#LearnEconomics
— E.K-H (@AXECorg) May 7, 2022
All IS-LM models are axiomatically false.
Cross-references Refutation of I=Shttps://t.co/TGGYpnS9sG pic.twitter.com/XcgoaUGWSN
Showing posts sorted by relevance for query title:IS-LM. Sort by date Show all posts
Showing posts sorted by relevance for query title:IS-LM. Sort by date Show all posts
May 7, 2022
Occasional Tweets: The futile attempt to recycle IS-LM (I)
February 8, 2014
Mr. Keynes, Prof. Krugman, IS-LM, and the end of economics as we know it {53}
Working Paper at SSRN
Working paper at ARCHIVE
Abstract Krugman has recently revitalized IS-LM with a number of succinct analytical pieces on his blog. The reverberations were remarkable. Economists, however, are known often not grasp the full content of their own and, a fortiori, of others' models. This happened to Keynes in the days of high theory and to Krugman these days. Keynes applied a defect formalism, which is here replaced by objective-structural axioms. This yields the correct relationship between retained profit, saving, and investment which in turn makes it clear after the event that the IS-part of the IS-LM construct had been logically defective ab initio.
Abstract Krugman has recently revitalized IS-LM with a number of succinct analytical pieces on his blog. The reverberations were remarkable. Economists, however, are known often not grasp the full content of their own and, a fortiori, of others' models. This happened to Keynes in the days of high theory and to Krugman these days. Keynes applied a defect formalism, which is here replaced by objective-structural axioms. This yields the correct relationship between retained profit, saving, and investment which in turn makes it clear after the event that the IS-part of the IS-LM construct had been logically defective ab initio.
February 26, 2016
IS-LM is dead and waiting to be buried
Comment on Nick Rowe on ‘IS-LM pictures with interest on money’
Blog-Reference and Blog-Reference
“But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281) Curiously, neither proponents nor opponents of Keynesianism have grasped until this very day what is actually in the Keynesian system (2011; 2014).
The formal foundations of Keynesianism are logically defective since the General Theory. Keynes’ fundamental equations of macroeconomics (1973, p. 63), i.e. “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” is provably false.
The deeper reason is that Keynes — just like his predecessors, fellows, and successors — 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., 2010, pp. 12-13, 16)
All IS-LM models suffer from the same fundamental defect and are dead since Hicks’ prototype. Economists, though, have still not fully grasped this.
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. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. 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.
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.
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
Related 'I=S: Mark of the Incompetent'. For details of the big picture see the cross-references Refutation of I=S.
Blog-Reference and Blog-Reference
“But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281) Curiously, neither proponents nor opponents of Keynesianism have grasped until this very day what is actually in the Keynesian system (2011; 2014).
The formal foundations of Keynesianism are logically defective since the General Theory. Keynes’ fundamental equations of macroeconomics (1973, p. 63), i.e. “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” is provably false.
The deeper reason is that Keynes — just like his predecessors, fellows, and successors — 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., 2010, pp. 12-13, 16)
All IS-LM models suffer from the same fundamental defect and are dead since Hicks’ prototype. Economists, though, have still not fully grasped this.
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. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. 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.
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.
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
Related 'I=S: Mark of the Incompetent'. For details of the big picture see the cross-references Refutation of I=S.
February 9, 2017
New IS-LM macro ― just another fake revolution
Comment on Larry Christiano on ‘The Great Recession: A Macroeconomic Earthquake’
Blog-Reference
For all those who thought macroeconomics has been refuted once and for all by the Great Recession Larry Christiano has a tumbler surprise: “The Great Recession is having an enormous impact on macroeconomics as a discipline, in two ways. First, it is leading economists to reconsider two theories that had largely been discredited or neglected. Second, it has led the profession to find ways to incorporate the financial sector into macroeconomic theory.”
Christiano’s claim that the profession has opened a new dimension of macroeconomics has zero reality content. In more detail the success story goes: “The return of the dynamic version of the IS-LM model is revolutionary because that model is closely allied with the view that the economic system can sometimes become dysfunctional, necessitating some form of government intervention.”
