Economics is a failed science since Adam Smith and this has never been a secret among heads of state: “Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists if listened to, would suffice to reduce it to dust.” (Viner)
This is why economists are not really taken seriously but only employed as useful political idiots. The proof of the utter scientific incompetence of economists is given with the fact that profit theory is false since Adam Smith.#1, #2, #3
Keynes, of course, is no exception. He 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)
After-Keynesians have NOT spotted the blunder in Keynes’ elementary syllogism to this day. Asad Zaman is no exception: “As I read more and more about effective demand, I got more and more confused ― how can I explain this concept to my poor students, if I don’t understand it myself? There are a huge number of articles with different and conflicting views and interpretations of this concept, which Keynes describes as being central to his theory.”
That an abysmally confused confuser can get even more confused is a real surprise. But, after all, one should never underestimate the stupidity of Asad Zaman.#4
What Asad Zaman has not realized is that, according to well-established scientific standards, profit theory, Keynesian economics in ALL variants, and all I=S/IS-LM models are definitively refuted.#5, #6, #7
Here is the short proof:
The elementary production-consumption economy is given with 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.
In 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, 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, the business sector’s profit is equal to the household sector’s dissaving, and 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). There is NO such thing as an IS-curve or an equilibrium of I and S.
(1) Qm≡−Sm in the elementary production-consumption economy,
(2) Qm≡I−Sm in the elementary investment economy,
(3) Qm≡Yd+I−Sm in the investment economy with profit distribution.
(4) Qm≡Yd+I−Sm+(G−T)+(X−M) in the general case with government and foreign trade.
Elementary algebra tells everyone that saving is never equal to investment. Both Orthodox and Heterodox economists are too stupid for the elementary algebra that underlies macroeconomic accounting. Both Orthodox and Heterodox economists have to be expelled from the sciences.#8 This applies in particular to Asad Zaman before he can do even more damage to the brains of his poor students.
#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 Refutation of Asad Zaman’s heterodox methodology: all arguments you ever need
#5 I is never equal S and even Nick Rowe will eventually grasp it
#6 Keynesians ― terminally stupid or worse?
#7 For details of the big picture see cross-references Refutation of I=S
#8 The inexorable paradigm shift in economics
Related 'Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It' and 'The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment' and 'How the Intelligent Non-Economist Can Refute Every Economist Hands Down' and 'Debunking Squared' and 'Economists: political trolls since 200+ years' and 'Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn' and 'Essentials of Constructive Heterodoxy: Aggregate Demand'. For the new Paradigm see cross-references Constructive Heterodoxy.