Home > Uncategorized > Keenonomics, aggregate demand/change of debt, and some misleading critique

Keenonomics, aggregate demand/change of debt, and some misleading critique

from Egmont Kakarot-Handtke

In a recent critique of Steve Keen’s approach Severin Reissl announces: “It is also shown that many weaknesses in Keen’s argument stem from a lack of terminological clarity which originates in his interpretation of the works of Hyman Minsky.” (Reissl, 2015, Abstract)

This is true as I have shown with regard to Keen’s definition of profit (2013) but Reissl argues from an unacceptable reference point, that is, from Stützel’s version of balance mechanics. It has to be emphasized that balance mechanics is an indispensable tool of economic analysis; the crucial point is that Stützel got it not exactly right. For a start, a succinct summary of the different strands that treat the interconnection between the circular flow, the creation of credit/money, and balance mechanics is to be found in (Schmitt and Greppi, 1996).   Reissl summarizes Stützel’s key methodological insight as follows. “Partial statements are valid for groups, while global statements are valid for the aggregate economy. The application of a partial statement to the aggregate economy is very often only possible through the addition of highly restrictive assumptions; otherwise it is an outright fallacy of composition.” (2015, p. 7)

In fact, the crippling methodological defect of the microeconomic approach is that partial truths are habitually but illegitimately generalized. Most conclusions of standard supply-demand-equilibrium analysis are false when generalized. Stützel was correct and far ahead of his time on this score.

The socially most deleterious fallacy of composition is what has become known as Ricardo’s principle. “… profits would be high or low in proportion as wages were low or high.” (Ricardo, 1981, p. 110) This is true for a single firm but not for the economy as a whole. Hence it is not a great exaggeration to define the microfoundation Orthodoxy as the proto-science that confuses logic and fallacy of composition.

Reissl first correctly points out that it is important to distinguish between flows like consumption expenditures and income which affect net worth, on the one hand, and receipts and payments which affect the household/business sector’s stocks of money, on the other hand.

But then, directly after eq. (6), the fatal blunder occurs: “Saving here denotes the difference between all additions and all reductions in net worth during a period. Investment (that is, by definition, a change in the quantity of tangible assets) is hence only a subcategory of saving for any subset of economic actors.”

This misleads Reissl in the course of the argument finally to: “These relations imply that, in a macroeconomic sense, investment is saving, but also that saving is investment.” (2015, p. 17)

And this, of course, is analytical rubbish but one that Reissl shares with the majority of economists. Keynes stated in his General Theory: “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.” (1973, p. 63) Just like Reissl’s balance mechanics, this elementary syllogism contains a fundamental conceptual error/mistake (2011) that invalidates all I=S-models without exception (see also the post E.K-H, 2015).

Where is the flaw in Reissl’s critique of Keen? Reissl – just like Keen, Minsky, Keynes, Krugman, Wren-Lewis, Glasner, and the rest – got the pivotal distinction between income and profit wrong. So, welcome to the party: “… one of the most convoluted and muddled areas in economic theory: the theory of profit.” (Mirowski, 1986, p. 234)

The correct relationship between the key variables is given by Qre=I-S (2015, eq. (49)), that is, the business sector’s investment expenditures are never equal to the household sector’s saving and their difference is always equal to the business sector’s retained profit. Balance mechanics cannot possibly yield a different result.

While Keen’s approach is formally deficient, his assertion that there is a straightforward connection between aggregate demand and the change of the household sector’s debt is absolutely correct for the pure consumption economy. For every economist, including Reissl, this is the firm ground in the conceptual morass. The First Law of balance mechanics says: saving:=loss and not saving:=investment.

Not to have realized this in more than 200 years is the scientific opprobrium of economics.

 

References

E.K-H (2015). Tricky business. Blog-post. URL http://axecorg.blogspot.com/2015/06/tricky-business.html.

Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438.

Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2357902.

Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Financial Markets. SSRN Working Paper Series, 2607032: 1–33. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607032.

Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

Mirowski, P. (1986). Mathematical Formalism and Economic Explanation. In P. Mirowski (Ed.), The Reconstruction of Economic Theory, pages 179–240. Boston, MA, Dordrecht, Lancaster: Kluwer-Nijhoff.

