Blog-Reference and Blog-Reference
Eighty years ago, Keynes got macro wrong and Keynesians did not notice it until this very day.
Dirk Ehnts quotes Keynes: “S=I at all rates of investment.” and comments enthusiastically: “This is very enlightening. The ‘General Theory’ also contained the issue of savings and investment, but the quote above nails it. There is no ‘supply’ and ‘demand’ for capital, hence savings and investment do not need anything to move so that there can be equilibrium.”
There is no better proof of the abysmal scientific incompetence of economists in general and of Keynesians in particular than S=I.
Here is the evidence from the General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (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 et al.)
Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false.#1 Let this sink in: Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Keynes, though, was not alone: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” (Mirowski) Fact is, the profit theory is false since Adam Smith. Economics is scientifically worthless since 200+ years.
What has to be done is to replace Keynes’ false macrofoundations by the correct macrofoundations. The pure production-consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit Qm≡C−Yw, monetary saving Sm≡Yw−C). The graphical representation is shown on Wikimedia.#2, #3
For the investment economy, the profit equation reads Qm=I−Sm. Legend: Qm monetary profit, I: investment expenditures, Sm monetary saving/dissaving. The business sector’s investment expenditures and the household sector’s saving/dissaving are completely independent and NEVER equal.
There is NO such thing as an equality of investment and saving, neither ex-ante nor ex-post, and there is NO such thing as an equilibrium of I and S. Keynes was too stupid to understand this, and After-Keynesians are even worse.#4
#1 Why Post Keynesianism Is Not Yet a Science
#2 Wikimedia, The pure production-consumption economy
#3 For the detailed description see ‘How the intelligent non-economist can refute every economist hands down’
#4 For more details see cross-references Refutation of I=S
You say: “I don’t understand your claim because it comes without any argument.”
The proof has been given that Qm=−Sm in the pure production-consumption economy and Qm=I−Sm in the investment economy. In plain text, the proof says that saving and investment are NEVER equal.#1
You say: “Regarding wording, how about: ‘saving is the accounting record of investment’? I find it immensely useful!”
In their pathetic incompetence, economists got even the elementary mathematics of accounting wrong.#2 The wording ‘saving is the accounting record of investment’ is the very proof that economists cannot even put 2 and 2 together.
You say: “What I don’t find useful is the inclusion of profits in macroeconomic models.”
Macroeconomic profit exists and economists should know and tell what it is. Neither orthodox nor heterodox economists do it, though, because they have no idea what the pivotal concept of their subject matter is.#3
You say: “Of course, the question what drives investment needs to be attacked using the concept of profit, but that is a different question from what determines the level of unemployment, which was Keynes’ question in the GT!”
Keynes’ employment theory is false because I=S ― and, by implication, the multiplier ― is false which, in turn, is false because Keynes never understood what profit is.#4
Because Keynes’ premise Income = value of output is false, ALL I=S/IS-LM models from Keynes/Hicks to Krugman/Ehnts are provably false.#5, #6
After-Keynesians are light years behind the curve. The scientific level of economists in general and Dirk Ehnts, in particular, is worse than zero.
#1 How Keynes got macro wrong and Allais got it right and
The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 A tale of three accountants and cross-references Accounting
#3 Heterodoxy, too, is scientific junk
#4 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#5 Getting out of IS-LM = Getting out of despair
#6 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
Dirk Ehnts subscribes to: “S = I at all rates of investment. Y either definable as C+S or as C+I. S and I were opposite facets of the same phenomenon they did not need a rate of interest to bring them into equilibrium for they were at all times and in all conditions in equilibrium.”
Nick Edmonds maintains: “The expected real rate of interest is in some sense the price of savings and so, in principal, changes in this expected rate might be able to reconcile desired saving and desired investment. In a barter economy, goods for current delivery can be traded for promises of the same goods for future delivery.”
Keynes was right on two points: (i) he has to be credited for realizing that the economics of Jevons/Walras/Menger/Marshall was false at its core and that nothing less than a paradigm shift was needed, (ii) that economic analysis has to start with the ‘monetary theory of production’ and NOT with some silly barter economy of the Sraffa type.#1
From the analysis of the most elementary economic configuration, the pure production-consumption economy, follows for the balances Qm+Sm=0 or Qm=−Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit=loss (surplus=profit) equals the household sector’s surplus=saving (deficit=dissaving). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law.#2
This, first of all, tells one that the profit theory is false since Smith and Ricardo.#3 And, secondly, this tells one that the theory of saving and investment is false by implication. It always holds Qm=I−Sm, that is, investment and saving are NEVER equal, neither in accounting nor in reality.#4
All I=S/IS-LM models are provably false from Wicksell/Keynes/Hicks onward. Because MMT is built upon the false Keynesian balances equations it is false, too.#5
#1 The futile attempt to recycle Sraffa
#2 How the intelligent non-economist can refute every economist hands down
#3 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#4 Rectification of MMT macro accounting
#5 For the full-spectrum refutation of MMT see cross-references