Comment on Thomas Palley on ‘James Tobin’
Thomas Palley summarizes: “Robert Dimand has written a short book, which is part of The Great Thinkers in Economics series edited by Tony Thirlwall, on Tobin’s economics. ... Dimand’s assessment of Tobin’s contribution is elegantly framed in terms of Hicks’ IS-LM model which dominated neo-Keynesian economics, and which Tobin subscribed to and sought to improve.”
Tobin’s failure consists in the fact that he sought to improve on Keynes but never realized that Keynes’ approach was fundamentally flawed from the very beginning. So, in the strict sense, any improvement of Keynes can only consist of the full replacement of Keynes. Because Tobin set himself a senseless task he was bound to fail.
Keynes based macroeconomics on logically and conceptually defective foundations and neither neo-Keynesians nor Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder in 80 years.
Keynes defined 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 syllogism is defective because Keynes never came to grips 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 et al., 2010, p. 12)
Keynes had NO idea of the fundamental concepts of economics, viz. of profit and income. Because profit is ill-defined the whole theoretical superstructure of Keynesian macroeconomics falls apart (2011; 2013).#1
As Georgescu-Roegen put it: “The elementary is the hotbed of the errors that count most.” Keynes’ elementary blunder caused a lot of collateral damage:
(i) All I=S/IS-LM models from Hicks to Blanchard/Krugman/Rowe are provably false (2014).
(ii) The investment multiplier is formally defective since Keynes.
(iii) The error/mistake in Keynes’ profit theory remained undetected.
(iv) The error/mistake in Keynes’ employment function remained undetected and this led to the Phillips curve disaster (2012).
Thomas Palley concludes: “In my view, Tobin’s macroeconomics has faded because of political reasons and because of theoretical limitations, ... The good news is that Tobin’s macroeconomics remains profoundly relevant and can be revived theoretically, as suggested by the work of Godley and Lavoie.”
It is pretty obvious that After-Keynesians are still deep in the woods. To this day, the application of I=S is the mark of utter scientific incompetence.#2
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. 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 The correct relationship is given by Qm≡Yd+I−S Legend: Qm monetary profit, Yd distributed profit, I investment expenditure, S saving.
#2 For details of the big picture see cross-references Refutation of I=S