The warmed-up version of IS-LM will bring economists to nowhere because the whole approach is axiomatically false for 80 years.#1 The representative economist has not realized this until this very day. In methodological terms, axiomatically false is the death sentence for a paradigm, because when the foundational premises are false the whole analytical superstructure is false.#2
The true revolution consists in a Paradigm Shift, that is, in the full replacement of false Walrasian microfoundations and false Keynesian macrofoundations by entirely new macrofoundations.#3
Egmont Kakarot-Handtke
#1 How Keynes got macro wrong and Allais got it right
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
and cross-references Refutation of I=S
#3 Macroeconomics ― dead since Keynes and The other half plus the hitherto missing true foundations of macroeconomics and Tobin, the tragedy of After-Keynesians, and the indelible mark of incompetence and From false micro to true macro: the new economic Paradigm
Blog-Reference
For all those who thought macroeconomics has been refuted once and for all by the Great Recession Larry Christiano has a tumbler surprise: “The Great Recession is having an enormous impact on macroeconomics as a discipline, in two ways. First, it is leading economists to reconsider two theories that had largely been discredited or neglected. Second, it has led the profession to find ways to incorporate the financial sector into macroeconomic theory.”
Christiano’s claim that the profession has opened a new dimension of macroeconomics has zero reality content. In more detail the success story goes: “The return of the dynamic version of the IS-LM model is revolutionary because that model is closely allied with the view that the economic system can sometimes become dysfunctional, necessitating some form of government intervention.”
The warmed-up version of IS-LM will bring economists to nowhere because the whole approach is axiomatically false for 80 years.#1 The representative economist has not realized this until this very day. In methodological terms, axiomatically false is the death sentence for a paradigm, because when the foundational premises are false the whole analytical superstructure is false.#2
The true revolution consists in a Paradigm Shift, that is, in the full replacement of false Walrasian microfoundations and false Keynesian macrofoundations by entirely new macrofoundations.#3
Egmont Kakarot-Handtke
#1 How Keynes got macro wrong and Allais got it right
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
and cross-references Refutation of I=S
#3 Macroeconomics ― dead since Keynes and The other half plus the hitherto missing true foundations of macroeconomics and Tobin, the tragedy of After-Keynesians, and the indelible mark of incompetence and From false micro to true macro: the new economic Paradigm
April 17, 2023
Occasional Tweets: The futile attempt to recycle IS-LM (II)
#Economics#FailedFakeScience
— E.K-H (@AXECorg) April 17, 2023
You seem to be the last #Economist who has not yet realized that #ISLM is proto-scientific garbage.
Just revealed: IS-LM is dead for 80+ yearshttps://t.co/HryYkZ9Xaj
For more about IS-LM see AXECquery.
December 20, 2016
The IS-LM macro imbeciles
Comment on Lars Syll on ‘The non-existence of Paul Krugman’s Keynes/Hicks macroeconomic theory’
Blog-Reference and Blog-Reference and Blog-Reference on Dec 21
Economists think they can solve any problem by painting the triad SS-function―DD-function―equilibrium. Leijonhufvud called this analytical tool the totem of the micro/totem of the macro. What economists do not understand is that there is NO such thing as an economic equilibrium and NO such thing as SS and DD functions. #1 The totem of micro/macro is a NONENTITY. And this means that the history of IS-LM from Keynes to Hicks to Davidson to Krugman and beyond is a perfect example of economists’ absolutely vacuous model bricolage. #2
Keynesianism in general, and IS-LM, in particular, has always been methodologically unacceptable, and its proper place for 80+ years is the wastebasket. #3
What economists’ in their innate scientific incompetence fail to realize is that the economy as a system is defined by the interrelationship of a number of elementary variables. Every model, no matter how differentiated, must contain these OBJECTIVE interrelationships as its hardcore. This is an imperative methodological necessity.
The false Walrasian microfoundations and the false Keynesian macrofoundations have to be replaced with the true macrofoundations. This is achieved as follows
(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm.
(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.
