Blog-Reference and Blog-Reference on Jan 26 and Blog-Reference
“Since every act of spending results in income for somebody else, total spending for the economy as a whole equals total income. This is true by definition and is a basic building block in macroeconomics.” (Cooper) Both, orthodox and heterodox economists subscribe to this statement as the self-evident rock-bottom truth of all of economics.
The foundational methodological error/mistake/blunder of economics is that the pivotal concepts — profit and income — are ill-defined and not at all understood. This explains why economics is a failed science or what Feynman called a cargo cult science. Actually, economics is at the stage of medieval physics before the pivotal concept of energy was properly defined and understood.
The proof of the utter scientific incompetence of economists is given with the fact that the profit theory is false since Adam Smith.#1, #2, #3
Keynes started macroeconomics with false premises and ended with false conclusions “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)#4
That Keynes was too stupid for the elementary mathematics of macro accounting was proven by Allais.#5
According to well-established scientific standards, profit theory, Keynesian economics, and all I=S/IS-LM models are definitively refuted. However, economists NEVER lived up to any standards “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941)
Nick Rowe stands firmly in this corrupt methodological tradition “If households own the firms, we can say that firms’ assets are owned by households, and firms’ profits are included in households’ income. And if we do that, then we are back at the standard definitions where Expenditure = Income, and Investment = Saving, must always be true. … There’s a number of different ways we could add things up. Which is the best way? It depends.”#6
This is the classical argument since Alice’s and Humpty Dumpty’s memorable methodological dialogue “‘When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all’.”
Science, of course, is different “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Science is defined by material and formal consistency and this is known for 2300+ years ― except among economists “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)
Keynes’ premise Income = Value of Output is axiomatically false and because of this, the whole analytical superstructure of Keynesianism up to MMT is scientifically worthless. Worse, with MMT the toxic combination of stupidity and corruption has reached a new quality and has unnoticed mutated into ordinary political fraud.#7
Since Keynes, macroeconomics is proto-scientific garbage but Nick Rowe and his Trump University colleagues have not realized it.#8
#1 The profit theory is false since Adam Smith
#2 “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008)
#3 “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” (Mirowski, 1986)
#4 I is never equal S and even Nick Rowe will eventually grasp it
#5 How Keynes got macro wrong and Allais got it right
#6 No accountant worth his salt adds wage income (= flow) and profit (= balance of the flows consumption expenditures and wage income) together. Only brain-dead economists do this. For more details about Flow-Balance Consistency see cross-references Accounting.
#7 Down with idiocy!
#8 Rethinking macro
Immediately preceding I is never equal S and even Nick Rowe will eventually grasp it. For details of the big picture see also cross-references MMT.
You say it depends, and this a not so smart answer from the handbook of lame excuses.#1 Science is about proof, so here is the unassailable proof of Nick Rowe’s incompetence.
1. PremisesThe elementary production-consumption economy is given by three macroeconomic 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 expenditures C is equal to price P times quantity bought/sold X.#2
2. Logical implicationsIn the elementary production-consumption 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. For a start, the market-clearing price as the dependent variable is given by P=C/X=W/R.
• In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative. The market-clearing price P is less than W/R.
• In case (iii) monetary saving Sm is negative and the business sector makes a profit, i.e. Qm is positive.
It always holds Qm≡−Sm, in other words, the business sector’s loss is equal to the household sector’s saving. In still other words, saving is NOT equal to investment (because there is NO investment in the elementary production-consumption economy) but saving is equal to loss. There is NO such thing as an IS-curve but there is an SL-line = Saving/Loss-line which runs with minus 45 degrees through the origin.#3
3. ConclusionSimple algebra tells everybody that saving is NEVER equal to investment and that, by consequence, there is NO such thing as an IS-curve. All IS-LM models are a priori false. Nick Rowe’s model is wackadoodle.
4. GeneralizationThe axiomatically correct Profit Law says for the general case Qm≡Yd+I−Sm+(G−T)+(X−M). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving, G government expenditures, T taxes, X exports, M imports. Again, there is NO such thing as an equality/identity/equilibrium of investment and saving. Both variables are entirely independent.#4
#1 Failed economics: The losers’ long list of lame excuses
#2 For more details see Economics for Economists
#3 See on Wikimedia
#4 For details of the big picture see cross-references Refutation of I=S
You say “MMTers *insist* in the I=S identity.”
The MMT balances equation reads (I−S)+(G−T)+(X−M)=0. This boils down to I=S if the government balance and the foreign trade balance is set to zero. The MMT balances equation is provably false.#1
The axiomatically correct balances equation reads (I−S)+(G−T)+(X−M)−(Qm−Yd)=0. The correct equation contains profit Qm and distributed profit Yd while these pivotal economic magnitudes are MISSING in the MMT equation.
Conclusion: Keynes’ I=S was false because Keynes NEVER understood what profit is which is the defining mental defect of the representative economist. The Post Keynesians realized nothing.#2 The MMTers, too, realized nothing and built their whole approach upon the false macroeconomic balances equation. Because of this, the whole analytical superstructure of MMT is proto-scientific garbage. MMT policy lacks sound scientific foundations and is nothing more than ordinary political fraud.
