April 7, 2019

From Keynes’ fatal blunder to the true economic model

Comment on Merijn Knibbe on ‘What’s in a model … (an economic one, that is)’


Merijn Knibbe refers to a post of Noah Smith: “This time he however stated: ‘accounting is not a model of the economy’. Which is wrong. The national accounts are a model of the economy. And economists have to learn it is. The way the entities are conceptually defined matters as this also defines the monetary relations we see.”

Under the heading Formal Models vs. Guru-Based Theories Noah Smith demanded: “These days, most economic theories are collections of mathematical models. If you want to know what the theory says, you can parse out the models and see for yourself. You don’t have to go ask Mike Woodford what New Keynesian theory says. You don’t have to go ask Ed Prescott what RBC theory says. You can go read a New Keynesian model or a Real Business Cycle model and figure it out on your own. MMT is different. There are many wordy explainers and videos that will explain some of the concepts behind MMT, or tell you some of MMT’s policy recommendations. But that’s different than having a formal model of the economy.”#1

The problem with economics is this: microfoundations are false and because of this, ALL microeconomic models are false. Supply-demand-equilibrium is proto-scientific garbage. However, macrofoundations are also false and because of this, ALL macroeconomic models are false since Keynes. Proofs have been given elsewhere.#2

The question of correct macrofoundations is closely related to macroeconomic accounting. Merijn Knibbe is spot on: “National accounts do use a model of the economy, the accounting identities are based on the fundamental social properties of money and monetary transactions but for the way we measure them a conceptual model is key.”

The problem with both orthodox and heterodox economists is that they are too stupid for the elementary mathematics that underlies macroeconomic accounting.#3, #4, #5

From the overall failure of economics follows that a new theory has to be macrofounded but not Keynesian because Keynes messed things up. What is required is the Paradigm Shift from false microfoundations and false Keynesian macrofoundations to true macrofoundations.

From true macrofoundations follows the macroeconomic Profit Law as Q≡Yd+(I−S)+(G−T)+(X−M). The Profit Law, in turn, yields the correct macroeconomic sectoral balances equation (I−S)+(G−T)+(X−M)−(Q−Yd)=0 which compares to the false Keynesian/Post-Keynesian/MMT equation (I−S)+(G−T)+(X−M)=0. The equations are testable with the precision of two decimal places. Exactly here, macroeconomic accounting is needed in order to settle matters empirically.

Because neither orthodox nor heterodox economists got the foundational concepts, the elementary math, and the basic accounting identities right, ALL macroeconomic models are provably false from Keynes onward to this day.#6

Egmont Kakarot-Handtke

#1 Noah Smith Examining an MMT model in detail
#2 The miracle cure of economists’ micro-macro schizo
#3 Wikipedia and the promotion of economists’ idiotism (II)
#4 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#5 For details of the big picture see cross-references Accounting
#6 The canonical macroeconomic model