Humpty Dumpty is back again

Comment on Henry/David Glasner on ‘Keynes on the Theory of Interest’

Blog-Reference

“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, 1994, p. 31)

So, science is about formal and material consistency. Economists fail on both counts since Adam Smith and for this reason, economics is not a science. It is as simple as that.

What has the outer appearance of science is, in fact, a proto-science to this very day. This includes Orthodoxy and Heterodoxy and Keynesianism in particular. With regard to consistency, Keynesians have conveniently defined their own methodological rules: “For Keynes as for Post Keynesians, the guiding motto is ‘it is better to be roughly right than precisely wrong!’” (Davidson, 1984, p. 574)

With regard to definitions, the representative economist easily takes sides with Humpty Dumpty: "‘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’.” (Carroll Through the Looking-Glass)

That is not how science works. The freedom or arbitrariness of definition is a methodological illusion. It applies only to the first definition. Subsequently, one has to make sure that every new definition is consistent with the preceding ones. Overall consistency cannot be achieved in the economist's cavalier fashion: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen, 2009, p. 344)

Keynes got the fundamental concepts of income and profit wrong. The formal core of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

This is rather elementary mathematics and it should not be too hard to get it right. Actually, Keynes got it wrong; and neither Keynesians, nor Post-Keynesians, nor New Keynesians, nor the Anti-Keynesians ever spotted the logical blunder.

The axiomatically correct relationship is given on Wikimedia AXEC143d. It says: the business sector's monetary profit Q_m is equal to distributed profit Y_d plus investment expenditure I minus the household sector's monetary saving S_m (2014, Sec. 3). Alternatively: The business sector's retained profit Q_m−Y_d is equal to the difference between investment and saving. In short, household sector saving is NEVER equal to business sector investment, that is, all I=S models including IS-LM are provably false. And this, in turn, means that all theories of interest which are predicated on the equalization/equilibrium of investment and saving are false. All attempts to filibuster this fact away are self-defeating.

It is pretty obvious that Henry goes straight off into a parallel universe with what Keynes rightly condemned as ‘method of blind manipulation’ (1973, p. 297).

As mentioned above, there is no such thing as freedom or arbitrariness of definition. This freedom is restricted by the requirement of consistency. The fault in Henry's argument lies in the redundant on-top definitions of total income and total saving S_t which actually yield I=S_t. What Henry does not notice is that S_t is different from S, so the intended proof of I=S fails. This has already been demonstrated in Section 17 of Keynes’ Missing Axioms.

There is no hope that the Keynesian Humpty Dumpties will ever understand what formal consistency is all about. After all, they did not get it in the last 80+ years.

Egmont Kakarot-Handtke


References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, Vol. 1. Norderstedt: Books on Demand BoD, 2nd edition. URL

Immediately preceding Accounting basics.

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ICYMI (comment on FedUp of Nov 1 on Nov 2)

Imagine that, starting at zero, the national accountant records every single transaction between the business sector and the household sector in the investment economy. At any arbitrary point in time, he may close the books and draw the balances. What the balances show is with mathematical certainty Q≡Y_d+I−S. Let us simplify matters with Y_d=0, then the accountant ends up with Q≡I−S. Accounting is the natural measurement instrument in economics and the underlying math is indeed elementary. The sad fact is that the representative economist does not even understand the principles of accounting.

With closing the books and arriving at Q equals I−S the accountant’s job is done. Like a physicist, he has taken a correct measurement with the precision of two decimal places. Every time he makes his measurement, i.e. entirely independent of the period length, he verifies the formula.

Enters the representative economist in his full smartness and says. Let’s play with the symbols and make a new definition, that is, let total saving Σ be the sum of household sector saving S and profit Q which we rename as business sector's saving, so Σ≡S+Q. Note in passing that renaming profit as saving is semantic idiotism, hence the concept of total saving is a NONENTITY.

But now, look what we get: I≡Σ, i.e. total saving is invariably equal to investment. Yes, but look carefully, this is different from I=S. What this formal shell game amounts to is a substitution of Σ and S and an unnoticed verbal equalization of saving and "total saving".

Every accountant who carries out the economist’s redundant add-on book entry is either fired for incompetency or jailed for cooking the books.

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ICYMI comment on JKH of Nov 2

In Keynes' derivation of I=S neither profit nor retained profit appears (Keynes, 1973, p. 63).

