False economic theory makes bad economic policy

Comment on Mish Shedlock on ‘Yet Another Fed Study Concludes Phillip’s Curve is Nonsense’

Blog-Reference and Blog-Reference and Blog-Reference

Mish Shedlock summarizes: “Proponents of the Phillips Curve keep looking for ways in which it works. Yet, another study concludes it doesn’t. The Phillips Curve, an economic model developed by A. W. Phillips purports that inflation and unemployment have a stable and inverse relationship. This has been a fundamental guiding economic theory used by the Fed for decades to set interest rates. Various studies have proven the theory is bogus, yet proponents keep believing.”

The Phillips Curve (better: bastard Phillips Curve) is the centerpiece of standard employment theory. Economists get employment theory wrong for 200+ years. The Phillips Curve has always been the highly visible landmark of economists’ scientific incompetence.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

The materially/formally inconsistent Phillips Curve has to be replaced by the correct macroeconomic Employment Law. For details see

• NAIRU, wage-led growth, and Samuelson’s Dyscalculia
• Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
• NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy
• Full employment, the Phillips Curve, and the end of Gaganomics

Egmont Kakarot-Handtke

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REPLY to Stuki on Jan 16

Economists claim to do science from Adam Smith/Karl Marx onward to the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. Fact is, though, that economics is a failed/fake science or what Feynman called a cargo cult science.

The problem does NOT lie in the subject matter but in the fact that economics is a science without scientists. Economics has been hijacked early on by political agenda pushers. These stupid/corrupt folks have produced NOTHING of scientific value in the last 200+ years. They do not understand to this day the elementary mathematics that underlies macroeconomic accounting.#1

Economists can always explain why they are still at the proto-scientific level. You, too, repeat merely worn-out slogans from the long list of lame excuses.#2

The scientific incompetence of economists consists of the fact that it is beyond their means to realize that NO way leads from the understanding of Human Nature/motives/behavior/ action to the understanding of how the economic system works. What makes things worse is that there is NO scientifically valid knowledge of Human Nature/motives/behavior/ action, to begin with.#3

What has to be done is (i) to get rid of all stupid/corrupt agenda pushers, (ii) to execute the Paradigm Shift from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations.


#1 DrainTheScientificSwamp
#2 Failed economics: The losers’ long list of lame excuses
#3 Economics is NOT about Human Nature but the economic system

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REPLY to Bob Roddis on Jan 18

You say: “I want money that maintains its value over the years.”

Economic theory can show you the way but, of course, neither Austrianism nor MMT.

Let us start with the simplest possible economic configuration. The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household 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 expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1), i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.

The price is determined by the wage rate, which takes the role of the nominal anchor, and the productivity. From (1) follows W/P=R (2), i.e. the real wage is equal to productivity. Productivity determines the real value of money.

If one wants absolute price stability in the elementary production-consumption economy from beginning to eternity one has to apply the simple rule: change of wage rate = change of productivity.

Needless to emphasize that things become a bit more complex if investment, saving, government, and foreign trade are added. This, though, does NOT alter the core rule that the wage rate has to move synchronously with the productivity.

A fiat money system with perfect price stability is possible. Austrians have been too stupid to figure this out.

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REPLY to Bob Roddis on Jan 18

You say: “However, for a particular sale, cost is irrelevant to the subjective valuation of the ultimate buyer. ”

Oh no, the Austrian value theory. Take notice that the derivation of the market-clearing price above relates to the economy as a whole and NOT to a particular sale. The argument is based on objective-systemic macroeconomic axioms and not on silly Austrian individualistic subjectivism.

The macroeconomic profit Q≡C−Yw in the elementary production-consumption is zero because of the condition of budget balancing. This is fully compatible with, for example, the film industry making a huge profit and the rest of the economy making a loss of equal magnitude.

Macroeconomic profit, too, is an objectively given and well-defined magnitude. It does not come of wishful thinking or individual necessity but from dissaving, i.e. C greater Yw. Microeconomics in all variants is known by now as a methodological failure.

