September 30, 2016

The general theory of scientific incompetence

Comment on Paul Krugman on ‘A General Theory Of Austerity?’


Paul Krugman explains the world by second guessing the motives of folks he does not agree with: “[The] bottom line is that austerity was the result of right-wing opportunism, exploiting instinctive popular concern about rising government debt in order to reduce the size of the state.” (See intro)

Krugman should know that ‘right-wing opportunism’ is not exactly a profound scientific argument: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.” (Schumpeter)

The very characteristic of the Austerity discussion is that the arguments of BOTH sides have no sound scientific foundation. In other words, they are provable false.

The title of Krugman’s post refers to Keynes’s General Theory. Keynes based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder since 1936.

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.

Allais clearly identified Keynes’s 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 stumbled upon 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.

So, Keynes got it wrong 80 years ago and Allais got it right 23 years ago and Krugman did not check anything and is deep in the woods until this day (2014). The same holds for Wren-Lewis.*

Because Keynesianism in all its variants is axiomatically false, the commonplace theory of employment is false by implication.** What is needed is NOT brain dead political blather but the scientifically true general theory of profit, employment and deficit spending. Don’t wait for Krugman, Wren-Lewis and the rest of logical insufficients to deliver it.

Egmont Kakarot-Handtke

Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. 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 post ‘I=S: Mark of the Incompetent
** See post ‘The choice between Friedmanian pest and Keynesian cholera