The graphical representation of this absolute formal minimum is given with Graphic AXEC31
This chart replaces the hare-brained totem of SS-function―DD-function―equilibrium. A detailed description of the elementary macro relationships has been given elsewhere. #4
The systemic macro axiom set (A1) to (A3) is the one stone that kills, for a start, the Keynesian multiplier, ALL IS-LM models from Hicks onward, the stickiness argument, and the (bastard-) Phillips Curve, including the natural rate hypothesis. #5
This, though, is forever beyond the horizon of the representative economist who flunked the intelligence test already by accepting the totems of micro and macro.
Egmont Kakarot-Handtke
#1 Ground Control to David Glasner
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 Keynesianism is broken: Get over it!
#4 Getting out of IS-LM = Getting out of despair
#5 The final smackdown of blahblah-Keynesianism
For details of the big picture, see cross-references Refutation of I=S.
Blog-Reference and Blog-Reference and Blog-Reference on Dec 21
Economists think they can solve any problem by painting the triad SS-function―DD-function―equilibrium. Leijonhufvud called this analytical tool the totem of the micro/totem of the macro. What economists do not understand is that there is NO such thing as an economic equilibrium and NO such thing as SS and DD functions. #1 The totem of micro/macro is a NONENTITY. And this means that the history of IS-LM from Keynes to Hicks to Davidson to Krugman and beyond is a perfect example of economists’ absolutely vacuous model bricolage. #2
Keynesianism in general, and IS-LM, in particular, has always been methodologically unacceptable, and its proper place for 80+ years is the wastebasket. #3
What economists’ in their innate scientific incompetence fail to realize is that the economy as a system is defined by the interrelationship of a number of elementary variables. Every model, no matter how differentiated, must contain these OBJECTIVE interrelationships as its hardcore. This is an imperative methodological necessity.
The false Walrasian microfoundations and the false Keynesian macrofoundations have to be replaced with the true macrofoundations. This is achieved as follows
(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm.
(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.
The graphical representation of this absolute formal minimum is given with Graphic AXEC31
This chart replaces the hare-brained totem of SS-function―DD-function―equilibrium. A detailed description of the elementary macro relationships has been given elsewhere. #4
The systemic macro axiom set (A1) to (A3) is the one stone that kills, for a start, the Keynesian multiplier, ALL IS-LM models from Hicks onward, the stickiness argument, and the (bastard-) Phillips Curve, including the natural rate hypothesis. #5
This, though, is forever beyond the horizon of the representative economist who flunked the intelligence test already by accepting the totems of micro and macro.
Egmont Kakarot-Handtke
#1 Ground Control to David Glasner
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 Keynesianism is broken: Get over it!
#4 Getting out of IS-LM = Getting out of despair
#5 The final smackdown of blahblah-Keynesianism
For details of the big picture, see cross-references Refutation of I=S.
September 7, 2016
Causa finita: the end of I=S/IS-LM
Comment on Lars Syll on ‘Hicks’ misrepresentation of Keynes — the Wicksellian connection’
Blog-Reference and Blog-Reference on Sep 11 and Blog-Reference on Sep 23 adapted to context
Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
This elementary syllogism is conceptually defective because Keynes never came to grips with profit (Tómasson et al., 2010, p. 12). As a result, (i) all I=S models and the Keynesian multiplier are false (2011), (ii) the Wicksellian interest rate mechanism is false, (iii) the theory of interest is false, and (iv) Hicks’s/Krugman’s/Farmer's IS-LM models are false (2014).
The periodic rewarming of the I=S/IS-LM debate of the 1930s is only good for one thing: to demonstrate the abysmal scientific incompetence of both orthodox and heterodox economists. For details, see cross-references Refutation of I=S.
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. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. 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
Blog-Reference and Blog-Reference on Sep 11 and Blog-Reference on Sep 23 adapted to context
Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
This elementary syllogism is conceptually defective because Keynes never came to grips with profit (Tómasson et al., 2010, p. 12). As a result, (i) all I=S models and the Keynesian multiplier are false (2011), (ii) the Wicksellian interest rate mechanism is false, (iii) the theory of interest is false, and (iv) Hicks’s/Krugman’s/Farmer's IS-LM models are false (2014).
The periodic rewarming of the I=S/IS-LM debate of the 1930s is only good for one thing: to demonstrate the abysmal scientific incompetence of both orthodox and heterodox economists. For details, see cross-references Refutation of I=S.
