July 3, 2013

Where is profit?

Comment on Edward Fullbrook on 'Dr. X'


What a coincidence! You sum up: To say it with a Keynes’ quip: “It is better to be vaguely right than precisely wrong.” In #26 I referred Paul Davidson to a paper of mine which starts on p. 96 with the quote: “For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’ (Davidson, 1984, p. 574).” The title of the paper is: Why Post Keynesianism is Not Yet a Science.

Let us start with a point that is beyond the slightest doubt. Keynes’ formal groundwork consisted in the main of two equations, i.e. Y=C+I and S=Y–C.  (1973, p. 63). From this follows immediately I=S, and later the multiplier.

The first question is: Where is profit? How can Keynes present a formalization of the economy we happen to live in without mentioning profit? Keynes, of course, was fully aware that profit is the pivotal magnitude in the market system and he has defined on p. 23 that total income is the sum of factor costs and profit. The problem is that this definition does not harmonize with the formal groundwork above. Keynes knew this.

“His [Keynes's] 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)

My paper is a formal demonstration that the correct relation reads Qm≡I−Sm+Yd, i.e. total monetary profit in period t  is given by the difference of business sector’s investment expenditures and household sector’s monetary saving plus distributed profits of the business sector. This implies that Keynes' I=S or the ex-ante/ex-post rationalization is untenable.‡

In sum: Keynes' profit theory is wrong and because of this the investment-equals-saving proposition is false. Now, there is no need to go any further, because: “Even if we cannot prove a theory or model is true, at the very minimum to be true it must be logically consistent.” (Boland, 2003, p. 24).

The General Theory is inconsistent and Keynes' intellectual heirs never rectified it. Therefore, neither original Keynesianism nor its modern reincarnations or bastardizations can be accepted as a successor to neoclassics which has debunked itself recently.

How does Davidson comment on this fatal situation in #29? “You can define anything you want but as a sage once said ‘A rose by any other name will smell as sweet!’”

Economics could be real science if economists were real scientists.

Egmont Kakarot-Handtke

Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York, NY: Routledge, 2nd edition.
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. 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


‡ For an early forerunner of this equation see Gerhard Michael Ambrosi Carl Föhl on Economic Activity and Money, eq. 1.