January 24, 2018

I is never equal S and even Nick Rowe will eventually grasp it

Comment on Nick Rowe on ‘“Monetary Policy Accommodation” and Upward-sloping IS curves’

Blog-Reference and Blog-Reference

The economist’s idea of the price mechanism is encapsulated in the Totem of the Micro/Macro, i.e. supply-curve-demand-curve-equilibrium. Because each of the three elements is a NONENTITY, price theory in general and IS-LM, in particular, will forever stand out as laughable proto-scientific constructs.

In order to see this, one has to go back to the most elementary economic configuration, that is, the elementary production-consumption economy which consists of the household and the business sector.#1

In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.

• In case (i) the monetary saving of the household sector Sm≡Yw−C is zero and the monetary profit of the business sector Qm≡C−Yw, too, is zero. The product market is cleared, i.e. X=O in all three cases.
• In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
• In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It always holds Qm≡−Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. Obviously, there is NO such thing as the equality/identity/equilibrium of saving and investment and by consequence, there is NO such thing as an IS-curve.

The profit theory is false since Adam Smith and all IS-LM models are false since Keynes/Hicks.#2

The axiomatically correct profit equation for the investment economy with profit distribution reads Qm≡Yd+I−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditures. This boils down to Allais’ Qre≡I−Sm.

The difference between investment and saving I−Sm plus distributed profits Yd determine monetary profit Qm in each period. All variables are measurable with the precision of two decimal places with an appropriate macroeconomic accounting system.

IS-LM models are worthless for 80+ years. Is Nick Rowe really the last to get it?

Egmont Kakarot-Handtke

#1 The elementary production-consumption economy is given by three macro axioms: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
#2 How Keynes got macro wrong and Allais got it right

Related 'I=S: Mark of the Incompetent' and 'Nick Rowe: Bury me at the end of coal-pit' and 'Getting out of IS-LM = Getting out of despair' and 'Macro poultry entrails reading' and 'Worthless Canadian model bricolage' and 'Keynesians ― terminally stupid or worse?' and 'Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It'. For details of the big picture see cross-references The Representative Economist and cross-references Refutation of I=S.

Immediately following Is Nick Rowe stupid or corrupt or both?.