April 8, 2013

Flawed logic

Comment on Lars Syll on 'IS-LM is bad economics no matter what Krugman says'


Lars Syll and Paul Davidson argue (a) that IS-LM is bad economics and (b) that it has not much in common with Keynes' economic reasoning in the General Theory.

I agree with both points. My question is a more fundamental one. Does this clarification make the General Theory look much better?

Let me resume the point that I have made at length in: Why Post Keynesianism is Not Yet a Science, Economic Analysis and Policy, March 2013, pp. 95-106. There is no need to lose many words about equilibrium, ergodicity, or the finance motive because Keynes' formalism is logically defective. This is sufficient to refute it and with it all illegitimate IS-LM derivatives.

Hence we have to go one step further: it is not such simple that IS-LM is bad economics and Keynes is good economics; both are bad economics and for the same reason.

Keynes' profit theory is false. The correct relation reads Qret≡I−S, i.e. retained profit is equal to the difference of business sector's investment and household sector's saving. Since retained profit for the economy as a whole is always different from zero we have empirical proof that investment and saving are, as a corollary, never equal. The ex-ante/ex-post argument can be shown to be logically defective. Because the IS schedule of IS-LM is formally unacceptable the whole argumentation built upon it is vacuous. Free association, interpreting IS-LM, or reading tea leaves is scientifically on the same level. What unites Keynes, Hicks, and Krugman, as well as his critics, is the same logical flaw in the formal foundations.

Egmont Kakarot-Handtke

Related 'How Keynes got macro wrong and Allais got it right'.