January 11, 2015

Economists for all seasons or just confused confusers?

Comment on 'Krugman & Wren-Lewis flim-flamming on heterodox assaults on mainstream economics'


Keynes is so eminently quotable because, as a genuine political economist, he said many plausible things and also the opposite.

“It is well known that John Maynard was born anew every morning; for this reason, his colleagues at Bretton Woods commented that he was too intelligent to be consistent.” (Valentino, 1988, p. 239)

Clearly, with his famous programmatic statement in the General Theory he demanded a wholesale paradigm shift.

“Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (1973, p. 16)

There is no need, though, to play Krugman and Wren-Lewis off against Keynes or vice versa because all three are wrong.

This is the corpus delicti from the General Theory:
“Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

This two-liner 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 and Bezemer, 2010, pp. 12-13, 16)

With the Profit Puzzle solved the correct relationship between monetary profit Qm, distributed profit Yd, monetary saving Sm and business sector investment I is given here.

Therefore, all I=S models are definitively false (see also Allais, 1993, p. 69 and give up all hope to filibuster away this logical fact with ex ante/ex post or inventory investment). And this includes IS-LM, a model that has been widely applied in the golden times when all were Keynesians and which is seriously discussed again by Krugman in our days.

Krugman repeated Keynes's mistake on his blog (2014) and Wren-Lewis on his with the post's subtitle “This post is for first year undergraduate students (and the occasional blogger) who appear confused.” See here.

In the final analysis, I=S is a mistake that unites Keynes, Krugman, Wren-Lewis, and some others. Therefore, in the discussion about austerity the underlying theories of all parties are defective —no flim-flam here only the usual scientific incompetence of economists.

Egmont Kakarot-Handtke

Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
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. (1936).
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
Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, pages 238–249. Cambridge, New York, NY, etc.: Cambridge University Press.