I=S is the epitome of economists' scientific incompetence. If this were as plain as a meteorite hitting the earth the problem would have been fixed long ago; it is, though, just the contrary: subtle, unspectacular, counter-intuitive, subterranean, and rather involved.
Already von Neumann spotted the peculiar methodological defect of economics: “I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (quoted in Mirowski, 2002, p. 146 fn. 49)
This, however, has never been a point of great concern for the representative economist. In particular, for the Cambridge School of Loose Verbal Reasoning sharpness, precision, uniqueness, rigor, bivalent logic, etcetera always amounted rather to a violation of the human right to mental messiness. This stance has habitually been defended with a false but suggestive alternative.
“Marshall followed the maxim: Better to be ambiguous and relevant than precise and irrelevant.” (Colander, 1995, p. 283)
Then, Keynes occupied the realm of vagueness, ambivalence, indeterminism, fogginess, wish-wash, inconclusiveness, complexity, twilight, uncertainty — the realm where nothing is clear and everything is possible — as the ecological niche of Keynesianism.
“Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. ... Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates, 2007, p. 87)
This problem avoidance strategy was soon summed up in a catchy pseudo-choice: “For Keynes, as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’" (Davidson, 1984, p. 574)
With this cavalier mentality, Keynesians, and eventually the majority of other schools, have occupied the habitat between true and false where the scientific procedure of ‘conjecture and refutation’ runs into the bottomless swamp: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158)
So, economics is no longer about the true economic theory, all one has to do is to avoid a crystal-clear refutation. This can be achieved by persevering fuzzy filibustering and by maintaining that crystal-clear refutation is impossible in the first place. If, against all defensive complacency, a refutation plainly succeeds, ignorance and business-as-usual help. This has become standard operating procedure in economics, as already Morgenstern complained: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (1941, pp. 369-370)
With these two stratagems, economists entrenched themselves in the swamp of anything-goes and subsequently turned to defend their scientific no-man's-land in the main with rhetorical soap-bubbles. All this is — as economists always readily admit — second-best, however, “... most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)
What made this deadlock possible is a tacit quid-pro-quo agreement among different camps on the legitimacy of Humpty Dumpty methodology. "When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less." "The question is," said Alice, "whether you can make words mean so many different things." "The question is," said Humpty Dumpty, "which is to be master — that's all." (Carroll, Through the Looking-Glass)
This quasi-feudal Freedom-of-Definition Privilege constitutes the different schools and has been sanctioned by the likes of Schumpeter. “For, on principle, we may call things what we please.” (1994, p. 598)
Of course, freedom of definition is a methodological illusion. It applies but to the FIRST definition. Subsequently, one has to make sure that every additional definition is consistent with the preceding ones. Overall consistency cannot be achieved in the economist's cavalier fashion: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen, 2009, p. 344)
Institutionalized economics never seriously aimed at, and therefore never arrived at, a coherent language, not to speak of an axiomatic framework of foundational concepts. Thus, debates between schools resemble nothing so much as ‘Babylonian incoherent babble’ (cf. Dow, 2005, p. 385). Without a common frame of reference, perpetual cross-talk is guaranteed. Economics fits the format of a sitcom.
The lack of a minimal common ground explains the secular stagnation of economics: “We know from the history of science that entrenched classificatory schemes and misleading descriptive vocabularies have impeded scientific advance as much or more than the complexities and observational inaccessibility of the subject matter.” (Rosenberg, 1980, p. 114)
What, then, is the — minimal, objective, consistent, testable — common conceptual ground of all of the economics?
Total period income in an elementary production-consumption economy with only one giant firm is given by the sum of wage income and distributed profit, i.e. (1) Y=Yw+Yd. Total consumption expenditures are equal to the product of price and quantity sold, i.e. (2) C=PX. That's all for a start.
Monetary profit of the business sector as a whole is then defined as the difference between consumption expenditures and wage costs, i.e. Qm≡C−Yw. Monetary saving of the household sector is then defined as the difference between total income and consumption expenditure Sm≡Y−C. Hence, Sm≡−Qm if, for a start, Yd=0. In simple words: saving Sm is equal to loss −Qm, or, dissaving −Sm is equal to profit Qm. From this follows immediately that all I=S or IS-LM models from Keynes, to Hicks, to Krugman, and all the busy blogging rest are false — irrevocably in all eternity.
Generally speaking, it holds for the production-consumption economy that Qre≡−Sm, i.e. retained profit Qre is equal to dissaving −S. And for the investment economy holds Qre≡I−Sm, i.e. retained profit is equal to the difference between investment and saving (for details see 2014). No accounting trick and no ex-ante/ ex-post filibuster and no expected/unexpected stock changes and no equilibrium verbiage and no natural rate of interest will ever make the household sector's saving equal to the business sector's investment expenditures. Never ever! No way! Forget it!
Saving-equals-investment is the epitome of conceptual and logical incompetence of economists of all schools. In science, there is no ecological niche between true/false and no pluralism of false theories. Humpty Dumpty’s methodological no-man’s-land is an uninhabitable swamp for every thinking human being.
The root cause of the IS error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income and profit but of wage income and distributed profit (2013). The profit theory is false since Adam Smith. This, in turn, means that economists have failed to capture the essence of the market system. Neither attack nor defense of the market economy ever had a sound theoretical foundation (2015). Political economics has been a complete waste of time.
Economics of the last 200 years is the most embarrassing failure in the history of modern science.
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge, New York, etc.: Cambridge University Press.
Colander, D. (1995). Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3): 281–293. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Dow, S. C. (2005). Axioms and Babylonian Thought: A Reply. Journal of Post Keynesian Economics, 27(3): 385–391. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand BoD, 2nd edition. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Related 'Economists: Jacks of all trades ― except economics' and 'Economics ― a doctor worse than the disease' and 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist' and 'Knowledge is attainable ― even in economics'. For details of the big picture see cross-references Failed/Fake Scientists and cross-references Not a Science of Behavior.