mark of the Incompetent