Now, you assert “Saving by firms amounts to their retained profit.” This add-on definition is nowhere to be found in the General Theory. The simple reason is that Keynes never understood what profit is: “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 and Bezemer, 2010, pp. 12-13, 16)

Because Keynes never came clear with either profit, distributed profit, or retained profit — not to speak of those who came after him — one will not find a correct definition of these concepts in all of Keynesianism. Yet, one can find the consistent definitions in Allais or in my paper Keynes' Missing Axioms.

The final result of correct accounting is invariably Q_re≡I−S. Your definitions are (i) a superfluous add-on (ii) formally illegitimate (iii) a semantic shell game that proves, if anything, a complete lack of understanding of the mechanisms of profit generation and distribution.

Keynesianism has been formally deficient from the very beginning. Because the multiplier and IS-LM rely on Keynes' profitless I=S all Keynesian policy advice has been nothing more to this very day than reading tea leaves and telling the silly ex-ante/ex-post story. Monetary policy that relies on the familiar interest mechanism has no theoretically sound foundation.

The equality/equilibrium of saving and investment has been academically declared dead with Allais’ publication of 1993. In the history of science, I=S will forever stand out as a monument of utter scientific incompetence.


References
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

Immediately following Down and out

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Wikimedia AXEC129d The Humpty Dumpty Fallacy "Income"

Wikimedia AXEC128b The Humpty Dumpty Fallacy "Saving"

Economics as fool’s paradise

Comment on Ken Zimmerman on ‘Clarence Ayres on the economic concept of capital’

Blog-Reference

Ken Zimmerman says: “The confusion and uncertainty is inherent in the social sciences, including economics.” Here you have in a nutshell the triple self-deception of Heterodoxy which neatly explains its own failure.

(i) I said: “The confusion starts already with the elementary concepts of income and profit.” This, clearly, has nothing to do with the distinction between social and natural sciences but only with logical consistency which applies to all sciences. Now, the fact of the matter is, that four heterodox economists apply four different definitions of income/profit.#1 Elementary logic tells one that not all four can be true (in fact all four are provably false#2). This conceptual confusion is indefensible. Heterodoxy, as it stands now, is outside of science just like Orthodoxy. The utter foolishness of Heterodoxy consists of idealizing its own unresolved contradictions as pluralism. Pluralism is a political concept that relates to opinions. In science, there can be no pluralism of false theories.

(ii) But things are far worse. When the representative economist is criticized for his gross conceptual blunders he defends them like a feudal prerogative. Both orthodox and heterodox economists subscribe to the Humpty Dumpty methodology "‘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’.” (Carroll, Through the Looking-Glass).#3 The utter foolishness of Heterodoxy consists of idealizing arbitrariness and sloppiness as superior methodology and praising Keynes and the Cambridge School of Loose Verbal Reasoning as a role model.#4

(iii) The worst self-deception of Heterodoxy, though, is not to realize that economics, to begin with, is not a science of behavior (Hudík, 2011). Economics is NOT a social science like psychology/sociology and NOT a natural science like physics but a systems science.#4 The foolishness of Heterodoxy consists of sharing with Orthodoxy the fundamental error that economics is primarily about individual/social behavior. The not-so-new news is that the so-called social sciences are not sciences at all but what Feynman famously called cargo cult sciences because “By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can't be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman, 1992, p. 159)

Science, to recall, is about knowledge. Waffling about things that cannot be known is left to sitcoms.

As you correctly observe ‘confusion and uncertainty is inherent in the social sciences’. The fact of the matter is that Heterodoxy has not found in the last 100 years — roughly since Veblen — the way out of the fool’s paradise ‘where it is possible to get either result’ or, as Keynes aptly put it, where ‘nothing is clear and everything is possible’ (1973, p. 292). On the contrary, it is pretty obvious that most orthodox and heterodox economists feel well at home there.

Heterodoxy, though, has one valid point: there is no good reason at all why orthodox fools should occupy more space in academia than heterodox fools.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

#1 Heterodoxy, too, is proto-scientific garbage
#2 How the intelligent non-economist can refute every economist hands down
#3 The Humpty Dumpty methodology
#4 Sloppiness as economic methodology
#5 Still on the wrong track

Related 'Conceptual blunder' and 'The future of economics: why you will probably not be admitted to it, and why this is a good thing' and 'Are economists natural born scientific failures?'.

