November 3, 2015

Down and out

Comment on Henry of Nov 3 on ‘Keynes on the Theory of Interest’


You bring in a seemingly new aspect “As a matter of interest, Keynes in his ‘Treatise on Money’, did actually develop a model using entrepreneur’s income — he ended up with a relationship similar to yours i.e. saving — investment = normal enterprise profit — actual enterprise profit. He discarded this approach in the GT. See p. 60-61 of GT.”

Correct, Keynes caught a glimpse of the solution and then went the other way. But, as is obvious from the General Theory, in this direction he did not come to grips with profit. Let this sink in: Keynes had no idea of the essential phenomenon of the market economy! An economist who does not understand how the actual economy works lectures politicians who know even less.

Now, the new aspect you bring in is not new at all. I have dealt with it in Section 16 ‘Treatise and General Theory as limiting cases’ of ‘Keynes’s Missing Axioms’ see here.

And I have refuted your redundant definition of “economy wide aggregate saving” in Section 17. There is, though, no need to read or understand the paper because to stay behind the curve is the natural place for After-Keynesians.

You ask rhetorically “You define income as household income. Why not use wages income? Why not use entrepreneur’s income?” Because the definition of income and profit is by no means arbitrary. It is known since Senior that it is all-important to state ‘consciously and explicitly’ the basic concepts: “To Senior belongs the signal honor of having been the first to make the attempt to state, consciously and explicitly, the postulates that are necessary and sufficient in order to build up … that little analytic apparatus commonly known as economic theory, or to put it differently, to provide for it an axiomatic basis.” (Schumpeter, 1994, p. 575)

Only dilettantes think that they can define whatever seems convenient. “In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” (Georgescu-Roegen, 1970, p. 9)

These errors are fatal because they bring down the whole theoretical superstructure: “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison, 1960, p. 5)

The irony is that Keynes understood the crucial methodological point better than the After-Keynesians. “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) and “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)

The unfortunate fact of the matter is that Keynes messed up his ‘non-Euclidean’ axioms. Again: the formal foundations of Keynesianism are provable false until this very day.*

This is not a minor point but has consequences for the scientific status of Keynesianism in particular and economics in general. Because economics does not satisfy the scientific criteria of material and formal consistency and cannot even tell what income and profit is it has to leave the academic community of sciences.**

Egmont Kakarot-Handtke

Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

* It is recommended that Keynesians make a full mental reset and start with this New curriculum which correctly applies the axiomatic-deductive method.
** See ‘Free the academy from economics

Immediately preceding post 'Humpty Dumpty is back again'


ICYMI (comment on Henry of Nov 3 on Nov 4)

Theories do not consist of a heap of statements that describe a certain part of reality, they have an architectonic structure. In purely formal terms they consist of premises and logical conclusions. The well-structured whole has to meet the criteria of material and formal consistency. “The chief demerit is inconsistency, including inconsistency with the results of experiments that a competing theory can explain.” (Popper, 1994, p. 160)

Methodologically, therefore, J. S. Mill’s Starting Problem has always to be dealt with first. The crucial question is: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (2006, p. 746)

At present, economics is not built upon a set of acceptable premises or axioms. Orthodoxy is based on the behavioral axiom of constrained optimization. Heterodoxy lacks a consistent foundation. That is, both approaches do not meet the formal minimum standards of theoretical economics.* There is nothing to choose.

Conclusion: “Scrap the lot and start again!” (Joan Robinson). A paradigm shift is not to be delayed.** The correct formal foundations of economics are given here.

The next step is to reconstruct the theoretical superstructure. In the course of reconstruction it turns out that the Keynesian I=S is untenable and has to be replaced by Q=Yd+I-S (see preceding posts). This immediately affects the theory of interest.

Whether the new axiomatic foundations are acceptable is not to be decided by argument but by empirical testing of propositions that are deductively derived from the axioms (the employment multiplier for example, or the Profit Law).

Keynes explicitly addressed (with his call for ‘non-Euclidean’ axioms) but failed to solve Mill’s Starting Problem. Because its formal basis is defective, Keynesianism is irrevocably out of science. Keynesian policy proposals have no sound theoretical foundation.

Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, pages 154–184. London, New York, NY: Routledge.

* See ‘How Orthodoxy buffaloed Heterodoxy
** See ‘Replacing sand by granite

Immediately following post 'Are economists methodological retards?'