Blog-Reference and Blog-Reference on Dec 28
The Keynesian Revolution had already been dead in the cradle but economists have not realized it until this day. Since 80 years, orthodox and heterodox economists are involved in the insoluble deep semantic riddle whether there is involuntary unemployment or not.
Farmer, in a new book, writes: “Macroeconomics has taken the wrong path. The error has nothing to do with classical versus New Keynesian approaches. It is a more fundamental error that pervades both.” The fact of the matter is, though, that Farmer does not spot the fundamental error in macro that pervades all of economics. In order to see this, one has to go back to Keynes.
Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations. This is why Keynesianism, too, is a failure.#1
The lesson from the history of economic thought is that theoretical economics has to proceed top-down, i.e. from macrofoundations down through intermediate levels (sectors, branches, firms, households) to the individual. What has to be recognized is the methodological insight that NO way leads from the understanding of microeconomic behavior to the understanding of how the monetary economy works. And this explains why the microfoundations approach had been doomed to failure already 140 years ago.
What neither Orthodoxy nor Keynes ever understood was 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)
It is pretty obvious that an economist who cannot tell the difference between the fundamental economic magnitudes profit and income is a laughing stock. This applies to Walrasians and Keynesians of all colors. The messed-up profit theory is the “more fundamental error” that pervades both microeconomics and macroeconomics.
Macroeconomics is NOT in need of another brain-dead discussion about voluntary/ involuntary unemployment, nor about what Keynes really meant, nor about IS-LM, nor about what went wrong 80 or 140 years ago. Economics is in need of a paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations to new macrofoundations. This, of course, is entirely beyond the horizon of the representative orthodox and heterodox economist in his involuntary goofiness.
#1 See ‘The unfinished Keynes’ and ‘How Keynes got macro wrong and Allais got it right’
#2 See ‘Macro for dummies’ and ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’
Related 'The father of modern economics and his imbecile kids' and 'Economists: the Trumps of science' and 'Economists still don’t get Econ 101 right'
Heterodoxy, too, is scientific junk. For details see cross-references Heterodoxy and cross-references Incompetence