Reissl, S. (2015). The Return of Black Box Economics – a Critique of Keen on Effective Demand and Changes in Debt. IMK Working Paper, (149): 1–24. URL http://www.boeckler.de/pdf/p_imk_wp_149_2015.pdf.

Ricardo, D. (1981). On the Principles of Political Economy and Taxation. The Works and Correspondence of David Ricardo. Cambridge, New York, NY, etc.: Cambridge University Press. URL http://www.econlib.org/library/Ricardo/ricP.html.

Schmitt, B., and Greppi, S. (1996). The National Economy Studied as a Whole: Aspects of Circular Flow Analysis in the German Language. In G. Deleplace, and E. J. Nell (Eds.), Money in Motion, pages 341–364. Houndmills, Basingstoke, London: Macmillan.

  1. Larry Motuz
    June 17, 2015 at 1:38 am

    “Introduction to a Scientific Economics for Laymen and Academic Economists:: A Foundational Restructuring of All post-Classical ‘Neo-Classical and Austrian” Schools of Economic Theory” is an essay I intend to publish.

    It will not critique existing theory. It replaces it at its micro-foundations.

    Investment out of savings is a function of the growth of markets, not an accounting identity.

    I have tried to interest some people in my thought, but it appears that anyone who says the theory of the consumer is is simply mathemagical is paid no attention to.

    Come October, I will submit it here.

    • June 17, 2015 at 5:25 pm

      ICYMI see

      Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL http://ssrn.com/abstract=2207598

      • Larry Motuz
        June 26, 2015 at 4:39 am

        Thank you. Will read a.s.a.p.

  2. June 17, 2015 at 6:41 am

    Agree that I=S is a fallacy. The Keynesian multiplier says we need more consumption to grow. From Income = Consumption + Saving, then we need to save less (as widely asserted). But Saving = Investment, therefore we also need to invest less (also widely disputed). Debt is a finance quantity, which grows with interest even without any economic activity. Starting in a muddle, any modelling can only end in a muddle. What important facts have we explained with all that?

  3. June 17, 2015 at 11:22 am

    “Reissl first correctly points out” the difference between net worth and stocks of money, then defines savings and investment in terms of “net worth during a period”. “This misleads Reissl”, says Egmont, into the “analytical rubbish” that “in a macroeconomic sense, investment is saving, but also that saving is investment” (as indeed “Keynes stated”, but – Egmont still fails to acknowledge – challenged).

    Surely this is only rubbish to Egmont because he has slipped back into the usual error of thinking of savings and investment in terms of monetary measures and not the real worth of providing for a future which transcends “periods”? Indeed, isn’t division into periods a rich opportunity for fallacies of composition?

    The beginning of this posting is brilliant. Pity about the analytical monetary rubbish after. In the real world people invest not in balance mechanics but in refrigerators and maintenance.

    • June 17, 2015 at 5:23 pm

      ICYMI see

      Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL http://ssrn.com/abstract=2220651.

      • June 17, 2015 at 9:04 pm

        From the SSRN paper:

        “This paper deals with saving and its interaction with real and nominal key variables, in particular with the relation between saving, investment and profit. It starts from the fact that there is no such thing as a ‘real’ economy”.

        If one can believe the latter one can believe anything.

      • June 20, 2015 at 1:11 pm

        Keep on reading. This is the next sentence: “Hence economic phenomena are only explicable as the outcome of the interaction of real and nominal variables.”

        The real world is a monetary economy, neither a barter economy nor an Aristotelian oikos. ‘Real’ models are irrelevant (at best useful as a plaything to keep Sraffaians employed).

        The ‘real’ economy is not the real economy, the monetary economy is the real economy.

        ICYMI see for the difference between surplus and profit

        Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25.
        http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301

      • June 21, 2015 at 8:46 am

        Egmont, you make your point with admirable clarity, but thereby emphasise the point at issue, which is the scope of the term ‘economics’. As an information scientist I am arguing for unambiguous definition, but as a (probably unconscious) Humean you are keeping the same term for realities which have evolved, leaving the terminology ambiguous, determined subjectively by “agreement of the elite” on usage.

