December 30, 2016

The futile synthesis of neoclassical rubbish and Keynesian garbage

Comment on Roger Farmer on ‘Keynes betrayed’

Blog-Reference and Blog-Reference on Jan 26, 2017

The Keynesian Revolution had already been dead in the cradle but economists have not realized it until this day. Since 80 years orthodox and heterodox economists are involved in the insoluble deep semantic riddle whether there is involuntary unemployment or not.

Farmer, in a new book, writes: “Macroeconomics has taken the wrong path. The error has nothing to do with classical versus New Keynesian approaches. It is a more fundamental error that pervades both.”

The fact of the matter is, though, that Farmer does not spot the fundamental error in macro that pervades all of economics. In order to see this, one has to go back to Keynes.

Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations. This is why Keynesianism, too, is a failure.*

What neither Orthodoxy nor Keynes ever understood was 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)

It is pretty obvious that an economist who cannot tell the difference between the fundamental economic magnitudes profit and income is a laughing stock. This applies to Walrasians and Keynesians of all colors. The messed-up profit theory is the “more fundamental error” that pervades both microeconomics and macroeconomics.

In Samuelson’s synthesis the defective Walrasian microfoundations and the defective Keynesian macrofoundations were cobbled together. Samuelson’s textbook consisted of two well-balanced halves: micro and macro. Needless to emphasize that both halves did not logically fit together.

Science is committed to material and formal consistency. Samuelson’s textbook had ― with a probability close to 1 ― the lowermost scientific content of all textbooks ever written. The fact of the matter is: the micro axioms are inconsistent, the macro axioms are inconsistent, and the synthesis of the two sets is by consequence also inconsistent.

Macroeconomics is NOT in need of another brain-dead discussion about voluntary/ involuntary unemployment nor about what Keynes really meant nor about IS-LM nor about what went wrong 80 or 140 years ago nor about a new synthesis of old trash. Economics is in need of a paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations to  consistent macrofoundations.

Egmont Kakarot-Handtke

* See ‘How Keynes got macro wrong and Allais got it right