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. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. 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
Related 'Wikipedia, economics, scientific knowledge, or political agenda pushing?' and Ch. 13, The indelible scientific disgrace of economics, in Sovereign Economics
For more about I=S see AXECquery.
***
Graphic AXEC172
June 6, 2016
Getting out of IS-LM = Getting out of despair
Comment on Nick Rowe on ‘On Olivier Blanchard on IS-LM and Teaching Intermediate Macro. And my despair.’ and on Oliver Blanchard on ‘How to Teach Intermediate Macroeconomics after the Crisis?’
Blog-Reference and Blog-Reference on Jun 7 and Blog-Reference on Jun 13 adapted to context, and Blog-Reference adapted to context
Blanchard concludes his article:#1 “Macroeconomics is a tremendously exciting subject. Most of what we taught before the crisis remains highly relevant. But it needs some dusting and updating. My hope is that a model along the lines above can contribute to it.”
Not so. IS-LM has always been methodologically unacceptable, and its proper place is the Flat-Earth Cemetery. The attempts of Blanchard and Rowe to save it with “some dusting and updating” are purely ceremonial.
This elementary syllogism is conceptually defective because Keynes never came to grips with profit (Tómasson et al., 2010, p. 12). As a result, all I=S models and the Keynesian multiplier are false (2011).
A0. The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm.
(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.
For the graphical representation of this ABSOLUTE formal MINIMUM, see the 4-Quadrant chart under the label Graphic AXEC31.
(A1) to (A3) asserts: At any given level of employment L, the wage income Yw that is generated in the consolidated business sector is obtained by multiplying the wage rate W. On the real side, output O is followed by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of (i) budget balancing, i.e., C=Yw, and (ii) market clearing, i.e., X=O.
Under the conditions (i)|(ii), the price is derived in each period as P=W/R, i.e., the market-clearing price is, in the most elementary case, equal to unit wage costs which vary over successive periods.
In the next period, the households save, i.e., condition (i) is now lifted. The result is shown under the label AXEC33.
Consumption expenditures C fall below Yw, and with it the market-clearing price P. The product market is cleared due to (ii), and there is no such thing as inventory investment, i.e., I=0. Monetary saving of the household sector is given by Sm≡Yw−C.
The business sector makes a monetary loss which is equal to the household sector’s saving, i.e., Qm≡−Sm. Therefore, loss is the exact counterpart of saving; by consequence, profit is the exact counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition Qm≡C−Yw and the definition of household sector saving.
The sector balances always add up to zero, i.e., Qm+Sm=0, and this is the correct accounting identity. Saving and investment are NEVER equal, neither ex-ante nor ex-post. Therefore, NO IS-curve ever existed. The elaborate interpretation of the IS-LM-nonentity over more than 80 years is on the same level as haruspicy, i.e., old Roman poultry entrails reading.
The DIFFERENCE between investment and saving I−Sm plus distributed profit Yd determines monetary profit Qm, which is measurable with two decimal places.
From this equation, which is complementary to the structural Phillips Curve (2012), follows: (i) An increase in the expenditure ratio ρE leads to higher employment L (the Greek letter ρ stands for ratio). (ii) Increasing investment expenditures I exert a positive influence on employment; a slowdown in growth does the opposite. (iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.
Items (i) and (ii) cover Keynes’s arguments about aggregate demand. What is missing in the Keynesian employment multiplier, though, is the ratio ρF as defined in (iii). This variable embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to the average price P and productivity R, and vice versa.
The complete Employment Law is a bit longer and contains, in addition, profit distribution, public deficit spending, and import/export. Investment and the interest rate for business loans Jb are connected via the elasticity Eb, and the household sector’s expenditure ratio and the interest rate for loans/deposits are connected via the elasticity Eh. Hence, the structural Employment Law fully replaces what Blanchard advertises as his updated IS-LM-Phillips-Curve model.
(ii) The investment multiplier is formally defective since Keynes.
(iii) The classical and Keynesian profit theories are false.
(iv) The representative economist has NOT gotten (i) to (iii) to this day because of incurable scientific incompetence.
Egmont Kakarot-Handtke
#1 How to Teach Intermediate Macroeconomics after the Crisis?