        I try to spell out my position on evolution at the end of https://rwer.wordpress.com/2015/06/12/the-context-dependency-of-human-economic-behaviour/#comments, where Rhonda (June 14) was also saying you can’t have unambiguous terms without sticking to their purpose. The key word missing from your account here is ‘now’: “economic phenomena are NOW only explicable …” (where Rhonda doesn’t agree with you), and “The real world is NOW a monetary economy” – where I say that WAS a means of facilitating household management, but monetary institutions have evolved (via automation and derivatives) to the point where they NOW stand alone and are pursuing money making and NOT household management. For what we have another name is urgently needed, for it is putting survival not only of human families but even of our species at risk. Among scientists, Aristotle provided, Soddy echoed and I accept the purpose of the term ‘chrematistics’.

      • Larry Motuz
        June 26, 2015 at 4:49 am

        There is a real economy. That it is a monetized economy also means that exchange values are often taken to be indicators of real values of goods and services in terms of the benefits such use provides. Money illusion exists when money is taken only as the grease with the economy, as if money is itself not a commodity. It is. And this has serious repercussions for behavior.

      • June 26, 2015 at 10:54 am

        Larry, yes there still is a real economy: parents trying to feed the kids and grandparents trying to help them ‘manage’ it. A monetized economy is a special case of this, and I agree, money illusion exists when money is seen as simply as helpful “grease” even if – due to “usury” in the form of compound interest, rent-seeking, retail and wholesale profiteering – it no longer is, having deteriorated into gunge clogging up the works. But since the 1970’s things have got worse. Money has always represented credit – a means of purchasing as and when needed – but since 1694 the credit notes have, as you say, been commodified (forcing families to buy on hire purchase) and since the 1980’s the running of money, shares and wholesale futures markets have amounted not only to insider dealing facilitated by 1870’s monetary theorising but the dealers now hide their misdeeds in the laundry baskets of derivatives, while money marketing theory has been legalised and automated, eliminating any exercise of human judgment. In short, human economic management, governmental sanity, civilisation and our human habitat – our world – are being killed by our taking for granted the bureaucratised and now automated institutions created by chrematists. On this I agree with Egmont: we need to scrap the lot and start again.

  4. June 17, 2015 at 4:07 pm

    “While Keen’s approach is formally deficient, his assertion that there is a straightforward connection between aggregate demand and the change of the household sector’s debt is absolutely correct for the pure consumption economy.”

    Stupidity beyond belief.

    EVERYONE says debt is important. Nobody is saying debt is not unimportant. The issue is whether Keen has made some revolution or is doing simple accounting errors.

    • June 17, 2015 at 5:21 pm

      ICYMI see

      Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right. SSRN Working Paper Series, 2389341: 1–17. URL
      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2389341.

    • Jeff Z
      June 17, 2015 at 6:08 pm

      Everyone, except a certain sect of academic economists that occupy the top echelons of the profession, and the policy makers that take their advice!

      There are numerous people who agree that debt is tremendously important, and Keen is one of them. There are also people, like myself, who toil in obscurity to reenforce the idea that debts matter. People who work in business acknowledge this, a fair few business economists acknowledge this. Almost everyone outside of the tip-top echelon of academic economists acknowledges this.

      But Keen was rightly critiquing the foundations of neoclassical analysis

      “By delaying the day of reckoning, neoclassical economists thus turned what could have been a ‘run of the mill’ financial crisis and recession into possible the greatest capitalism will ever experience.” (Debunking Economics, revised and expanded edition, 2011, p. 23)

      Why? Because of a fundamental misunderstanding of money and a set of assumptions that have no empirical validity. Those economists that reject some of those assumptions, but still use neoclassical tools are on firmer empirical ground, even if it is difficult to give up the basic framework. Think Akerlof, Stiglitz, Krugman, and Sen.

  5. Paul Schächterle
    June 19, 2015 at 10:21 am

    This is a very interesting discussion. I understand there is an agreement that the change of the level of debt has an effect on total GDP. The question is how that relationship is structured. Right?