Get it, Austrianism is dead since its inception. The fact that it still appeals to brain-dead blatherers has to be taken as supporting evidence.

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REPLY to Bob Roddis on Jan18

The Austrian core assertion is that laissez-faire would result in a stable economy with overall optimal outcomes. This assertion has never been proven. The provable fact of the matter is that the market economy is inherently unstable.#1

So, the very premise of Austrian economics is false and because of this, the whole verbal superstructure is false. Austrian economics is scientifically worthless and Austrians’ vacuous blather is only good for political agenda pushing.

You say: “There is no such thing as the ‘macro economy’.” You are a casualty of the methodological blunder called Fallacy of Insufficient Abstraction. Macroeconomic profit, for example, is measurable with the precision of two decimal places. Austrians cannot tell to this day what profit is.

It is macroeconomics that is objective. Microeconomics, on the other hand, has never been anything else than psychological/behavioral blather and pointless motive speculation.#2 Austrianism is a case in point.


#1 Proof of the inherent instability of the market economy
#2 The economist as second-guesser, mind reader, and folk psychologist

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REPLY to Stuki on Jan 19

You say that economics cannot be a science. This is simply false.

Economics has been hijacked early on by political agenda pushers. These stupid/corrupt folks have produced NOTHING of scientific value in the last 200+ years.

The problem with economics is that it is a science without scientists. For details of the big picture see cross-references Failed/Fake Scientists.

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LINKS on Roger Farmer’s ‘Replacing the Phillips Curve: I showed you my macro model. Now show me your macro model’ on Apr 22 and Blog-Reference EV

► NAIRU, wage-led growth, and Samuelson’s Dyscalculia
► Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
► Full employment, the Phillips Curve, and the end of Gaganomics
► NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather
► The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
► NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy
► False economic theory makes bad economic policy
► The five pathetic blunders of Roger Farmer
► Modern macro moronism
► For more details of the big picture see cross-references Employment/Phillips Curve

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Source: Real-World Economics Review Blog on Apr 27

Source: Real-World Economics Blog

Economists ― standing on the shoulders of dwarfs

Comment on Roger Farmer on ‘Standing on the Shoulders of Giants’

Blog-Reference and Blog-Reference on Apr 17

Roger Farmer maintains: “There is much that is wrong with existing economics. But to contribute to our subject, you must first understand how we got here. Neoclassical Economics was constructed by young, idealistic, smart, dedicated people, just like you, who built on the ideas of those who came before. Take a page from the book of those who preceded you. We are all standing on the shoulders of giants.”

This passage is sufficient proof of Roger Farmer’s utter confusion.#1, #2 Fact is that economics is one of the worst failures in the history of modern science. This is the actual state of economics: provably false
• profit theory, for 200+ years,
• Walrasian microfoundations (in particular equilibrium), for 150+ years,
• Keynesian macrofoundations (in particular I=S/IS-LM), for 80+ years.

The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong. With the pluralism of provably false theories economics sits squarely at the proto-scientific level.

Economics is a science without scientists.#3 Feynman called this phenomenon cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is missing among economists is an understanding of what science is all about. Roger Farmer is no exception. What he has not understood is that economics is NOT a so-called social science but a systems science.

To recommend neoclassical economics as a worthwhile study for the aspiring economist is much like a deranged physicist recommending some pre-Copernican Flat-Earther.#4, #5

There were never “young, idealistic, smart, dedicated people” in economics, only useful political idiots. Economics started 200+ years ago with the agenda pushers, fake scientists, and intellectual dwarfs of Political Economy and has never produced more than proto-scientific garbage.