The Humpty Dumpty methodology

Comment on Nick Rowe on ‘On defining "recession"’

Blog-Reference

With regard to definitions, the representative economist easily takes sides with Humpty Dumpty. "’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’.” (Carroll, Through the Looking-Glass)

That is NOT how science works. The freedom or arbitrariness of definition is a methodological illusion. It applies only to the first definition. Subsequently, one has to make sure that every new definition is consistent with the preceding ones. Overall consistency cannot be achieved in the economist's cavalier fashion: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen, 2009, p. 344)

The fact of the matter is that economists got the fundamental concepts of income and profit wrong. Keynes is a case in point. The formal core of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, p. 63)

This is rather elementary mathematics and it should not be too hard to get it right. Actually, the fault in Keynes' two-liner is in the false premise income = value of output. This equality holds only in the limiting case of zero profit in both the consumption and investment goods industry. Profit does not appear in Keynes' elementary formalism. That is, he in effect talks about capitalism without profit. The simple reason for this analytical blunder is that Keynes NEVER got the profit theory right. This sad fate is shared by the representative economist (2014) — among many others by Nick Rowe.

The axiomatically correct relationship is given with the 2-sector Profit Law Q_m≡Y_d+I−S_m.

It says that the business sector's monetary profit Q_m is equal to distributed profit Y_d plus investment expenditure I minus the household sector's monetary saving S_m (2014, Sec. 3). Alternatively: The business sector's retained profit Q_m−Y_d is equal to the difference between investment and saving.

In short, household sector saving is never equal to business sector investment, that is, all I=S models including IS-LM are false.#1

From this follows in turn that Nick Rowe's blog post of 2011#2 is logically defective as well as the recent posts on the Origin of Specious blog.#3

The problem here, as everywhere in economics, is the false definition of profit which in turn leads to a false definition of income which in turn leads to a false definition of saving. All mistakes together produce a closed and stable framework of self-delusion. After-Keynesians are trapped in this logical fallacy for 80+ years.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition. URL

#1 See also cross-references Refutation of I=S
#2 here
#3 here

Wikipedia and the promotion of economists’ idiotism (II)

Comment on Wikipedia’s ‘Accounting identity’#1

Own post, no external Blog-Reference

“In accounting, finance and economics, an accounting identity is an equality that must be true regardless of the value of its variables, or a statement that by definition (or construction) must be true.” and “The term accounting identity may be used to distinguish between propositions that are theories (which may or may not be true, or relationships that may or may not always hold) and statements that are by definition true.”

The first point to notice is that there is NO such thing as “true by definition”.#2 Truth has to be established by proof. Scientific truth is well-defined by material and formal consistency: “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)

The second point is that the term “accounting identity” shows that economists do not understand elementary mathematics that underlies accounting.

The third point is that identities that are incompatible are declared “true by definition”. Simple logic tells everyone that wildly different accounting identities cannot all be “true by definition”.

Economists have obviously a serious problem with methodology. More specifically, they suffer badly from the Humpty Dumpty Fallacy which is expressed in these familiar slogans:

• “You can define anything you want but as a sage once said ‘A rose by any other name will smell as sweet!’” (Davidson)
• “For, on principle, we may call things what we please.” (Schumpeter)
• “This is a tough question to adjudicate on scientific grounds since the issue is largely definitional and, as Lewis Carroll pointed out, everyone is entitled to his own definitions. (Blinder)
• “‘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’.”

The point is that a single definition is indeed arbitrary but one NEVER has only one definition. So, one has to make sure that the set of definitions that refer to one subject matter is internally consistent.

From methodology, it is known that “The often-heard rule that concepts are to be defined before they are used in a discussion is much too simple-minded pre-Hilbertian. The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) The fact of the matter is that the foundational concepts of economic are ill-defined. And this is why economics never rose above the proto-scientific level.

For compelling methodological reasons, economics has to be built upon objective-systemic macrofoundations.#3, #4, #5

(A0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. For a start, the 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 expenditure C is equal to price P times quantity bought/sold X.

From the macroeconomic axioms follow models by specification. The Ur-Model is given by two conditions (X=O, C=Yw) and two definitions (monetary profit/loss Qm≡C−Yw, monetary saving/dissaving Sm≡Yw−C).

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.

The point to notice is that a definition is a one-way relation. The new term “monetary profit Qm” (= definiendum) is derived from the terms already given by the axioms, i.e. C and Yw (= definiens).

From the definition (≡) of the balance of the business sector Qm≡C−Yw, follows that to write down the identity Qm+Yw=C is INADMISSIBLE. So, one is NOT permitted to say that “total income” is the “sum of profits and wages” and that “total income” is equal to household sector spending C or that Income = Value of Output (Keynes). Economists, though, do not get it to this day.#6, #7

What should be quite clear is that profit Qm is a balance, i.e. a difference of flows, and wage income is a flow from the business to the household sector. So profit is NOT a sub-category of total income but a balance. A balance can either be positive or negative while a flow like wage income is always greater than zero.

So, Qm+Yw=C is NOT a balance identity that is “true by definition” but plain methodological garbage. From Qm≡−Sm, in turn, follows immediately that the Keynesian accounting identity I=S and the MMT balances equation (I−S)+(G−T)+(X−M)=0 are methodological garbage by logical implication.

What holds for the flows of the Profit-and-Loss-Account holds also for Wikipedia’s “most basic identity in accounting”, that is, Assets=Liabilities+Equity. The correct definition for the Asset-and-Liability-Account of the business sector is the one-way relation Equity≡Assets−Liabilities.

The economic Ur-Model above tells us two important things: (i) under the condition of market-clearing X=O and budget-balancing C=Yw, macroeconomic profit is zero and independent of employment, productivity, wage rate, etcetera, and (ii), because of Qm≡−Sm macroeconomic profit comes in the most elementary case from dissaving, i.e. the growth of household sector debt.#8

From the fact that the foundational concepts of economics ― profit and income ― are ill-defined follows (i) that the Wikipedia entry “Accounting identity” is proto-scientific garbage, and (ii), that all Wikipedia entries which directly or indirectly depend on the definition of profit/income are proto-scientific garbage by logical implication.#9, #10

Egmont Kakarot-Handtke


#1 Wikipedia Accounting identity
#2 Truth by definition? The Profit Theory has been axiomatically false for 200+ years
#3 For details of the big picture see cross-references Axiomatization
#4 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#5 Wikimedia AXEC137 Macrofoundations
#6 How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#7 For details of the big picture see cross-references Profit
#8 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#9 Wikipedia and the promotion of economists’ idiotism (I)
#10 Hooray! The formalization issue is finally settled

Related 'Humpty Dumpty is back again' and 'The Humpty Dumpty methodology' and 'Economics: 200+ years of scientific incompetence and fraud' and 'Economists: just too stupid for counting' and 'Keynes and the logical brilliance of Bedlam' and 'Yes, economists are really that stupid' and 'Keynes ― the poster boy for the weakness of the economist’s mind' and 'MMT and the canonical macroeconomic model'.

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Wikimedia AXEC143d

It is shrinking debt which eventually explodes the market economy

Comment on David Richardson on ‘What does “too much government debt” mean in a stock-flow consistent model?’

Blog-Reference

You are right, of course, in summarizing that representative agent models are worse than dilettantish. How anybody at the IMF could ever have taken this stuff seriously is a mystery. What can be observed with the naked eye is what you call a ‘failure of the instincts of many economists and others’.

You are right, of course, to point out that Godley and Lavoie’s approach is the correct one and that every economic model has to satisfy stock-flow consistency. There can be absolutely no doubt and no discussion about this. The two well-known criteria of science are formal and material consistency.

The sad fact is that there is a logical flaw in how Godley and Lavoie define stock-flow consistency. To be precise the fundamental error/mistake is to be found on page 8: “Over any accounting period expenditure has to be equal to income and, as a consequence in a simple model investment must be equal to savings.”

This blunder goes back to Keynes and After-Keynesians have not realized until this very day that Keynes had messed up the formal foundations of the General Theory with this simple syllogism “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

The fatal flaw of Keynes’ and Godley/Lavoie’s approach is that the underlying profit theory is false (2011). And it should be beyond doubt that if one gets the pivotal concept of economics wrong all the rest of one’s theory is vacuous, to say the least. For the rectification of the accounting approach see (2012).

From this follows that your treatment of the debt problem is not substantially better than what standard economics has delivered. The real crux of the debt problem lies in the stock-flow relationship between the change of debt (household sector and government sector) and overall profit/loss of the business sector and that means that the market economy breaks down as soon as overall household and government sector’s debt is redeemed (2014; 2013).

The present state of economics is that neither Orthodoxy nor Heterodoxy has an idea of how the market economy works.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2013). Redemption and Depression. SSRN Working Paper Series, 2343561: 1–28. URL
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

For details of the big picture see cross-references Refutation I=S.

For more about stock-flow consistency see AXECquery.

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ADDENDUM  The brain-dead blunder with profit; comment on Nick Edmonds on ‘An SFC Version of the Diamond Growth Model’ on Dec 17

Your profit equation (6) is false and because profit is the pivotal concept in economics it holds without exception: if profit is ill-defined the whole theoretical superstructure falls apart.

For details see the related comment on David R. Richardson’s RWER No 73 article ‘What does “too much government debt” mean in a stock-flow consistent model?’ here.

For the comprehensive critique of the ubiquitous profit blunder and its final rectification see How the intelligent non-economist can refute every economist hands down.

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REPLY  Urgent: your methodological check-up; reply to Nick Edmonds on Dec 18

You maintain: “You can’t say it’s false, because it’s no more than a definition.” This is what Humpty Dumpty always said — and it is pure methodological nonsense. See The Humpty Dumpty methodology and Humpty Dumpty is back again.

There is no such thing as freedom of definition. This freedom is restricted by the requirement of consistency. Logical consistency, though, has never been a strong point of economists. For more on scientific incompetence see cross-references Scientific Incompetence.

So, indeed, I can say it is false because it is provably false. No room for the usual wish wash.

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REPLY  to Nick Edmonds on Dec 19

The common usage including SNA is provably false as demonstrated in The Common Error of Common Sense: An Essential Rectification of the Accounting Approach.

Your appeal to authority is beside the point. The fact of the matter is that ‘the EC, the IMF, the OECD, the UN, and the World Bank’ employ Humpty Dumpty economists who even messed up the elementary mathematics of accounting. Ever wondered why economics never got above the level of silly model bricolage?

Mental messies and loose losers

Reply to comments on E.K-H's ‘Keenonomics, aggregate demand/change of debt, and some misleading critique’

Blog-Reference

I=S is the epitome of economists' scientific incompetence. If this were as plain as a meteorite hitting the earth the problem would have been fixed long ago; it is, though, just the contrary: subtle, unspectacular, counter-intuitive, subterranean, and rather involved.

Already von Neumann spotted the peculiar methodological defect of economics: “I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (quoted in Mirowski, 2002, p. 146 fn. 49)

This, however, has never been a point of great concern for the representative economist. In particular, for the Cambridge School of Loose Verbal Reasoning sharpness, precision, uniqueness, rigor, bivalent logic, etcetera always amounted rather to a violation of the human right to mental messiness. This stance has habitually been defended with a false but suggestive alternative: “Marshall followed the maxim: Better to be ambiguous and relevant than precise and irrelevant.” (Colander, 1995, p. 283)

Then, Keynes occupied the realm of vagueness, ambivalence, indeterminism, fogginess, wish-wash, casual conversation, inconclusiveness, complexity, twilight, uncertainty — the realm where nothing is clear and everything is possible — as the ecological niche of Keynesianism: “Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. ... Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates, 2007, p. 87)

This problem avoidance strategy was soon summed up in a catchy pseudo-choice: “For Keynes, as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’" (Davidson, 1984, p. 574)

With this cavalier mentality, Keynesians, and eventually the majority of other schools, have occupied the habitat between true and false where the scientific procedure of ‘conjecture and refutation’ runs into the bottomless swamp: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158)

So, economics is no longer about the true economic theory, all one has to do is avoid a crystal-clear refutation. This can be achieved by persevering fuzzy filibustering and by maintaining that crystal-clear refutation is impossible in the first place. If, against all defensive complacency, a refutation plainly succeeds, ignorance and business-as-usual help. This has become standard operating procedure in economics, as already Morgenstern complained: “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.” (1941, pp. 369-370)

With these two stratagems, economists entrenched themselves in the swamp of anything-goes and subsequently turned to defend their scientific no-man's-land in the main with rhetorical soap bubbles. All this is — as economists always readily admit — second-best, however, “... most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

What made this deadlock possible is a tacit quid-pro-quo agreement among different camps on the legitimacy of Humpty Dumpty methodology: "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." (Carroll, Through the Looking-Glass)

This quasi-feudal Freedom-of-Definition Privilege constitutes the different schools and has been sanctioned by the likes of Schumpeter. “For, on principle, we may call things what we please.” (1994, p. 598)

Of course, freedom of definition is a methodological illusion. It applies but to the FIRST definition. Subsequently, one has to make sure that every additional definition is consistent with the preceding ones. Overall consistency cannot be achieved in the economist's cavalier fashion: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen, 2009, p. 344)

Institutionalized economics never seriously aimed at, and therefore never arrived at, a coherent language, not to speak of an axiomatic framework of foundational concepts. Thus, debates/conversations between schools resemble nothing so much as ‘Babylonian incoherent babble’ (cf. Dow, 2005, p. 385). Without a common frame of reference, perpetual cross-talk is guaranteed. Economics fits the format of a sitcom.