    • June 19, 2015 at 11:07 am

      Right

      From Reissl’s abstract: “In a paper for the Review of Keynesian Economics, Steve Keen recently provided a restatement of his claim that “effective demand equals income
      plus the change in debt”. The aim of the present article is to provide a detailed critique of Keen‘s argument using an analytical framework pioneered by Wolfgang Stützel which has recently been developed further. Using this framework, it is shown that there is no strictly necessary relationship whatsoever between effective demand and changes in the
      level of gross debt.”

      • Paul Schächterle
        June 19, 2015 at 12:25 pm

        I find that abstract a bit misleading. Clearer is this statement:

        “The question at issue is not whether levels of (private) debt or changes therein can have an impact on effective demand and consequently national income, or on macroeconomic stability. On this proposition there appears to be universal agreement in the post-Keynesian literature. Whether such a connection exists in a given context is then an empirical question.”
        Reissl, Severin: The return of black box economics, p. 3.

        So there seems to be an observed relationship (a correlation) between the changes in debt and GDP. In his videos Keen presents almost incredibly strong correlations.

        The first question IMHO is the empirical question. Is there a real relationship or are those correlations a statistical artefact, e.g. a reflection of the definitions used in the statistical data?

        If we accept that correlation then we have to ask how that relationship is structured.

        In any case this is a topic that deserves a lot of attention.

      • Paul Schächterle
        June 19, 2015 at 12:37 pm

        I forgot my main point. If we accept the existence of a relationship in the data then we can’t dispute that relationship with a theoretical model.

        We can still discuss different models or dispute the validity of a certain model. But all models and arguments should be consistent with the accepted observable facts.

      • June 20, 2015 at 1:54 pm

        Your quote is to the point. Thx.

        You say: “We can still discuss different models or dispute the validity of a certain model. But all models and arguments should be consistent with the accepted observable facts.”

        I think there is a lot more at issue than the usual handwaving about this or that model. What has to be demonstrated is that Keenonomics is the correct approach and that Heterodoxy is theoretically/empirically superior to Orthodoxy.

        This is the precondition of a new heterodox curriculum. It is neccessary but not sufficient to tell the students that DSGE is crap and that ‘we’ are the good guys and that ‘our’ goal is the pluralism of debunked theories.

        “If you believe in the correctness of your ideas, you do not want pluralism; you want your ideas to win out because they are correct.” (Colander et al., 2007, p. 308)

        References
        Colander, D., Holt, R. P., and Rosser, J. B. (2007). Live and Dead Issues in the Methodology of Economics. Journal of Post Keynesian Economics, 30(2): 303–312. URL http://www.jstor.org/stable/27746800

      • June 20, 2015 at 2:02 pm

        Sorry, correct sentence:

        … that ‘we’ are the good guys and to conclude that ‘our’ goal is the pluralism of debunked theories.

  6. June 20, 2015 at 2:54 pm

    “…the business sector’s investment expenditures are never equal to the household sector’s saving..”

    Does anyone say they are generally equal?

    The conventional position is that aggregate savings equals aggregate investment (suitably defined). So, in an economy with only two sectors – households and firms – combined savings of households and firms equals combined investment of household and firms. That’s not the same as saying that savings of households equals investment of firms, unless you assume that certain components are zero (which of course people often do for simplicity in models – but that doesn’t mean they think that assumption holds in the real world).

    Sticking with the two sector assumption, if you also assume that household investment is zero, then business investment equals household saving plus business saving. Business saving is business income (retained earnings) less business consumption (conventionally zero), i.e. business saving is equal to business retained earnings (as you can see in any national accounts). So business retained earnings are therefore equal to investment less household saving (in the two sector model with household investment of zero). That is your equation: Qre = I-S.

    This is all pretty standard stuff.

  7. merijnknibbe
    June 21, 2015 at 9:20 pm

    In the national accounts the basic equation which is used to estimat this is;

    (income + net change in debt) = (expenditure + net change in assets).
    .

