January 9, 2017

Say hello to Lars Syll, Keynes’s last parrot

Comment on Lars Syll on ‘The true nature of saving’

Blog-Reference and Blog-Reference

“Throughout the 1920s and 1930s the focus was increasingly on the role of the equality of saving and investment, but the semantic squabbles that dominated much of the debate (the distinctions between ‘ex ante,’ and ‘ex post,’ ‘planned’ and ‘realized’ saving and investment, the discussion of whether the equality of saving and investment was an identity or an equilibrium condition) reflected a deeper confusion.” (Blanchard, 2000, p. 1378)

As always in economics, confusion is not resolved but warmed up in irregular intervals.

Keynes formulated 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 elementary syllogism is conceptually and logically defective because Keynes never came to grips with profit (Tómasson et al., 2010, p. 12).#1

Let this sink in: Keynes had NO idea of the fundamental concepts of economics, that is, of profit and income. Post-New-After-Keynesians never detected and rectified Keynes’s lethal blunder.

The correct profit equation for the investment economy reads: Qm=Yd+I-Sm. Legend Qm: monetary profit, Yd: distributed profit, Sm: monetary saving, I: investment expenditures. The profit equation gets a bit longer when government and foreign trade is included.

The difference between investment and saving I-Sm plus distributed profit Yd determines monetary profit Qm for the economy as a whole. Saving is NEVER equal to investment, neither ex ante nor ex post nor otherwise, and there is NO mechanism to equalize them, that is, NO such thing as supply-demand-equilibrium. The whole discussion about whether the Wicksellian interest rate mechanism or the Keynesian income mechanism establishes the equality/equilibrium of saving and investment is entirely vacuous. BOTH models are provable false.

To conclude (2013):
(i) All I=S/IS-LM models from Keynes/Hicks to the present are provable false.
(ii) The loanable funds/natural interest rate theory is provable false.
(iii) The classical and Keynesian profit theories are provable false.

After-Keynesians have not gotten (i) to (iii) since 80 years. Lars Syll mindlessly reiterates Keynes’s blunder until this day.

Egmont Kakarot-Handtke

Blanchard, O. (2000). What Do We Know about Macroeconomics that Fisher and Wicksell Did Not? Quarterly Journal of Economics, 115(4): 1375–1409. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. 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

#1 See post ‘How Keynes got macro wrong and Allais got it right
#2 For details see cross-references Refutation of I=S