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). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. 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
Blog-Reference and Blog-Reference on Jun 7 and Blog-Reference on Jun 13 adapted to context, and Blog-Reference adapted to context
Blanchard concludes his article:#1 “Macroeconomics is a tremendously exciting subject. Most of what we taught before the crisis remains highly relevant. But it needs some dusting and updating. My hope is that a model along the lines above can contribute to it.”
Not so. IS-LM has always been methodologically unacceptable, and its proper place is the Flat-Earth Cemetery. The attempts of Blanchard and Rowe to save it with “some dusting and updating” are purely ceremonial.
1. How Keynes got it wrong
Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)This elementary syllogism is conceptually defective because Keynes never came to grips with profit (Tómasson et al., 2010, p. 12). As a result, all I=S models and the Keynesian multiplier are false (2011).
2. Rectification
The Keynesian premises have to be replaced by the correct macrofoundations. This is achieved as followsA0. The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm.
(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.
For the graphical representation of this ABSOLUTE formal MINIMUM, see the 4-Quadrant chart under the label Graphic AXEC31.
(A1) to (A3) asserts: At any given level of employment L, the wage income Yw that is generated in the consolidated business sector is obtained by multiplying the wage rate W. On the real side, output O is followed by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of (i) budget balancing, i.e., C=Yw, and (ii) market clearing, i.e., X=O.
Under the conditions (i)|(ii), the price is derived in each period as P=W/R, i.e., the market-clearing price is, in the most elementary case, equal to unit wage costs which vary over successive periods.
In the next period, the households save, i.e., condition (i) is now lifted. The result is shown under the label AXEC33.
Consumption expenditures C fall below Yw, and with it the market-clearing price P. The product market is cleared due to (ii), and there is no such thing as inventory investment, i.e., I=0. Monetary saving of the household sector is given by Sm≡Yw−C.
The business sector makes a monetary loss which is equal to the household sector’s saving, i.e., Qm≡−Sm. Therefore, loss is the exact counterpart of saving; by consequence, profit is the exact counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition Qm≡C−Yw and the definition of household sector saving.
The sector balances always add up to zero, i.e., Qm+Sm=0, and this is the correct accounting identity. Saving and investment are NEVER equal, neither ex-ante nor ex-post. Therefore, NO IS-curve ever existed. The elaborate interpretation of the IS-LM-nonentity over more than 80 years is on the same level as haruspicy, i.e., old Roman poultry entrails reading.
3. Generalization
The Profit Law for the investment economy reads Qm≡Yd+I−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditures.The DIFFERENCE between investment and saving I−Sm plus distributed profit Yd determines monetary profit Qm, which is measurable with two decimal places.
4. The Employment Law/Phillips Curve
From the differentiated axiom set (A1) to (A3) follows the structural Employment Law, which is shown with Graphic AXEC62
Items (i) and (ii) cover Keynes’s arguments about aggregate demand. What is missing in the Keynesian employment multiplier, though, is the ratio ρF as defined in (iii). This variable embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to the average price P and productivity R, and vice versa.
The complete Employment Law is a bit longer and contains, in addition, profit distribution, public deficit spending, and import/export. Investment and the interest rate for business loans Jb are connected via the elasticity Eb, and the household sector’s expenditure ratio and the interest rate for loans/deposits are connected via the elasticity Eh. Hence, the structural Employment Law fully replaces what Blanchard advertises as his updated IS-LM-Phillips-Curve model.
5. Conclusions
(i) All I=S/IS-LM models from Keynes/Hicks to Blanchard/Krugman/Rowe are provably false (2014).(ii) The investment multiplier is formally defective since Keynes.
(iii) The classical and Keynesian profit theories are false.
(iv) The representative economist has NOT gotten (i) to (iii) to this day because of incurable scientific incompetence.
Egmont Kakarot-Handtke
#1 How to Teach Intermediate Macroeconomics after the Crisis?
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). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. 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
Related 'Keynes’s Missing Axioms' and 'I is never equal S and even Nick Rowe will eventually grasp it' and 'Causa finita: the end of I=S/IS-LM' and 'The IS-LM macro imbeciles' and 'Just revealed: IS-LM is dead for 80+ years' and 'I=S: Mark of the Incompetent' and 'Are economics professors really that incompetent? Yes!' For details of the big picture, see cross-references Refutation of I=S.