    I.e: people either spend their money on new goods or services (expenditure) or on assets. Spending on assets does however not necessarily lead to a *net* change in assets. Money is of course an asset an when money is spent on existing financial assets (foreign currency, stocks, bonds) the total amount of assets does not increase (though the value of these assets might change). It’s a swap of one kind of asset for another kind of asset and can’t be considered to be ‘saving’. It is only when money is spent on new fixed assets (roads, houses, machinery, …) that there is any kind of real saving, i.e. production which we can not only use in this period but also in a coming period (this includes investments in stock: the present use is: stock). In that sense I=S on the macro level.

    https://rwer.wordpress.com/2011/10/28/why-steve-keen-is-even-more-right-than-he-thinks/

    • June 22, 2015 at 9:20 am

      When numbers don’t add up
      Comment on Merjin Knibbe

      Thank you for the link to ‘Why Steve Keen is even more right than he thinks.’ In this 2011 thread you already point out that Keen’s argument leads directly to accounting. Basically, this dovetails with Stützel balance mechanics approach. So we have an analytical square consisting of Keen-Reissl-Stützel-Knibbe which encloses the general issue of accounting.

      With regard to the whole formalization and mathiness debate it is worth remembering that accounting is the natural formal tool of the economist and the indispensable integrating hub of all empirical work.

      “Somewhere between the Political Arithmetician, alias the National Income Accountant, and the Financial Analyst, alias the Accountant, lies the task of the quantitative economist’s analytical role, and none of the theoretical or applied tasks of these two pragmatic and paradigmatic figures requires anything more than arithmetic, statistics and the rules of compound interest.” (Velupillai, 2005, pp. 866-867)

      The trouble is, as you point out, that the representative economist cannot handle this tool properly and this applies first and foremost to Orthodoxy.

      I have addressed the inconsistency between theory and accounting/balance mechanics in (2012). As you say, this inconsistency has to be eliminated first from the current discussion.

      Egmont Kakarot-Handtke

      References
      Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential
      Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415:
      1–23. URL http://ssrn.com/abstract=2124415.
      Velupillai, K. (2005). The Unreasonable Ineffectiveness of Mathematics in Economics.
      Cambridge Journal of Economics, 29: 849–872.

    • June 22, 2015 at 2:56 pm

      Merijn,

      I’m not sure I follow what you are doing here. Do you mean net change in assets to refer only to financial assets, or are you including real assets in there as well (in which case isn’t expenditure just consumption expenditure)?

  8. Blissex
    June 21, 2015 at 11:21 pm

    «Keynes stated in his General Theory: “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.”»

    That’s a ridiculous misquote. Almost the whole point of JM Keynes is to show that investment and savings decisions are completely independent, and investment and savings are as a rule different, both ex-ante and ex-post, and that demand for liquidity (monetary or inventories) bridges the gap ex-post. One of his major points is that there is that investment is driven by “animal spirits” inspired by dreams of future profitability based on anticipation of future demand, and not by savings, and t

    «The First Law of balance mechanics says: saving:=loss and not saving:=investment.
    Not to have realized this in more than 200 years is the scientific opprobrium of economics.»

    70 years after JM Keynes and lots of people still get stuck on accounting identities as if they were other than the necessary outcome of arbitrary statistical definitions, and therefore still don’t account for the difference between ex-ante and ex-post.

    My impression of S Keen’s work is that instead he is driven by a dynamic, ex-ante and ex-post approach, thus for example his use of a Minskian approach and modelling tools.

    • June 27, 2015 at 9:06 pm

      The trouble with counting to 3
      Comment on Blissex on ‘Keenonomics, aggregate demand/change of debt, and some misleading critique’

      You comment my verbatim quote from the General Theory as: “That’s a ridiculous misquote.” Obviously you had not the time to check it. For your convenience, here is the direct link to Google-books

      https://books.google.de/books?id=M-pvBgAAQBAJ&pg=PT62&dq=Keynes+General+Theory:+%E2%80%9CIncome+%3D+value+of+output%22&hl=de&sa=X&ei=dO-OVcOVAYnkUZKagKAC&ved=0CC0Q6AEwAQ#v=onepage&q=Keynes%20General%20Theory%3A%20%E2%80%9CIncome%20%3D%20value%20of%20output%22&f=false

      Ok, we agree, the quote is correct and your assertion is incorrect, or, don’t let us mince words, utterly ridiculous.

