January 1, 2015

Economic theory — as false as ever

Comment on Peter Temin, David Vines, Lars Syll on ‘ 'Keynes  more important than ever'


You write: “We show how hard it was for Keynes to break away from previous theories that work well for individual people and companies — and even for the economy as a whole in the long run — to define the short run in which we all live.”

You hereby acknowledge that pre-Keynesian economics, i.e. “previous theories”, are valid except in the short run. That is to say, the Keynesian Revolution claims only the short run as its niche and leaves the rest to what Keynes called the 'classicals'.

This is not only false modesty but downright nonsense. Why? Because 'classical' economics always has been invalid and it is still invalid in its recent reincarnations. Why?

Let us take the widest possible perspective. The fact of the matter is that neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionalists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor New Keynesians, nor New Classicals ever came to grips with profit (cf. Desai, 2008, p. 10). Hence, 'they fail to capture the essence of a capitalist market economy' (Obrinsky, 1981, p. 495).

Keynes, to his greatest honor, realized that there was something wrong with previous profit theories: “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 and Bezemer, 2010, pp. 12-13, 16)

Neither orthodox nor heterodox economists understand the two most important phenomena in the economic universe: profit and income (2014b; 2014a). This is like pre-Newtonian physics before the elementary concepts of force and mass were clearly defined.

There seems to be complete ignorance among both orthodox and heterodox economists that they have nothing to offer in the way of scientifically founded advice: “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, 1991, p. 30)

Because they lack a correct profit theory neither the proponents of the 'classical' nor of the Keynesian approach have a true theory that could help to fix a crisis or to make the world a better place.

Egmont Kakarot-Handtke

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
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics, 3(4): 491–502. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered.