Why economists don’t know what profit is

Comment on Steve Roth on ‘Why Economists Don’t Know How to Think about Wealth (or Profits)’

Blog-Reference and Blog-Reference

The short answer is because economists are scientifically incompetent. The profit theory is false since Adam Smith or, as the Palgrave Dictionary puts it, “A satisfactory theory of profits is still elusive.” (Desai, 2008)#1, #2 In fact, Walrasians, Keynesians, Marxians, Austrians, and Pluralists have NO idea of profit ― the foundational concept of their subject matter.

Both Orthodoxy and Heterodoxy lack material/formal consistency. From the viewpoint of science, economics is a failure, from the viewpoint of the general public, economics is a fraud.

In order to establish material consistency, one needs measurement and one of the most important measurement tools of economics is National Accounting. The importance of National Accounting for testing of economic models is comparable to CERN for testing in physics. MMTers got the point in principle (albeit not in practice#3), yet in general, it holds that economists neither understand the significance nor the elementary mathematics of National Accounting.

Economic theory and accounting are like hand and glove. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in theory and accounting. It is the worst mistake to play accounting against theory/model. At a deeper level, they have a common conceptual/formal core, i.e. the axioms of economics.

Because the nominal magnitudes of accounting are a subset of a comprehensive theory which is composed of nominal and real variables, the concepts have to be consistently defined in theory and then applied one-to-one in National Accounting.#4 Theory has to take the lead.#5

It holds: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) The fact is that Walrasian microfoundations and Keynesian/MMT macrofoundations are axiomatically false. This is why economics is a failed science.

Steve Roth names two big discrepancies between theory and National Accounting, i.e. ‘The Paradox of Monetary Profits’#6 and ‘Saving and Investment’.#7 These discrepancies can only be resolved by a Paradigm Shift, that is, by a move from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations.#8

Steve Roth concludes: “To quote David Glasner, ‘as much as macroeconomics may require microfoundations, microeconomics requires macrofoundations.’ … Those foundations are the technical economic terms used — because words are what we use to think together — and the mutually coherent and interrelated accounting identities that define those terms. Absent those definitions, economists quite literally don’t know what they’re talking about.” In brief: If it isn’t macro-axiomatized, it isn’t economics.#9

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith
#2 How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#3 Rectification of MMT macro accounting
#4 True macrofoundations: the reset of economics
#5 A tale of three accountants
#6 For more details of the big picture see cross-references Profit.
#7 For details of the big picture see cross-references Refutation I=S.
#8 Keynesians ― terminally stupid or worse?
#9 For details of the big picture see cross-references Paradigm Shift.

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Wikimedia AXEC121g

Economic methodology for the little guy

Comment on Lars Syll on ‘Methodological arrogance’

Blog-Reference and Blog-Reference

It is a fact that the little man has an ego problem. Worse, this psychological disadvantage is exploited in all kinds of discussions. To position oneself as the humble friend of the people and to call the opponent an arrogant elitist is a sure way to win standing ovations in every sitcom, no matter what the issue is.

These age-old rhetorical maneuvers, though, are entirely misplaced in a discussion about the methodology of economics. David Glasner disqualifies himself with this argument: “So what do I mean by methodological arrogance? I mean an attitude that invokes micro-foundations as a methodological principle — philosophical reductionism in Popper’s terminology — while dismissing non-microfounded macromodels as unscientific.” Note that the introduction of the psychological notion of arrogance adds nothing of relevance but merely emotionally distracts from the point at issue.

The point at issue is whether Walrasian microfoundations or Keynesian macrofoundations are the correct starting point of economic analysis. And the short and simple answer is, without humbleness or arrogance, that BOTH are unacceptable proto-scientific garbage.

Microfoundations are given with these verbalized Walrasian axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

From these premises follows supply-demand-equilibrium and all the rest of microeconomics.

Obviously, the Walrasian axiom set contains three NONENTITIES: (i) constrained optimization HC2, (ii) rational expectations HC4, (iii) equilibrium HC5. Every theory/model that contains a NONENTITY is a priory false. Consequently, the economics from Jevons/Walras/Menger to DSGE/RBC is false.

Keynes has to be credited for realizing that Orthodoxy was false at its core and that nothing less than a Paradigm Shift was needed.

The Keynesian Revolution, though, failed because Keynes messed up the move from microfoundations to macrofoundations. Keynes’ own methodological blunder can be exactly located in the General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This syllogism is conceptually and logically 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.)

Because profit and income are ill-defined, the whole theoretical superstructure of Keynesianism is false. It was Allais who identified and rectified Keynes’s lethal foundational blunder. #1 After-Keynesians have not noticed anything to this very day.

What the team Glasner/Syll has not realized is that BOTH Walrasian microfoundations and Keynesian macrofoundations have to be buried. The former is dead for 150+ years, the latter for 80+ years.

As a consequence, there is only ONE worthwhile task in today’s economics: the Paradigm Shift from false microfoundations and false macrofoundations to the true macrofoundations.#2 It holds: If it isn’t macro-axiomatized, it isn’t economics.

Do not expect this urgent Paradigm Shift from the self-declared champions of the little guy, long-standing proto-scientific blatherers, and cargo cult scientists David Glasner and Lars Syll.

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right
#2 First Lecture in New Economic Thinking

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AXEC121i

Hunting down the economics body snatchers

Comment on Jason Smith on ‘Solow has science backward’

Blog-Reference

The story: In economics, a group of people discovers that scientists have been replaced one by one with political clones devoid of Feynman Integrity. These economists must escape or suffer the same fate. But who can be trusted and who has already been snatched?#1

There are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes;#2 in theoretical economics the scientific standards of material and formal consistency are observed.

Theoretical economics (= science) has been body-snatched/hijacked/captured by political economists (= agenda pushers). For the general public, science clones are virtually indistinguishable from scientists: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”#3

There is, though, a reliable method to identify economics body snatchers on the Internet: refute their arguments logically or empirically and see what happens.

A scientist is committed to the scientific method: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

A scientist accepts refutation. However, as already Morgenstern realized, this is NOT what can be observed in economics: “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.”

The science clone in the Internet age is not bothered much with a refutation but sees to it that it vanishes as fast as possible from his blog or makes sure that it is blocked from the outset.

Jason Smith, of course, is only one of many easily identifiable blog manipulators.#4 What makes him an especially repugnant body snatcher is that he constantly invokes Feynman Integrity.

Egmont Kakarot-Handtke


#1 Adapted from IMDb Invasion of the Body Snatchers
#2 "Paul Feyerabend argued that no description of scientific method could possibly be broad enough to include all the approaches and methods used by scientists, and that there are no useful and exception-free methodological rules governing the progress of science. He argued that 'the only principle that does not inhibit progress is: anything goes'." (Wikipedia) 'Anything goes' holds only in the context of discovery but NOT in the context of justification. Methodology, though, is NOT AT ALL about the context of discovery, it is not prescriptive about how to find the true theory. In the context of justification, nothing but proof (material/formal consistency) counts.
#3 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#4

• Economics: math-adorned incoherent blather
• Feynman Integrity, fake science, and the econblogosphere
• True macrofoundations: the reset of economics
• Macro imbeciles
• IS-LM ― a crash course for EconoPhysicists
• What genuine scientists believe about economics
• Hayek and other informationally retarded proto-economists
• Economics between cargo cult, farce, and fraud
• The key to macro and Keen’s debt-employment model

Related 'Robert Solow and Lars Syll, fake scientists' and 'MMT, fake science' and 'Keynesians ― terminally stupid or worse?' and 'Karl Marx, fake scientist' and 'Barkley Rosser, fake scientist' and 'In search of new economists' and 'The five pathetic blunders of Roger Farmer' and 'Milton Friedman, fake scientist' and 'Forget Hayek' and 'The myth of economics knowledge' and 'Friedman and the cluelessness of fake scientists' and 'The father of modern economics and his imbecile kids' and 'Economic methodology for the little guy' and 'Your economics is refuted on all counts: here is the real thing'.

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LINK at Brian Romanchuk — Book Review: A Random Physicist Takes On Economics

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AXEC108l

The death of Keynesianism

Comment on Lars Syll on ‘What is wrong with economic theory’

Blog-Reference

Eighty years ago, Keynes got macro wrong and Keynesians did not notice it to this very day. Yet, anti-Keynesians did not understand it either. This is how they tell the story.

“The main development I want to discuss has already occurred: Keynesian economics is dead [maybe ‘disappeared’ is a better term]. I don’t know exactly when this happened but it is true today and it wasn’t true two years ago. This is a sociological not an economic observation, so the evidence for it is sociological. For example, you cannot find a good, under 40 economist who identifies himself and his work as ‘Keynesian’. Indeed, people even take offense if referred to in this way. At research seminars, people don’t take Keynesian theorizing seriously any more — the audience starts to whisper and giggle to one another. Leading journals aren’t getting Keynesian papers submitted any more.” Robert E. Lucas, ‘The Death of Keynesian Economics’, in Issues and Ideas (Winter 1980).

There is no better proof of the abysmal scientific incompetence of economists in general and of Robert Lucas in particular than this narrative.

Keynes has to be credited for realizing that the economics of Jevons/Walras/Menger/ Marshall was false at its core and that nothing less than a paradigm shift was needed: “The [neo-]classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight ― as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.”

Primary Methodological Directive: Every economist who does not see the necessity of a Paradigm Shift is a moron. Robert Lucas is a moron because he never realized (i) that Walrasianism has already been dead in the cradle, and (ii), that Keynes was right on this point.

The Keynesian Revolution failed because Keynes messed up the move from microfoundations to macrofoundations.#2 Keynes’ own methodological blunder can be exactly located in the General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This syllogism is conceptually and logically defective because Keynes did not come 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.)

Because profit and income are ill-defined the whole theoretical superstructure of Keynesianism is false. It was Allais who identified and rectified Keynes’ lethal foundational blunder.#3 Lucas, to his everlasting scientific shame, identified and rectified NOTHING.

Both, the pro-Keynesians and the anti-Keynesians have to this very day NO idea of the fundamental concepts of economics, viz. profit and income. Fact is, the profit theory is false since Adam Smith. Walrasianism, Keynesianism, Marxianism, Austrianism, and Pluralism are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong.

Economics is dead and it has been killed by the mixed but unbroken phalanx of proto-scientific blatherers.#4 There is nothing to choose between Orthodoxy and Heterodoxy. When economists open their mouths in the scientific community the audience does not giggle but is sickened by the all-pervading stupidity.

What is wrong with economics? Economists, of course!

Egmont Kakarot-Handtke


#1 Wikiquote
#2 Keynes’ message for contemporaries
#3 How Keynes got macro wrong and Allais got it right
#4 Economics: 200+ years of scientific incompetence and fraud

Related 'Keynesians ― terminally stupid or worse?' and 'You are fired!' and 'A bitter pill for political economists' and 'The Logical Interface Between Objective Macrofoundations and Subjective Valuations'.

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Wikimedia AXEC138

Scientists do NOT predict the future (III)

Comment on Adam Shaw/theguardian on ‘Why economic forecasting has always been a flawed science’

Blog-Reference and Blog-Reference on Sep 22

A theory cannot be dismissed because it cannot predict the future. Therefore, as a matter of principle, economics from Jevons/Walras/Menger to DSGE cannot be dismissed because it has not predicted crises. Neoclassical, as well as Keynesian economics, is unacceptable because it is logically and empirically inconsistent. In more colloquial terms, all models that have been built and are still being built upon the maximization-and-equilibrium axioms have to be rejected as scientific garbage and NOT for any other reason. #1 The same holds for Keynesian macro models.

Who, in all history, has been preoccupied with prediction? Mainly two groups, (i) prophets, priests, doomsters, apocalyptics, fear mongers, gurus, utopians, astrologers, Pythia and other oracles, rise-and-fall historians/sociologists, politicians, and (ii) people who want to make a killing in the casino of Monte Carlo or on the stock market.

No scientist is occupied with the prediction of historical events because it is long known that “The future is unpredictable.” (Feynman)

The point is that scientists use the word prediction in a quite different sense from everyday usage. For example, Einstein deduced gravitational waves from his theory in 1916, and in our days, 100 years later, they are observed. Only in the very specific sense of ‘testable hypothesis’, scientists make ‘predictions’.

All this is well-known among methodologists: “We are very far from being able to predict, even in physics, the precise results of a concrete situation, such as a thunderstorm, or a fire.” (Popper)

So Arrow’s argument that long-run weather forecasts are pointless is not a great revelation but additional proof that economists never understood what science is all about. And just because of this, economics has never been anything else than a cargo cult science. This, too, is well known: “Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower)

In the sense of a self-description, the Keynesian “we simply do not know” applies to economists for more than 200 years. That economists are incompetent scientists, that much we know for sure — and it holds with absolute certainty for both orthodox and heterodox economists. #2, #3

So we can predict that nothing of real scientific value will ever come from these folks, in perfect analogy to the prediction of physics that pigs will never fly. #4 The problem of economics is NOT failed predictions, but that it is a failed science.

Only charlatans predict the future, and only morons take them seriously.

Egmont Kakarot-Handtke


#1 First Lecture in New Economic Thinking
#2 What is dead certain in an uncertain world: economists’ abysmal incompetence
#3 Fact of life: your econ prof is scientifically incompetent
#4 The Law of Economists’ Increasing Stupidity

Related 'Prediction does not work? Try retrodiction first' and 'Scientists do not predict' and 'Prediction/Forecasting' and 'The brouhaha about prediction: which Feynman is right?'

Rectification of MMT macro accounting

Comment on Peter Cooper on ‘Short & Simple 19 ― Sectoral Balances in a Closed, Demand-Determined Economy’

Blog-Reference

MMTers and other incompetent economists apply this sectoral balances equation (S−I)+(T−G)=0, which says that the non-government sector’s surplus, i.e., S−I greater zero, is equal to the government sector’s budget deficit G−T, respectively, that the non-government sector’s deficit, i.e., I−S greater zero, is equal to the government sector’s budget surplus T−G. This sectoral balances equation is used to demonstrate that a government deficit is advantageous for the non-government sector.

The MMT sectoral balances equation violates the rules of accounting. #1 What should be self-evident is that macroeconomic profit is entirely missing.

In the following, the correct relationships are derived by successively increasing the complexity. The pure production-consumption economy is the most elementary economic configuration and therefore the point to start from.

(i) Elementary production-consumption economy, #2 two sectors, balances

Qm≡C−Yw     profit/loss Qm is the household sector’s spending C minus wages Yw,
Sm≡Yw−C     saving/dissaving Sm is wage income Yw minus expenditures C,
--------------------------
Qm≡−Sm.

It always holds for the balances Qm≡−Sm or Qm+Sm=0, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit=loss (surplus=profit) equals the household sector’s surplus=saving (deficit=dissaving). Loss is the counterpart of saving, and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law.

(ii) Production-consumption economy with government sector GS, three sectors, balances

Qm≡C+G−Yw     profit Qm is HS and GS spending C+G minus wages Yw,
Sm≡(Yw−T)−C    saving Sm is net income (Yw–T) minus expenditures C,
Bm≡T−G            budget surplus/deficit Bm is taxes T minus government expenditures G,
------------------------------------
Qm≡−Sm+(G−T).

The business sector’s profit is equal to the household sector’s dissaving and the government sector’s budget deficit. Or, given the household sector’s saving/dissaving the business sector’s profit is equal to the government sector’s deficit. In a neat formula, Public Deficit = Private Profit.

