February 6, 2016

Coming soon: the canonical economics textbook

Comment on ‘Project: A heterodox macro textbook’


Surprisingly, Keynes’s lasting scientific contribution relates to methodology. He spoke it out loud, so that every fellow economist could hear it: Throw over the classical axioms and put theoretical economics on new foundations: “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)

With the revolutionary shift in mathematics and physics from Euclidean to non-Euclidean axiomatics (Hilbert, Einstein) before his eyes, Keynes called his fellow economists to arms: “Something similar is required to-day in economics.” (1973, p. 16)

Consequently, Keynes formulated the foundational syllogism of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

This elementary two-liner is conceptually and logically defective because Keynes did not come to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12) As a result, all I=S models including the Keynesian multiplier are false (2014) and with it the whole Post-Keynesian theoretical superstructure.

To see the enormity of intellectual failure one has to let this sink in: Keynes had no idea of the fundamental concepts of our discipline, viz. profit and income. This did not hinder him to push his economic policy agenda. As a matter of fact, Keynes’s policy proposals never had a sound theoretical foundation but were at best commonsensical.

After-Keynesians did not realize until this day that there is something fundamentally wrong with Keynes’s two-liner and I=S but still hallucinate about ex ante/ex post.*

In the neoclassical synthesis of Samuelson, Keynes’s new non-Euclidean axioms and the old Euclidean axioms of marginalism were cobbled together. Textbooks consisted of two well-balanced halves: micro and macro. Needless to emphasize that both halves did not fit together. Never mind, the half-wits of Econ 101 swallow every rubbish.

The inconsistency was never resolved but gradually all returned to the pre-Keynesian formal foundations of marginalism. As Krugman put it “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Now, it can be shown that the axiomatic foundations of the neoclassical paradigm are methodologically inadmissible.** Needless to emphasize that the promoters of the New Classical Counter Revolution missed the point. Never mind, the half-wits of Econ 101 swallow even DSGE.

So, we have two indicators of the intellectual incapacity of present day economists: Keynesians are since more than 80 years in the dark. Sorta-kinda neoclassicals are since more than 140 years in the dark. Because they have disqualified themselves neither Keynesians nor neoclassicals can be taken seriously. This applies to all textbooks.

Now comes the heterodox textbook. What are the premises heterodox macroeconomics is based upon? It cannot be maximization-and-equilibrium and it cannot be Y=C+I, that much is evident.***

As I put it on my website: The canonical textbook is still to be written.**** Here is the litmus test: tell me what profit is, and I tell you whether you succeed or fail like all textbooks since Samuelson’s first edition of 1947.*****

Egmont Kakarot-Handtke

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.
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

* For details see ‘I=S: Mark of the Incompetent
** Addendum to ‘Musings on Whether We Consciously Know More or Less than What Is in Our Models
*** See ‘How to restart economics
**** AXECwiki
***** See ‘False on principle