Roger Farmer’s attempt to somehow associate the dwarfs of economics with the giants of science is not merely a bad joke but a deception of the general public.#6

Egmont Kakarot-Handtke


#1 Economics: When the scientifically unfit blather about science
#2 When substandard thinkers dabble in science it is called economics
#3 Economics: communication without content
#4 Futile beatification and canonization of an economics Flat-Earther
#5 Economics: 200+ years of scientific incompetence and fraud
#6 The real problem with the economics Nobel

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Wikimedia AXEC136g

After-Keynesian zombie interbreeding

Comment on Roger Farmer on ‘Post-Keynesians and New-Keynesians: A Lesson From Evolutionary Biology’

Blog-Reference and Blog-Reference

Roger Farmer waves the flag of hope: “Post-Keynesian finches and their New Keynesian cousins have avoided each other for far too long. Just as the arrival of El Niño in the Galapagos Islands allowed diverging species to once more merge, it is my hope that the shock of the Great Recession will catalyze interbreeding between New Keynesian and heterodox economists.”

This, of course, is a misleading metaphor. The fact on the economic Galapagos island is that the four sub-approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concept profit wrong. No amount of interbreeding will result in anything else than just another scientific zombie. The simple reason is that the genetic code = the set of axioms of the four sub-approaches is defective.

Keynes formulated the foundational syllogism of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

This elementary syllogism is conceptually and logically untenable.#1 Keynes did not come to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al.). As a result of this unidentified inheritable blunder, the whole After-Keynesian population is imbecile.

The Walrasian axioms are verbally given as follows: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

It should be obvious that the Walrasian axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). As a result of this inheritable axiomatic blunder, the whole After-Walrasian population is imbecile.

In Samuelson’s interbreeding, a.k.a. synthesis, the defective Walrasian microfoundations, and the defective Keynesian macrofoundations were cobbled together. Needless to emphasize that both approaches did not logically fit together then and do not fit together now and will not in the future.

Roger Farmer’s attempt to combine the rotten genetic material of Keynesianism and Walrasianism is doomed to failure. Economics needs a paradigm shift, nothing less than an entirely new creation will do.#3

Egmont Kakarot-Handtke


#1 Post Keynesianism, science, and universal idiocy
#2 The father of modern economics and his imbecile kids
#3 First Lecture in New Economic Thinking

For details of the big picture see cross-references Keynesianism.

Walras, Keynes, Samuelson, DSGE, IS-LM ― R.I.P.

Comment on Roger Farmer on ‘Let’s All Be Keynesians Now’ and on ‘Animal Spirits in a Monetary Model’

Blog-Reference and Blog-Reference

Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This elementary syllogism is inconsistent because Keynes never came to grips with profit (Tómasson et al.). As a result, all I=S models and all IS-LM models are false.#1,#2

Because Keynesian macroeconomics is inconsistent any synthesis with inconsistent Walrasian micro is inconsistency squared since Samuelson.#3

The common denominator of Keynes, Walras, Samuelson, Farmer, and Platonov is that they have NO idea of the pivotal concept of the subject matter, that is, of profit. That is disqualifying for an economist.

In methodological terms, axiomatically false is the death sentence for a paradigm, because when the foundational premises are inconsistent the whole analytical superstructure falls apart.

The representative economist has not realized until this very day that there is NO such thing as fresh thinking about analytical monstrosities that were already dead in the cradle 150+ and 80+ years ago.

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
and cross-references Refutation of I=S
#3 The father of modern economics and his imbecile kids

Macroeconomics without Keynes

Comment on Roger Farmer on ‘Keynesian Economics Without the Consumption Function’

Blog-Reference and Blog-Reference and Blog-Reference on Apr 11 adapted to context

Roger Farmer announces: “In Prosperity for All, I describe a theory of Keynesian economics, developed in my recent body of work, in which the transmission mechanism from demand to employment is through wealth, not through income. I call this, a theory of Keynesian economics without the consumption function.”

This does not go far enough. Keynesianism as a WHOLE, and not only the consumption function, has to be buried because it is axiomatically false.

1. How Keynes got it wrong

Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This elementary syllogism is conceptually defective because Keynes never came to grips with profit (Tómasson et al.). As a result, all I=S models and the Keynesian multiplier are false.#1,#2

2. Rectification

The defective Keynesian premises have to be replaced by the correct macrofoundations.
(A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(A1) Y_w=WL wage income Y_w 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 expenditure C is equal to price P times quantity bought/sold X.