The lack of a minimal common ground explains the secular stagnation of economics: “We know from the history of science that entrenched classificatory schemes and misleading descriptive vocabularies have impeded scientific advance as much or more than the complexities and observational inaccessibility of the subject matter.” (Rosenberg, 1980, p. 114)

What, then, is the — minimal, objective, consistent, testable — common conceptual ground of all of the economics?

Total period income in an elementary production-consumption economy with only one giant firm is given by the sum of wage income and distributed profit, i.e. (1) Y=Y_w+Y_d. Total consumption expenditures are equal to the product of price and quantity sold, i.e. (2) C=PX. That's all for a start.

The monetary profit of the business sector as a whole is then defined as the difference between consumption expenditures and wage costs, i.e. Q_m≡C−Y_w. Monetary saving of the household sector is then defined as the difference between total income and consumption expenditure S_m≡Y−C. Hence, S_m≡−Q_m if, for a start, Y_d=0. In simple words: saving S_m is equal to loss −Q_m, or, dissaving −S_m is equal to profit Q_m. From this follows immediately that all I=S or IS-LM models from Keynes, to Hicks, to Krugman, and all the busy blogging rest are false — irrevocably in all eternity.

Generally speaking, it holds for the production-consumption economy that Q_re≡−S_m, i.e. retained profit Q_re is equal to dissaving −S. And for the investment economy holds Q_re≡I−S_m, i.e. retained profit is equal to the difference between investment and saving (for details see 2014). No accounting trick and no ex-ante/ ex-post filibuster and no expected/unexpected stock changes and no equilibrium verbiage and no natural rate of interest will ever make the household sector's saving equal to the business sector's investment expenditures. Never ever! No way! Forget it!

Saving-equals-investment is the epitome of conceptual and logical incompetence of economists of all schools. In science, there is no ecological niche between true/false and no pluralism of false theories. Humpty Dumpty’s methodological no-man’s-land is an uninhabitable swamp for every thinking human being.

The root cause of the IS error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income and profit but of wage income and distributed profit (2013). The profit theory is false since Adam Smith. This, in turn, means that economists have failed to capture the essence of the market system. Neither attack nor defense of the market economy ever had a sound theoretical foundation (2015). Political economics has been a complete waste of time.

Economics of the last 200 years is the most embarrassing failure in the history of modern science.

Egmont Kakarot-Handtke


References
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge, New York, etc.: Cambridge University Press.
Colander, D. (1995). Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3): 281–293. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Dow, S. C. (2005). Axioms and Babylonian Thought: A Reply. Journal of Post Keynesian Economics, 27(3): 385–391. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand BoD, 2nd edition. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

Related 'Economists: Jacks of all trades ― except economics' and 'Economics ― a doctor worse than the disease' and 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist' and 'Knowledge is attainable ― even in economics'. For details of the big picture see cross-references Failed/Fake Scientists and cross-references Not a Science of Behavior and cross-references Profit (i.e. the foundational concept of economics).

For more about the Humpty Dumpty Fallacy see AXECquery.

For more about inconclusiveness see AXECquery.

***

Wikimedia AXEC172

Is Nick Rowe stupid or corrupt or both?

Comment on Nick Rowe on ‘Profits = Investment − Saving’

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

Egmont Kakarot-Handtke


#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.

***

REPLY to Nick Rowe on Jan 26 and Blog-Reference MNE

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. Premises

The elementary production-consumption economy is given by three macroeconomic axioms: (A1) Y_w=WL wage income Y_w 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 implications

In the elementary production-consumption economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Y_w, (ii) C is less than Y_w, (iii) C is greater than Y_w.
• In case (i) the monetary saving of the household sector S_m≡Y_w−C is zero and the monetary profit of the business sector Q_m≡C−Y_w, 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 S_m is positive and the business sector makes a loss, i.e. Q_m is negative. The market-clearing price P is less than W/R.
• In case (iii) monetary saving S_m is negative and the business sector makes a profit, i.e. Q_m is positive.