You asked yourself: “OK Nick, but if you don’t like teaching IS-LM, what would you teach instead? Which is a perfectly reasonable question. Which is why I despair. Because what could I teach instead?”
The answer is in my post ‘Getting out of IS-LM = Getting out of despair’. With the structural axiom set (A1) to (A3), you get the CORRECT FORMAL MINIMUM. These macrofoundations fully replace both the obsolete Walrasian microfoundations and your apples-bananas-mangoes equilibrium model.
It seems that you cannot see the solution for your self-inflicted despair when it is right before your eyes. While it is perfectly understandable that you deleted my post in your analytical agony, it would have been perhaps helpful for others if you had at least left a link standing, e.g., this.
After all, other desperate IS-LMers should also have a fair chance to make up their minds. It is of utmost importance to terminate IS-LM teaching once and for all.
***
REPLY to Nick RoweYou asked yourself: “OK Nick, but if you don’t like teaching IS-LM, what would you teach instead? Which is a perfectly reasonable question. Which is why I despair. Because what could I teach instead?”
The answer is in my post ‘Getting out of IS-LM = Getting out of despair’. With the structural axiom set (A1) to (A3), you get the CORRECT FORMAL MINIMUM. These macrofoundations fully replace both the obsolete Walrasian microfoundations and your apples-bananas-mangoes equilibrium model.
It seems that you cannot see the solution for your self-inflicted despair when it is right before your eyes. While it is perfectly understandable that you deleted my post in your analytical agony, it would have been perhaps helpful for others if you had at least left a link standing, e.g., this.
After all, other desperate IS-LMers should also have a fair chance to make up their minds. It is of utmost importance to terminate IS-LM teaching once and for all.
February 20, 2017
Walras, Keynes, Samuelson, DSGE, IS-LM ― R.I.P.
Comment on Roger Farmer on ‘Let’s All Be Keynesians Now’ and on ‘Animal Spirits in a Monetary Model’
Blog-Reference and Blog-Reference
Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)
This elementary syllogism is inconsistent because Keynes never came to grips with profit (Tómasson et al.). As a result, all I=S models and all IS-LM models are false. #1,#2
Because Keynesian macroeconomics is inconsistent, any synthesis with it is inconsistent. Walrasian micro has been inconsistency squared since Samuelson. #3
The common denominator of Keynes, Walras, Samuelson, Farmer, and Platonov is that they have NO idea of the pivotal concept of the subject matter, that is, of profit. That is disqualifying for an economist.
In methodological terms, axiomatically false is the death sentence for a Paradigm, because when the foundational premises are inconsistent, the whole analytical superstructure falls apart.
The representative economist has not realized until this very day that there is NO such thing as fresh thinking about analytical monstrosities that were already dead in the cradle 150+ and 80+ years ago.
Egmont Kakarot-Handtke
#1 How Keynes got macro wrong and Allais got it right
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
and cross-references Refutation of I=S
#3 The father of modern economics and his imbecile kids
Blog-Reference and Blog-Reference
Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)
This elementary syllogism is inconsistent because Keynes never came to grips with profit (Tómasson et al.). As a result, all I=S models and all IS-LM models are false. #1,#2
Because Keynesian macroeconomics is inconsistent, any synthesis with it is inconsistent. Walrasian micro has been inconsistency squared since Samuelson. #3
The common denominator of Keynes, Walras, Samuelson, Farmer, and Platonov is that they have NO idea of the pivotal concept of the subject matter, that is, of profit. That is disqualifying for an economist.
In methodological terms, axiomatically false is the death sentence for a Paradigm, because when the foundational premises are inconsistent, the whole analytical superstructure falls apart.
The representative economist has not realized until this very day that there is NO such thing as fresh thinking about analytical monstrosities that were already dead in the cradle 150+ and 80+ years ago.
