August 6, 2015


Comment on ‘Accounting for ****’


Being very busy, economists as confused confusers did not miss the opportunity to mess up accounting, too. It started with Keynes. He gave the following elementary formal description of the economy: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, p. 63)

Since theories have an architectonic structure it is clear that if there is a fault in the formal foundations the whole superstructure of the theory is vulnerable. Actually, the fault in Keynes' syllogism is in the premise income = value of output. This equality holds only in the limiting case of zero profit in both the consumption and investment good industry.

Profit does not appear in Keynes' elementary formalism. That is, he in effect talks about capitalism without profit. Note well that Walras' economy was also a zero profit economy. Weird, isn't it?

Keynes' conceptual problems started 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 and Bezemer, 2010, p. 12)

This failure kicked off the chain reaction of errors/mistakes because when profit is not correctly defined, income is not correctly defined, and then saving is not correctly defined. By consequence, 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. Total income is not the sum of wage income and profit but of wage income and distributed profit income. The conceptual error carries over to national accounting (2012).

To make it short, what, then, is the — minimal, objective, consistent, testable — common conceptual ground of all of the economics?

Total period income in an extremely simple monetary economy with only one 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. More is not needed 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. Q≡C−Yw. Monetary saving of the household sector is then defined as the difference between total income and consumption expenditure S≡Y−C. Hence, S≡−Q if, for a start, Yd=0. In simple words: saving S is equal to loss −Q, or, dissaving −S is equal to profit Q.

Generally speaking, it holds for the pure consumption economy that Qre≡−S, i.e. retained profit Qre is equal to dissaving −S. And for the investment economy holds Qre=I−S, i.e. retained profit is equal to the difference between investment and saving (for details see 2014a).

Because the profit theory is false the loanable funds theory, too, is false (2014b).

Egmont Kakarot-Handtke

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. (2014a). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right. SSRN Working Paper Series, 2389341: 1–17. 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

Related 'The trouble with counting to 3' and  'Keenonomics, aggregate demand/change of debt, and some misleading critique' and 'Tricky business'

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