It always holds Q_m≡−S_m, 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. Conclusion

Simple 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. Generalization

The axiomatically correct Profit Law says for the general case Q_m≡Y_d+I−S_m+(G−T)+(X−M). Legend: Q_m monetary profit, Y_d distributed profit, I investment expenditures, S_m 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

***

REPLY to Benoit Essiambre on Jan 26 and Blog-Reference MNE

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)−(Q_m−Y_d)=0. The correct equation contains profit Q_m and distributed profit Y_d 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.

It holds
(i) Q_m≡−S_m in the elementary production-consumption economy,
(ii) Q_m≡I−S_m in the elementary investment economy,
(iii) Q_m≡Y_d+I−S_m 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≡Q_m+S_m and now (ii) is rewritten
(b) Q_m+S_m=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 S_m 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≡Y_w+Q_m. Note in particular that here a flow Y_w and a difference of flows Q_m 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=Y_w+Y_d.

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=Y_w+Y_d. 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. Q_m≡−S_m (1), and equal to the difference between investment and saving, i.e. Q_m≡I−S_m (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≡Q_m+S_m, 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≡Y_w+Q_m. This definition is methodologically inadmissible because a flow Y_w and a difference of flows Q_m 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

***

REPLY to Henry Rech on Jan 28 and Blog-Reference MNE

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.

Refutation of I=S: cross-references

Posts

• Too stupid for the elementary algebra of macrofoundations   here
• Macroeconomics and the fake History of Economic Thought   here
• How incompetent are economic methodologists? Very!   here
• Dear idiots, time to get saving and investment straight   here
• Still beyond the reach of economists: The Holy Grail of Science   here
• Krugman vs MMT ― like the blind talking about colors   here
• “But economics is not pure mathematics or logic” No, it is pure blather   here
• Both Austrianism and MMT are proto-scientific garbage   here
• Why is 0!=1? And why is I≠S? And why economics teaching is rotten   here
• #DrainTheScientificSwamp   here
• Kalecki and Keynes: The double macroeconomic false start   here
• Economics should never be a substitute for thinking   here
• Heterodox economics: When stupidity becomes a public danger   here
• The inexorable Paradigm Shift in economics   here
• Profit and the Private-Property-Irrelevance Theorem   here
• Fiscal policy and the Humpty Dumpty Fallacy   here
• Profit, income, and the Humpty Dumpty Fallacy   here
• Is Nick Rowe stupid or corrupt or both?   here
• I is never equal S and even Nick Rowe will eventually grasp it   here
• Saving NEVER equals investment   here
• John Hicks, fake scientist   here
• Why economists don’t know what profit is   here
• Keynesians ― terminally stupid or worse?   here
• Fixing the loanable funds blunder   here
• Loanable funds ― no hoax, just breathtaking stupidity   here
• A tale of three accountants   here
• Just revealed: IS-LM is dead for 80+ years   here
• First Lecture in New Economic Thinking   here
• IS-LM ― a crash course for EconoPhysicists   here
• Review of the economics troops   here
• The fundamental problem of economics: scientific incompetence aka stupidity   here
• Economics ― from attention and reputation management to science   here
• Walras, Keynes, Samuelson, DSGE, IS-LM ― R.I.P.   here
• New IS-LM macro ― just another fake revolution   here
• Macroeconomics without Keynes   here
• Say hello to Lars Syll, Keynes’s last parrot   here
• The IS-LM macro imbeciles   here
• Tobin, the tragedy of After-Keynesians, and the indelible mark of incompetence   here
• The final implosion of MMT   here
• A new episode of one of the worst blunders of economics   here
• Keynesian macrofoundations are defective   here
• Loanable funds, lack of scientific firepower and abundance of political fart power   here
• Note on saving and investment   here
• The general theory of scientific incompetence   here
• How Keynes got macro wrong and Allais got it right   here
• Keynesianism: The triumph of blathering over thinking   here
• Causa finita: the end of I=S/IS-LM   here
• The unfinished Keynes (III)  here
• There is no thrift paradox, or, How economists fell over their own feet   here
• Getting out of IS-LM = Getting out of despair   here
• The tiny little problem with economics   here
• The worst economic equation   here
• Joan Robinson and the ‘throng of superfluous economists’   here
• The economic Sisyphus: Forever kicking the can down the wrong road   here
• How Keynes messed macro up   here
• Econ 101 or How to train morons   here
• Economics: ‘a tale told by an idiot ... signifying nothing’   here
• No ground to lose   here
• As Napoleon said: don’t listen to economists   here
• Stanley Fischer: Rewarding scientific incompetence   here
• Macro of and for the scientifically blind and deaf   here
• Toward the true economic axioms   here
• Finalizing the Keynesian Revolution   here
• IS-LM is dead and waiting to be buried   here
• Another X-mas fantasy about IS curves   here
• Down and out   here
• Accounting basics   here
• Fundamentally flawed   here
• I=S: Mark of the Incompetent   here
• End of confusion   here
• Stupid or duplicitous? Both!   here
• Either stupid or duplicitous   here
• The Humpty Dumpty methodology   here
• Unaccountable   here
• Modern Moronomic Theory   here
• Oh no! How could this happen?   here
• Mental messies and loose losers  here
• The trouble with counting to 3  here
• More than two centuries of waffling in the dark  here
• Keenonomics, aggregate demand/change of debt, and some misleading critique  here
• Tricky business  here
• Economists — sloppy, stupid, or scientifically incompetent?  here
• Economists for all seasons or just confused confusers?  here
• The Profit Law  here