Egmont Kakarot-Handtke
#1 How Keynes got macro wrong and Allais got it right
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
and cross-references Refutation of I=S
#3 The father of modern economics and his imbecile kids
April 30, 2017
IS-LM ― a crash course for EconoPhysicists
Comment on Jason Smith on ‘The IS-LM model’
Blog-Reference
You define your task: “The economist John Hicks wrote out Keynes’ prose as an economic model that came to be known as the IS-LM model. I already derived this model before in a way that followed the way it is introduced in macroeconomics classes (as an IS and LM market). This derivation will achieve the same result, but approached fundamentally as an information transfer market system.”
This is an idle task because IS-LM is false on all methodological counts. Thus, it cannot be saved or improved by the misplaced application of information theory.
The formal core of IS-LM can be traced back to the General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, 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 is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all I=S and IS-LM models.#1
Let this sink in: Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Worse, Hicks did not get it either. Worst, after 80+ years Jason Smith still has not realized that ALL macro models that do not explicitly contain profit are false.#2
An economist who cannot tell how the foundational concept of economics, i.e. profit, is defined is like a physicist who cannot tell how energy is defined. Persons who neither understand economics nor physics are called EconoPhysicists. Mirowski has given an account of how these clueless folks have messed up economics in his masterpiece More Heat Than Light.
Egmont Kakarot-Handtke
#1 Why Post Keynesianism Is Not Yet a Science
#2 For more details see The IS-LM macro imbeciles and cross-references Refutation of I=S
Your understanding of the scientific method is rather superficial. You maintain: “that black line matching up with the blue line above means your criticisms are likely incorrect. That’s the wonderful thing about data. It can from time to time settle arguments definitively.”
Perhaps you have heard of the famous example that the false Geo-centric theory with its 20+ epicycles fitted the data initially better than the true Helio-centric theory. The geocentric theory was discarded nonetheless because it was theoretically unsatisfactory.
Genuine scientists know that science is more than a data-fitting exercise: “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)
Because a theory has to satisfy TWO criteria ― material AND formal consistency ― it is SUFFICIENT to refute it either on material or formal grounds. I have chosen to refute you on formal grounds.
I have delivered the proof that there is NO such thing as an IS curve because I and S are NEVER equal (it holds in the elementary case Qm≡I−Sm). Because there is NO such thing as an IS curve your data-fitting exercise is as phantasmagorical as epicyclic data-fitting. (There is NO LM curve either and NO such thing as an equilibrium but this proof is redundant in the given context.)
Your blog is a perfect example of what Feynman called cargo cult science: “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.”
The essential thing that is missing on your cargo cultic blog is a proper understanding of scientific methodology and integrity.
Blog-Reference
You define your task: “The economist John Hicks wrote out Keynes’ prose as an economic model that came to be known as the IS-LM model. I already derived this model before in a way that followed the way it is introduced in macroeconomics classes (as an IS and LM market). This derivation will achieve the same result, but approached fundamentally as an information transfer market system.”
This is an idle task because IS-LM is false on all methodological counts. Thus, it cannot be saved or improved by the misplaced application of information theory.
The formal core of IS-LM can be traced back to the General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, 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 is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all I=S and IS-LM models.#1
Let this sink in: Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Worse, Hicks did not get it either. Worst, after 80+ years Jason Smith still has not realized that ALL macro models that do not explicitly contain profit are false.#2
An economist who cannot tell how the foundational concept of economics, i.e. profit, is defined is like a physicist who cannot tell how energy is defined. Persons who neither understand economics nor physics are called EconoPhysicists. Mirowski has given an account of how these clueless folks have messed up economics in his masterpiece More Heat Than Light.
Egmont Kakarot-Handtke
#1 Why Post Keynesianism Is Not Yet a Science
#2 For more details see The IS-LM macro imbeciles and cross-references Refutation of I=S
***
ANSWER of Jason Smith-
-
Please note that a lack of scientific integrity is a violation of my comment policy.
Additionally, please don't refer to me in the third person when you comment on my blog.
***
REPLY to Jason Smith on Apr 30Your understanding of the scientific method is rather superficial. You maintain: “that black line matching up with the blue line above means your criticisms are likely incorrect. That’s the wonderful thing about data. It can from time to time settle arguments definitively.”
