Blog-Reference and Blog-Reference
Krugman defends the simplicity of IS-LM against more elaborate modeling approaches: “What worries me is the effective prohibition on simple, ad hoc models that sometimes yield most of the insight ... in a form that is much more useful for real-world policy discussion.”
The core issue, though, is NOT about simple or elaborate but about true or false. And the crucial point is that IS-LM is provably false. What is worse, it is false since Keynes/Hicks and neither the After-Keynesians in general nor Krugman, in particular, have realized this until this day (2014).
Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
This elementary syllogism is conceptually defective because Keynes never came to grips with profit (Tómasson et al., 2010, p. 12). As a result, all I=S/IS-LM models and the Keynesian multiplier and Post-Keynesianism and New Keynesianism are false (2011).
Because neither IS-LMers nor DSGEers have the true theory their economic policy advice has NO scientific foundation whatsoever but is at the same level as poultry entrails reading. Hence, Paul Krugman has ONE valid point: to read from simple entrails is for all communicative purposes better than to read from more elaborate entrails. This, though, should not distract from the fact that simple scientific garbage is still garbage. To do economics without an idea of what profit is is a hopeless undertaking and a reliable indicator of utter scientific incompetence of economists in general and Paul Krugman, in particular.#1
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. 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
#1 I=S: Mark of the Incompetent
Your examples relate to microeconomic profit. Keynes, of course, mentioned profit in the General Theory but never understood it: “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 et al., 2010, pp. 12-13, 16)
Keynes, though, is not alone as one can glean from the Palgrave Dictionary: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)
The fact of the matter is that economists have no idea since Adam Smith what profit is (2014). This includes Paul Krugman and this is why his IS-LM based economic policy analysis is scientifically worthless.#1
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pp. 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: pp. 1–34. URL
#1 Profit and the collective failure of economists.
Compared to IS-LM the quantity of credit theory of Werner is clearly superior. See also Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right.
The idea that wages and profits are antagonists quite naturally emerges from the observation of a single firm but is patently false when generalized for the economy as a whole. This elementary logical blunder (Fallacy of Composition) started with Smith, Mill, Ricardo, Marx and is still alive in modern macroeconomics. See also Profit for Marxists.