Refutation 1: Saving=Investment fallacy  here

• Confused confusers  here
• No more critique of economics, please!  here
• Testing is better than critique  here
• Axiomatization and test  here
• All problems settled — free way ahead  here

Refutation 2: Saving Equals Investment?  here

• The subtle distinction between storytelling and science  here
• Keeping the focus on the basic issue  here

Related

• IS-LM is bad economics no matter what Krugman says  here and here

Working papers — formal proof

• Keynes’s missing axioms  here
• Why Post Keynesianism is not yet a science  here
• The common error of common sense: an essential rectification of the accounting approach  here

New Paradigm

• See the cross-references here

***

YouTube Mar 3, 2023  They still don't get it → Investitionen = Ersparnis ― eine Identität?

Meta references

Profit, income, and the Humpty Dumpty Fallacy

Comment on Timothy Taylor/Conversable Economist on ‘Behind the Declining Labor Share of Income’

Blog-Reference

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words, economists have NO idea what the pivot of their subject matter is.#1

Because profit is ill-defined, income/distribution is ill-defined, and this is due to the Humpty Dumpty Fallacy ― one of the worst idiocies of economics.

In the elementary investment economy, macroeconomic profit Q is defined as the sum of profit in the consumer goods industry, i.e. Q_c≡C−Y_wc, and the investment goods industry, i.e. Q_i≡I−Y_wi, that is, Q≡(C−Y_wc)+(I−Y_wi) or Q≡C+I−Y_w (i). Profit Q is greater than zero if the value of output C+I is greater than total wage income Y_w.

Now, Humpty Dumpty introduces a redundant‡ definition by saying that profit may be called “income of the business sector” and that this “income” can be added up with the wage income of the household sector to “total income” Ψ thus
(a) Ψ≡Q+Y_w  and now (i) is rewritten
(b) Q+Y_w ≡C+I and then, hey presto,
(c) Ψ≡C+I that is, “total income” is “by definition” identical to “value of output” or in the usual sloppy parlance “income = value of output” which obviously contradicts (i) and ― strangely enough ― makes profit invisible.

This definitional idiocy can be traced back to Keynes “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT p. 63)

Without the true profit theory, there is no true distribution theory. The axiomatically correct macroeconomic Profit Law is given as Q≡Y_d+(I−S)+(G−T)+(X−M) [1], Legend: Q macroeconomic profit, Y_d distributed profit, I investment expenditure, S household sector saving, G government expenditures, T taxes, X exports, M imports. For the world economy as a whole, it holds X, M=0.

The nominal labor "share" λ is defined as the quotient of wage income Y_w and the sum of wage income and profit, that is, λ≡Y_w/(Q+Y_w) with Q given by [1] above. To recall, Ψ≡Q+Y_w is redundant/inadmissible, hence profit is NOT a "share" of "total income Ψ".

The fact is that neither market power nor capital intensity nor information technology nor union weakness can ultimately account for a falling nominal labor "share" λ. The main drivers of increasing macroeconomic profit Q have been in the past decades the increased deficit spending of the household- and the government sector. The other factors can only account for the distribution of profit Q between firms but NOT for the total amount.#2, #3

Traditional distribution theory is scientifically worthless because the foundational economic concepts of profit, income, and saving are ill-defined.* Worse, because profit is ill-defined/ poorly understood the whole of economics is proto-scientific garbage.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Keynes, Lerner, MMT, Trump and exploding profit
#3 For details of the big picture see cross-references Profit and cross-references Refutation of I=S.

‡ See Occam's razor in Wikipedia

*  Wikimedia AXEC129d

Wikimedia AXEC128b