(iii) Investment economy, two sectors with business sector differentiated, balances

Qmc≡C−Ywc         profit of the consumption good industry is spending C minus wages Ywc,
Qmi≡I−Ywi            profit of investment good industry is investment minus wages Ywi,
Sm≡(Ywc+Ywi)−C  saving/dissaving Sm is wage income minus expenditures C,
Äc≡−I                   change of the asset side of the consumption sector’s balance sheet
------------------------
Qmc+Qmi+Sm+Äc=0
Qm≡Qmc+Qmi
Qm≡I−Sm.

The business sector’s profit/loss is equal to the difference between the business sector’s investment expenditures and the household sector’s saving/dissaving.

(iv) Investment economy with government sector, three sectors with business sector differentiated, balances

Qmc≡C+G−Ywc          profit of CGI is HS and GS spending C+G minus wages Ywc,
Qmi≡I−Ywi                profit of IGI is investment expenditures minus wages Ywi,
Sm≡(Ywc+Ywi−T)−C   saving Sm is net wage income minus expenditures C,
Bm≡T−G                    budget surplus Bm is taxes T minus government expenditures G,
Äc≡−I                        change of the asset side of the consumption sector’s balance sheet,
-----------------------------
Qmc+Qmi+Sm+Bm+Äc=0
Qm≡Qmc+Qmi
Qm≡(I−Sm)+(G−T).

Given the difference between the business sector’s investment expenditures and the household sector’s saving/dissaving (I−Sm) the monetary profit of the business sector Qm is equal to the government sector’s deficit (G−T).

The original MMT balances equation (S−I)+(T−G)=0, rewritten as 0=(I−S)+(G−T), compares to the correct equation Qm≡(I−Sm)+(G−T). Formally, the original MMT balances equation covers a zero-profit economy. Overall monetary profit has NOT been zero in the last 200+ years and will NOT be zero in the future. What is MMT talking about?

When macroeconomic profit is factored into the balances equations according to the elementary mathematics that underlies double-entry accounting, then it becomes obvious that public and private deficit spending determines the overall profit of the business sector. More specifically, public deficits are always advantageous to the business sector. #3 Whether they also have a positive employment effect depends on the absence or presence of synchronous price increases. #4

Because the MMT sectoral balances equations are false, the whole analytical superstructure vaporizes, and therefore, MMT policy guidance has no sound scientific core. MMT is brain-dead soapbox economics, just like Walrasianism, Keynesianism, Marxianism, and Austrianism.

Egmont Kakarot-Handtke


#1 A tale of three accountants
#2 The elementary production-consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw), and two definitions (monetary profit Qm≡C–Yw, monetary saving Sm≡Yw–C). For details, see ‘How to restart economics’
#3 Keynesianism as ultimate profit machine and Who or what exactly did Keynes save?
#4 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster


Related 'MMT: NO sound scientific foundations'

Related 'Keynesians ― terminally stupid or worse?' and 'MMT and the magical profit disappearance' and 'MMT, fake science' and 'MMT ― the economics moron as problem solver' and 'MMT: The one deadly error/fraud of Warren Mosler'. For details of the big picture, see cross-references MMT.

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LINK at Bill Mitchell – billy blog on Sep 3

The MMT sectoral balances equations violate the rules of accounting. See ‘Rectification of MMT macro accounting’

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COMMENT on Short & Simple 20 on Sep 5

As Popper said, science proceeds by conjecture and refutation.

This does not happen in economics. Morgenstern reminded his fellow economists back in 1941: “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.”

Economics is a failed science because it does not get either conjecture or refutation right. This applies obviously to Peter Cooper.
• To begin with, he does not realize that the MMT balances equations are false since Keynes.
• When given the explicit mathematical refutation* he does understand it but presents the same analytical garbage in graphical form, “as if nothing had happened”.

For the record: Not only Walrasians, Keynesians, Marxians, and Austrians violate scientific standards on a daily basis, but MMTers, too.