These macroeconomic axioms replace Keynes’ provably false formal foundations and by implication the false Walrasian microfoundations.

3. The correct Employment Law

The elementary version of the objective systemic Employment Law for the investment economy which follows from (A1)/(A3) is shown on Wikimedia.#3

From this equation follows: (i) An increase of the expenditure ratio ρ_E leads to higher employment (the Greek letter ρ stands for ratio). An expenditure ratio ρ_E greater than 1 indicates credit expansion, a ratio ρ_E less than 1 indicates credit contraction. (ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown in growth does the opposite. (iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete Employment Law gets a bit longer and contains in addition profit distribution, the government sector, and foreign trade.

Item (i) and (ii) cover Keynes’ arguments about aggregate demand. The ratio ρ_E replaces the Keynesian consumption function. The factor cost ratio ρ_F as defined in (iii) embodies the price mechanism which, however, does not work as standard economics assumes. As a matter of fact, overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This implication is readily testable against standard economics.

4. Conclusion

The replacement of Keynes' false macrofoundations with the true macrofoundations yields the objective systemic (= behavior-free) Employment Law. This equation is the one stone that kills the Keynesian multiplier, all IS-LM models, the stickiness argument, the false Keynesian profit theory, and the (bastard-) Phillips Curve including the natural rate hypothesis.#4

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right
#2 Why Post Keynesianism Is Not Yet a Science
#3 Wikimedia AXEC62
#4 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

Related 'New IS-LM macro ― just another fake revolution' and 'Windmill economics' and 'Keynes saw the problems but did not solve them' and Ch. 13, The indelible scientific disgrace of economics, in Sovereign Economics.

The futile synthesis of neoclassical rubbish and Keynesian garbage

Comment on Roger Farmer on ‘Keynes betrayed’

Blog-Reference and Blog-Reference on Jan 26, 2017

The Keynesian Revolution had already been dead in the cradle but economists have not realized it until this day. For 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. To see this, one has to go back to Keynes.

Keynes realized that the classical microfoundations approach had led to 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

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)

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.

In Samuelson’s synthesis, the defective Walrasian microfoundations and the defective Keynesian macrofoundations were cobbled together. Samuelson’s textbook consisted of two well-balanced halves: micro and macro. Needless to emphasize that both halves did not logically fit together.

Science is committed to material and formal consistency. Samuelson’s textbook had, with a probability close to 1, the lowest scientific content of all textbooks ever written. The fact of the matter is: the micro axioms are inconsistent, the macro axioms are inconsistent, and the synthesis of the two sets is, by consequence, also inconsistent.

Macroeconomics does NOT need 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 150 years ago, nor about a new synthesis of old trash. Economics needs a Paradigm Shift from false Walrasian microfoundations and false Keynesian macrofoundations to consistent structural/systemic macrofoundations.

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right

Rethinking deficit spending

Comment on Roger Farmer on ‘Three Facts about Debt and Deficits’

Blog-Reference

You say: “Economics has the reputation of being the dismal science.” The most dismal thing about economics is that it is NOT a science.#1

In order to understand the failure of economics in general and Walrasianism, Keynesianism, Marxianism, Austrianism in particular one has, first of all, to realize that there is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda-pushing).

It holds: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Economists do NOT have the true theory. This holds also for Keynesianism and the concept of deficit-spending. What Keynes and the After-Keynesians never understood is the all-important relationship between deficit and profit.

Keynes defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This syllogism 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.)

Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of Keynesian macroeconomics falls apart.#2

But things are even worse. Because economists in general and Keynesians, in particular, do not understand profit they do not understand what deficit spending really means: “When government is added to the elementary production-consumption economy then it holds under the condition of zero investment of the business sector and zero saving of the household sector Q_m=G−T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus.”#3 In simple terms: Public Deficit = Private Profit.

