Blog-Reference and Blog-Reference on Sep 17
Eighty years ago, Keynes got macro wrong and neither Keynesians nor anti-Keynesians noticed it until this very day.
Joseph Stiglitz maintains: “So both stories, the DSGE and the old-fashioned Keynesian, are simplifications. When they are incorporated into a simple macro-model, one is saying the economy acts as if… And then the question is, which provides a better description; a better set of prescriptions; and a better basis for future elaboration of the model.”
This is NOT the question. The real question is, how could economists ever take this whole proto-scientific rubbish seriously?
Keynes has to be credited for realizing that the economics of Jevons/Walras/Menger/ Marshall was false at its core and that nothing less than a paradigm shift was needed: “The [neo-]classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight ― as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.”
After Keynes, every economist who does not see the necessity of a paradigm shift is a scientifically incompetent moron. There are NO excuses.
Keynes, though, messed up the shift from microfoundations to macrofoundations. His methodological blunder can be exactly located in the GT: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)
This two-liner is conceptually and logically defective because Keynes did not come 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.)#1
Because profit and income are ill-defined the whole theoretical superstructure of Keynesianism is false.#2 It was Allais who identified Keynes’ lethal blunder.#3 Obviously, neither Joseph Stiglitz nor Lars Syll got the message.
Both the DSGEers and the Keynesians have until this very day NO idea of the fundamental concepts of economics, viz. profit and income. By consequence, both proto-scientific sects get the intertemporal relationship between income, consumption, saving, and profit badly wrong.#4 Needless to emphasize that neither Joseph Stiglitz nor Lars Syll nor other pseudo-thinkers came since Keynes one millimeter closer to the correct macroeconomic relationships.#5
#1 For details see cross-references Keynesianism
#2 Where economics went wrong
#3 How Keynes got macro wrong and Allais got it right
#4 Settling the Theory of Saving
#5 Wikimedia, The Four Basic Economic Laws