Perhaps you have heard of the famous example that the false Geo-centric theory with its 20+ epicycles fitted the data initially better than the true Helio-centric theory. The geocentric theory was discarded nonetheless because it was theoretically unsatisfactory.
Genuine scientists know that science is more than a data-fitting exercise: “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)
Because a theory has to satisfy TWO criteria ― material AND formal consistency ― it is SUFFICIENT to refute it either on material or formal grounds. I have chosen to refute you on formal grounds.
I have delivered the proof that there is NO such thing as an IS curve because I and S are NEVER equal (it holds in the elementary case Qm≡I−Sm). Because there is NO such thing as an IS curve your data-fitting exercise is as phantasmagorical as epicyclic data-fitting. (There is NO LM curve either and NO such thing as an equilibrium but this proof is redundant in the given context.)
Your blog is a perfect example of what Feynman called cargo cult science: “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.”
The essential thing that is missing on your cargo cultic blog is a proper understanding of scientific methodology and integrity.
***
The whole conversation vanished from the ITE blog on Apr 30, 20:26 MUC time.
***
Blog capture May 26
August 12, 2021
Occasional Tweets: IS-LM ― still a landmark of utter scientific incompetence
#Economics#FailedScience#FakeScience#Economists#StupidOrCorruptOrBoth
— E.K-H (@AXECorg) August 12, 2021
Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know Ithttps://t.co/QtIPGfRCk0
Btw. Jo Michell is an #EconBlocker. pic.twitter.com/XqO302fB9F
For details of the big picture see cross-references Refutation of I=S
June 8, 2017
Just revealed: IS-LM is dead for 80+ years
Comment on Bradford DeLong on ‘On the negative information revealed by Marvin Goodfriend’s “I don’t teach IS-LM”’
Blog-Reference and Blog-Reference
Brad DeLong summarizes: “But I believe that whenever anybody says “I don’t teach IS-LM” they are one of:
1. Making completely implausible and wrong claims about how the economy works.
2. Being lazy and/or stupid.
3. Declaring a tribal affiliation to xxx that I think has shed a lot more heat than light on real issues.”
The fact of the matter is that IS-LM is axiomatically false. Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63) This elementary syllogism is conceptually 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.)
Keynes had no idea of what profit is, nor did After-Keynesians. As a result, all I=S models, all IS-LM models, the Keynesian multiplier, Post Keynesianism, and New Keynesianism are false.#1
So, whenever anybody says “I apply a variant of IS-LM” they are one of these folks
1. Taking provably false macroeconomic axioms as formal foundations.
2. Not knowing what profit, i.e., the foundational economic magnitude, is.
3. Being moronic and/or imbecile and/or committing scientific suicide. #2
Egmont Kakarot-Handtke
#1 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
and Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#2 For details of the big picture, see cross-references Refutation of I=S
***
Blog-Reference and Blog-Reference
Brad DeLong summarizes: “But I believe that whenever anybody says “I don’t teach IS-LM” they are one of:
1. Making completely implausible and wrong claims about how the economy works.
2. Being lazy and/or stupid.
3. Declaring a tribal affiliation to xxx that I think has shed a lot more heat than light on real issues.”
The fact of the matter is that IS-LM is axiomatically false. Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63) This elementary syllogism is conceptually 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.)
Keynes had no idea of what profit is, nor did After-Keynesians. As a result, all I=S models, all IS-LM models, the Keynesian multiplier, Post Keynesianism, and New Keynesianism are false.#1
So, whenever anybody says “I apply a variant of IS-LM” they are one of these folks
1. Taking provably false macroeconomic axioms as formal foundations.
2. Not knowing what profit, i.e., the foundational economic magnitude, is.
3. Being moronic and/or imbecile and/or committing scientific suicide. #2
Egmont Kakarot-Handtke
#1 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
and Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#2 For details of the big picture, see cross-references Refutation of I=S
***
Graphic AXEC172
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So it's a good effective theory regardless of what you think economic theory should look like.
Let that sink in. Despite all your pompous verbosity, that black line matching up with the blue line above means your criticisms are likely incorrect.
That's the wonderful thing about data. It can from time to time settle arguments definitively. This is one of those cases. The data says you're wrong, so please display a bit of scientific integrity and admit it.