Whatever Keynes intended or argued about deficit spending is irrelevant. Because he did not understand the elementary economic relationship between deficit and profit, he de facto initiated the greatest profit boost in the history of humankind. The actual distributional problems are ultimately the handiwork of Keynes. In fact, no economist has done more for the one-percenters than Keynes.#4

You cite three trivial facts about deficits and debt and have NO idea about the most important fact, that is, the relationship between deficit and profit.#5

Egmont Kakarot-Handtke


#1 FakeNews, FakeScience: economics in the information age
#2 From false micro to true macro: the new economic Paradigm
#3 Wikipedia and the promotion of economists’ idiotism
#4 Keynesianism as ultimate profit machine
#5 For details of the big picture see cross-references Incompetence

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REPLY to franco on Dec 2

The paper you refer to (Levy et al., 2008) indeed addresses the fundamental issue of economics ‘Where Profits Come From’ but gives the wrong answer. For the formal refutation of the Levy approach, see the working paper ‘Keynes’s Missing Axioms’ (2011b)

For the correct explanation see ‘The Emergence of Profit and Interest in the Monetary Circuit’ (2011a).

The lethal error/mistake/blunder of the Levy approach consists in starting with Saving = Investment (2008, p. 6).

For the most elementary explanation of why Saving = Investment has ALWAYS been false and of why Saving = Loss resp. Dissaving = Profit is true see (2015).#1


References
Kakarot-Handtke, E. (2011a). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2011b). Keynes’ Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2015). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL
Levy, D. A., Farnham, M. P., and Rajan, S. (2008). Where Profits Come From. 1–28. URL

#1 For details of the big picture see cross-references Refutation of I=S and in particular The final implosion of MMT

Neo-Paleo-Stupidicism

Comment on Roger Farmer on ‘Neo-Paleo-Keynesianism: A suggested definition’

Blog-Reference

Science was there before economics was there. Economists either conform to well-defined scientific standards or they are outside of science: they are in NO position to redefine scientific criteria. This, though, is what they regularly attempt to do. Roger Farmer’s featured post is a case in point.

Because economics — as represented by the four failed sects Walrasians, Keynesians, Marxians, and Austrians — has never risen above the level of a proto-science it has become popular among economists to question the standards, to lower them, or, as Blaug put it, ‘to play tennis with the net down’. Hence, economists are very receptive to methodological soft-pedaling like anything-goes (Feyerabend), economics is not a Science with a capital S (Solow), economics is an inexact and separate science (Hausman/J. S. Mill), pluralism of false theories or nobody-knows-anything (Heterodoxy), or Lakatosian replacement of scientific true/false by opportunistic like/dislike.

The scientific method is well-defined by formal and material consistency (Klant, 1994, p. 31). Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing. To secure both consistencies is a tough job and it is in no way predetermined how the general methodological principle applies at the cutting edge of research. To figure this out is the creative scientific achievement.

Economics fails on both counts: the axiomatic foundations are provably false and, as a consequence, testing is regularly inconclusive. So, the four economic sects have happily established themselves in the swamp between true and false where ‘nothing is clear and everything is possible’ (Keynes).

Standard economics is built upon this set of foundational propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147)

Methodologically, these premises are forever unacceptable but economists swallowed them hook, line and sinker from Jevons/Walras/Menger onward to DSGE. The failure of methodological individualism as embodied in HC1|HC5 is indisputable. NOT ONE axiom is acceptable.

Because of this, the microfoundations approach has already been dead in the cradle more than 140 years ago. Have economists realized this? Forget it! Krugman put it thus: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.

Get this: ALL models that contain maximization-and-equilibrium in any shape or form are a priori unacceptable. Post-Keynesianism is different but in no way better.#1 This leaves only one option. As Joan Robinson put it: “Scrap the lot and start again.”

Roger Farmer asks: “How can we recover this idea, without discarding three hundred years of microeconomic principles?“ Wrong question. Sticking to these principles is as good as sticking to the flat-earth principle, that is, it is a reliable indicator of scientific incompetence.