Reply to Economuse
You say “Qre=I−S arises because of EKH’s narrow definition of income. Change the definition to the usually accepted definition and the usual Keynesian identity reappears. This is easily demonstrated.”
Yes, indeed. The point is, though, that what you call “narrow definition of income” is the correct definition and what you call the “usually accepted definition” is provably false. Here is the proof.
(i) Qm≡−Sm in the elementary production-consumption economy,
(ii) Qm≡I−Sm in the elementary investment economy,
(iii) Qm≡Yd+I−Sm in the investment economy with profit distribution.
Let us now take equation (ii) and play the Humpty Dumpty shell game.
We introduce a new definition by saying that profit may be called “saving of the business sector” and that this “saving” can be added up with saving of the household sector to “total saving” Σ thus
(a) Σ≡Qm+Sm and now (ii) is rewritten
(b) Qm+Sm=I and then, hey presto,
(c) Σ≡I that is, “total saving” is “by definition” identical to investment or in the usual sloppy parlance saving equals investment.
Let us call this the Humpty Dumpty Fallacy. It is at the bottom of all IS-LM models. Note that “total saving” Σ is different from household sector saving Sm and that this crucial difference simply gets lost in the brain-dead slogan “saving equals investment”.
The methodological blunder consists of the introduction of the redundant definition (a).
The parallel blunder consists of the introduction of the redundant definition of “total income” as the sum of wage income and profits, i.e. Ψ≡Yw+Qm. Note in particular that here a flow Yw and a difference of flows Qm is added together which is a plain Flow-Balance Inconsistency.#3 The 1st macroeconomic axiom says household sector income Y is the sum of wage income (= flow) and distributed profit income (= flow), i.e. Y=Yw+Yd.
Needless to emphasize that economists never feel any irritations about logical inconsistencies, just the opposite, this is the air that they breathe from their student days to the grave. And this is why economics is a failed science.
Conclusion: All of economics is proto-scientific garbage because the foundational concepts of profit and income are ill-defined since Adam Smith.
#1 For the full-spectrum refutation of MMT see cross-references MMT.
#2 Why Post Keynesianism Is Not Yet a Science
#3 A tale of three accountants
REPLY to Henry Rech on Jan 27 and Blog-Reference MNE
You say “EKH defines household income: Household Income = Wage Income + Distributed Firm Profits => Y=Yw+Yd. However, conventional Keynesian macro defines total economy income: Total Eco. Income = Wages Income + Dist Firm Profs + Retained Firm Profs.” Then you rearrange the equations and conclude: “That is, removing the definitional impediments EKH imposes, EKH’s equations reduce to the Keynesian relationship of equality between investment and savings.”
In fact, I have proven this:
(i) Loss/profit is equal to saving/dissaving in the elementary case of a production-consumption economy, i.e. Qm≡−Sm (1), and equal to the difference between investment and saving, i.e. Qm≡I−Sm (2), in the case of an investment economy without profit distribution. Conclusion: household sector saving is NEVER equal to business sector investment.
(ii) Keynes’ slogan saving-equals-investment is axiomatically false and is definitively refuted. By implication, the whole General Theory is refuted.
(iii) It is, however, quite easy to regress to Keynes’ false formula by introducing redundant definitions. So, by introducing the definition of “total saving” Σ, thus that Σ≡Qm+Sm, equation (2) turns to Σ≡I that is, “total saving” is “by definition” identical to investment. This, of course, is a methodologically inadmissible semantic shell game.
(iv) The same shell game is performed with the introduction of the redundant definition of “total income” as the sum of wage income and profits, i.e. Ψ≡Yw+Qm. This definition is methodologically inadmissible because a flow Yw and a difference of flows Qm are added together which is a Flow-Balance Inconsistency (which is just as bad as a stock-flow inconsistency).
So, yes, Keynes’ slogan saving-equals-investment can at any time be reestablished by applying the Humpty Dumpty Fallacy. The students of economics simply swallow and parrot every crap as the history of economic thought shows.#1 History shows also that heterodox profit theory has not been one iota better and falls flat as an alternative.#2
In order to end the 200+ years old predominance of utter incompetence in economics, it is necessary to get rid of the whole bunch of blatherers, shell-game artists, morons, and agenda pushers. Those who still parrot saving-equals-investment and those who present I=S/IS-LM models on their blogs or in the New York Times and those who peer-review and publish this proto-scientific garbage have to go first.
#1 For details of the big picture see cross-references Refutation of I=S
#2 Heterodoxy, too, is proto-scientific garbage
I said “Conclusion: household sector saving is NEVER equal to business sector investment.”
You say: “OK, however, the Keynesian formulation specifies total investment, not just household investment.”
Keynes said “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.”
There is NO such thing as household investment. The household sector either saves (consumption is less than income) or dissaves (consumption is greater than income) in the elementary cases under discussion and NOTHING else.
"Keynes always believed that ‘a little clear thinking’ or ’more lucidity’ could solve almost any problem." (Moggridge, 1976, p. 39)
Immediately following Cryptoeconomics ― the best of Nick Rowe’s spam folder.
Immediately preceding I is never equal S and even Nick Rowe will eventually grasp it.