November 15, 2015

A new fall back into old thinking

Comment on Lars Syll on ‘Methodological foundations of heterodox economics’


Marc Lavoie starts his new textbook with methodology and what he puts into the foreground as his most important concept is uncertainty. Now we know that uncertainty has been Keynes’ eureka insight and that he famously summarized it with “We simply do not know.” (1937, p. 214)

Do Post Keynsians not realize that after 80+ years it becomes a bit boring to hear that refrain? Is it not the very definition of science to produce knowledge? Is it not the essence of new thinking to produce new knowledge? To start a textbook with a worn-out excuse of why economics has failed is not exactly new thinking.

But matters get worse. There are things that Post-Keynesians claim to know, e.g. that the sum of the sectoral balances is zero (see around 10:40 min). Yet, this is inherent in the elementary mathematics of accounting and does not exactly constitute a new insight. What is devastating for all After-Keynesians is that Keynes had messed up the sectoral balances approach and that his logical blunder has not been detected and rectified in the sequel.

Genuine new thinking starts with the realization that Keynes got the formal foundations of macro wrong. And this two-liner provides the starting point: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment” (1973, p. 63). For the rigorous formal refutation see (2011; 2012).#1

New economic thinking presupposes the insight that the methodology of both Orthodoxy and Heterodoxy has been defective and, more specifically, that the representative economist got the foundational concepts of economics — income and profit — wrong. It is well-known from methodology that an inconsistency in the conceptual foundations explodes the whole theoretical superstructure.

“In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” (Georgescu-Roegen, 1970, p. 9)

After the exact identification of the core methodological blunder, the next step consists of formulating the axiomatic foundations of the new economic paradigm. New heterodox economics has to constitute itself with an entirely new set of foundational propositions.#2 This is what a paradigm shift is all about.

A methodological curriculum that starts with ‘We simply do not know’ is self-debunking.

Egmont Kakarot-Handtke

Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
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
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. 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.

#1 For an entry point into the detailed discussion, which has recently taken place on
the blog Uneasy Money, see the Debunking the natural rate of interest.
#2 For details of the big picture see the cross-references New Curriculum.