The failure of economics requires a paradigm shift. Nothing less will do. Roger Farmer instead teams up with a zombie: “The neo-paleo-Keynesian research program is unashamedly neo-classical.” But it gets worse. Who is Roger Farmer’s ideal economist? “Keynes was notorious for changing his views on a daily basis and was said to be capable of holding several conflicting opinions at the same time.” Allais called this “insuffisance logique” (1993, p. 70) which unceremoniously translates into stupidity (see also 2013).

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

#1 From microfoundations to macrofoundations

I=S: Mark of the Incompetent

Comment on JKH and Roger Farmer on ‘Demand Creates its Own Supply’

Blog-Reference

I=S is provably false but the representative economist never got the point. To some degree, this is understandable because the deeper conceptual problem is that the representative economist does not even know what profit is because, as the Palgrave Dictionairy summarizes “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)

In simple words, this means that all economic models are defective — except those that come explicitly to grips with the foundational economic concept of profit. None are known from Orthodoxy and Heterodoxy. And this, in turn, means that all economic policy advice lacks sound scientific foundations.

The I=S blunder is not a single or isolated event but a rather typical outcome of proto-scientific thinking and widespread misapprehension of scientific methodology.#1

The following economists are representatives of the general intellectual malaise which manifests itself in the longstanding I=S debate. The list could be easily extended.#2

• Keynes Keynes’s Missing Axioms,
• Hicks/Krugman Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It,
• Rowe IS-LM is dead and waiting to be buried,
• Farmer Fundamentally flawed,
• Syll Is Keynes acceptable?,
• Glasner End of confusion and Quod erat demonstrandum,
• JKH Tricky business,
• Radford No culpa, only stultitia,
• DeLong Sales talk vs. Science,
• Douglas Unaccountable,
• Mitchell Modern moronomic theory,
• Keen Mental messies and loose losers,
• Wren-Lewis The subtle distinction between storytelling and science.

For a crash course in profit theory see The Profit Law.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL

#1 The axiomatically correct relationship between monetary profit Q_m, distributed profit Y_d, investment expenditures I and monetary saving S_m is given with Q_m≡Y_d+I−S_m.
#2 For details of the big picture see cross-references Refutation of I=S

Preceding Fundamentally flawed.

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Fundamentally flawed

Comment on Roger Farmer on ‘Demand Creates its Own Supply’

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You say “Keynesian economics begins with a basic definition.” This is true. The fact of the matter is, though, that this basic definition is provably false and, worse, that Keynesians have not got the point until this very day (2011b).

The final proof of widespread logical incapacity is that the elementary accounting identities have been messed up. As a centerpiece of the General Theory Keynes formulated the foundational syllogism of macroeconomics. “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 and Bezemer, 2010, pp. 12-13, 16). The fault is in the premise ‘income = value of output’. This equality holds initially only in the limiting case of zero profit in both the consumption and investment good industry. Hence, Keynes formally dealt with a zero profit economy without being aware of it (2011b). This means in concrete terms that the multiplier formula is provably false.

The first logical blunder kicked off a chain reaction of mistakes, because when profit is not correctly defined, income is not correctly defined, and then saving is not correctly defined. Therefore, all I=S models are logically defective.

The root cause of all accounting errors/mistakes is a complete lack of understanding of what profit is. The conceptual error carries over to national accounting (2012).

You conclude “Here, finally, is the answer to the exchange between Jo and Noah. It is always true, in equilibrium, that savings is equal to investment.”

Definitively not! It is always true that Q_m≡Y_d+I−S_m, that is, monetary profit is equal to distributed profit plus investment expenditure minus the household sector's monetary saving. Saving and investment are never equal. This is a testable proposition.

To repeat: all I=S models are logically defective because they fail to consistently integrate profit. A short formal proof has been given on a parallel thread.*

Not only Jo and Noah got it wrong, but Roger, too. Not to forget, of course, Keynes and Hicks and Krugman (2014) and the rest of the logically feeble profession.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011a). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2011b). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
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. The Collected Writings of John Maynard Keynes Vol. VII. 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 the Uneasy Money blog or the summary End of confusion on the AXEC blog

For details of the big picture see cross-references Refutation of I=S