* Rectification of MMT macro accounting

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ADDENDUM on Oct 2

The Wikipedia entry ‘Modern Monetary Theory’ states:

“Therefore, budget deficits add net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is widely represented in macroeconomic theory by the national income identity:

G−T=S−I−NX

where G is government spending, T is taxes, S is savings, I is investment, and NX is net exports.

The conclusion that MMT draws from this is that it is only possible for the non-government sector to accumulate a surplus if the government runs budget deficits. The non-government sector can be further split into foreign users of the currency and domestic users.”

Let us ignore foreign trade here, i.e., NX=0, and regroup the MMT equation, then one gets
0= (G−T)+(I−S). This compares to Qm=(G−T)+(I−Sm) above which is simplified to
Q≡(G−T)+(I−S).

The MMT balance equation applies only to a zero-profit economy, i.e., Q=0. This follows in detail from the rectification above. The point to notice is that Q is the balance of the business sector.

Because the fundamental balances equation in the Wikipedia entry is false, most of the content is worthless or even misleading.

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Compilation: Graphic AXEC143d Profit Law (with increasing complexity) and Balances Equation

MMT: NO sound scientific foundations

Comment on Peter Cooper on ‘Short & Simple 19 ― Sectoral Balances in a Closed, Demand-Determined Economy’

Blog-Reference and Blog-Reference

In economics, it is important to separate politics and science. While anybody can make a plausible and populistic economic policy proposal, the economist can NOT. What the economist says must be backed up by the true theory. The economist who lacks the true theory is at one level with the cranks that populate the political arena.

“A sure sign of a crisis is the prevalence of cranks. It is characteristic of a crisis in theory that cranks get a hearing from the public which orthodoxy is failing to satisfy. In the thirties, we had Major Douglas, and social credit — it can all be done with a fountain pen — and Warren and Pearson who convinced President Roosevelt that raising the dollar price of gold would raise the price of everything else and bring the slump to an end. The cranks are to be preferred to the orthodox because they see that there is a problem. Nowadays we have plenty of cranks taking up the problems that the economists overlook.” (Robinson)

Not much has changed since Joan Robinson. The only difference between the ordinary crank and the economist is that the latter has a diploma.

The policy MMT stands for is backed in the main by Keynesian macroeconomics. The thing about Keynesianism is that it is scientifically worthless since the General Theory, that is, provably false, that is, materially and formally inconsistent. The thing about MMTers is that they are mindlessly repeating Keynes’ awkward blunders.

Peter Cooper combines key Keynesian macro identities with particular behavioral assumptions to provide a theory of income determination. The behavioral equations add causation to the model. The starting point is given with the macro identity S+T=G+I.

When the government sector is taken out for a moment, i.e. G, T = 0, then the equation reduces to the formal core of the General Theory, i.e. to I=S. To recall: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)#1

All I=S/IS-LM models are false because Keynes’ premise “Income = value of output” is false.#2 Scientists know since Aristotle that if the premises are false the whole theoretical superstructure falls apart. Because only “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.”

Because Peter Cooper starts from a false premise, i.e. the macro identity S+T=G+I, there is no use at all to add causal equations and then to derive economic policy conclusions. The only sensible thing to do is to throw this rubbish without further ado into the wastebasket.

The proof has been given that Q_m≡−S_m in the elementary production-consumption economy and Q_m≡I−S_m in the investment economy. In plain text, the proof says that saving and investment are NEVER equal.#3 So, Keynesianism and, by implication, MMT is refuted on all counts.#4

Note that not only Peter Cooper’s model is refuted but ALL models that contain I=S back to Wicksell and even further.#5

Egmont Kakarot-Handtke


#1 Keynesians ― terminally stupid or worse?
#2 How Keynes got macro wrong and Allais got it right
#3 For more details see cross-references MMT
#4 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#5 Going beyond Wicksell, Keynes, and MMT

Immediately following Rectification of MMT macro accounting.

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Wikimedia AXEC157 Employment multiplier for the elementary investment economy