January 6, 2019

Why is 0!=1? And why is I≠S? And why economics teaching is rotten

Comment on Lars Syll on ‘Why is 0!=1?’

Blog-Reference

The failed economics teacher Lars Syll indulges in self-promotion: “The single most important factor behind successful education ― from kindergarten to university ― is, and has always been — having a good teacher!”

True, but the situation in economics is this: textbooks and teaching are provably false from microeconomic supply-demand equilibrium to macroeconomic I=S.#1

Here is what good teaching looks like.

Keynes started macroeconomics with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

This proposition is false. Where is the mistake?

The first thing to do is always to clearly state the premises. The elementary production-consumption economy is defined with a set of macroeconomic axioms.

(A0) The objectively given and most elementary systemic configuration of the economy consists of the household sector and the business sector which, in turn, consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditures C is equal to price P times quantity bought/sold X.

In the elementary production-consumption economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.

In case (i) the saving of the household sector S≡Yw−C is zero and the profit of the business sector Q≡C−Yw, too, is zero. The product market is cleared, i.e. X=O in all three cases. Accordingly, the market-clearing price as the dependent variable is given by P=W/R.
In case (ii) saving S is positive and the business sector makes a loss, i.e. Q is negative. The market-clearing price P is less than W/R.
In case (iii) saving S is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Q is positive. The market-clearing price P is greater than W/R.

It always holds Q≡−S, in other words, the business sector’s profit is equal to the household sector’s dissaving, and the business sector’s loss is equal to the household sector’s saving.

And that’s it. The mistake in Keynes’ argument lies in the premise income = value of output. The fact is that the value of output C=PX can be less than wage income Yw. The balance of the two flows C−Yw is called loss. Loss as the difference of flows is different from the flow wage income. Loss is NOT income.

Analogous in the opposite case, i.e. C>Yw and Q>0. Profit is NOT income either.

In the elementary investment economy, it holds Q≡I−S. Simple algebra and a look at reality tell one that saving is NEVER equal to investment. However, economics teachers explain to their students 80+ years after Keynes why I=S.#2 And every student generation swallows it with a straight face.

Something is rotten with economics teaching.

Egmont Kakarot-Handtke


#1 The father of modern economics and his imbecile kids
#2 #DrainTheScientificSwamp

Related 'Trust in economics as a science?' and 'Fact of life: your econ prof is scientifically incompetent' and 'Textbooks and the mental cloning of dumb economists' and 'How to Get Rid of Supply-Demand-Equilibrium' and 'Economics: 200+ years of scientific incompetence and fraud'. For details of the big picture see cross-references Econ 101/Old Curriculum/New Curriculum.