      And so it goes on. You refer to the ex ante/ex post storytelling. Nice try. Here is the fact of the matter.

      “Throughout the 1920s and 1930s the focus was increasingly on the role of the equality of saving and investment, but the semantic squabbles that dominated much of the debate (the distinctions between “ex ante,” and “ex post,” “planned” and “realized” saving and investment, the discussion of whether the equality of saving and investment was an identity or an equilibrium condition) reflected a deeper confusion.” (Blanchard, 2000, p. 1378)

      This confusion has never been resolved in a formally satisfactory way until today and your reiteration is a telling example that ‘deeper confusion’ is still with us.

      The almost tragic thing is that accounting is elementary mathematics and that economists botch it up even at the beginner’s level. An accountant who writes down every single real-world transaction during a period and then comes up at period end with I=S instead of Qre=I-S gets fired because of incompetence or cooking up the books. And telling the ex ante/ex post story cannot prevent this (2012).* Bookeeping provides the most precise and reliable empirical test in economics. Is anybody surprised that economists cannot handle it properly?

      Egmont Kakarot-Handtke

      References
      Blanchard, O. (2000). What Do We Know about Macroeconomics that Fisher and
      Wicksell Did Not? Quarterly Journal of Economics, 115(4): 1375–1409. URL
      http://www.jstor.org/stable/2586928.
      Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential
      Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415:
      1–23. URL http://ssrn.com/abstract=2124415.

      * See the I-unequal-S cross-references for blog posts and the formal proof
      http://axecorg.blogspot.de/2015/01/is-cross-references.html

  9. July 10, 2015 at 11:52 am

    Mental messies and loose losers
    Comment on ‘Keenonomics, aggregate demand/change of debt, and some misleading critique’

    I=S is the epitome of economists’s scientific incompetence. If this were as plain as a meteorite hitting the earth the problem would have been fixed long ago; it is, though, just the contrary: subtle, unspectacular, counter-intuitive, subterranean, and rather involved.

    Already von Neumann spotted the peculiar methodological defect of economics: “I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (von Neumann, quoted in Mirowski, 2002, p. 146 fn. 49)

    This, however, has never been a point of great concern for the representative economist. In particular, for the Cambridge School of Loose Verbal Reasoning sharpness, precision, uniqueness, rigor, bivalent logic, etcetera always amounted rather to a violation of the human right to mental messiness. This stance has habitually been defended with a false but suggestive alternative.

    “Marshall followed the maxim: Better to be ambigous and relevant than precise and irrelevant.” (Colander, 1995, p. 283)

    Then, Keynes occupied the realm of vagueness, ambivalence, indeterminism, fogginess, wish-wash, inconclusiveness, complexity, twilight, uncertainty — the realm where nothing is clear and everything is possible — as the ecological niche of Keynesianism.

    “Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. … Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates, 2007, p. 87)

    This problem avoidance strategy was soon summed up in a catchy pseudo-choice: “For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’” (Davidson, 1984, p. 574)

    With this cavalier mentality, Keynesians, and eventually the majority of other schools, have occupied the habitat between true and false where the scientific procedure of ‘conjecture and refutation’ runs into the bottomless morass.

    “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158)

    So, it is no longer about the true economic theory, all one has to do is to avoid a crystal-clear refutation. This can be achieved by persevering fuzzy filibustering and by maintaining that crystal-clear refutation is impossible in the first place. If, against all defensive complacency, a refutation plainly succeeds, ignorance and business-as-usual helps. This has become standard operating procedure in economics, as already Morgenstern complained.

    “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (1941, pp. 369-370)

    With these two stratagems, economists entrenched themselves in the morass of anything-goes and subsequently turned to defend their scientific no-man’s land in the main with rhetorical soap-bubbles. All this is — as economists always readily admit — second-best, however, “… most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

    What made this deadlock possible is a tacit quid-pro-quo agreement among different camps on the legitimacy of Humpty Dumpty methodology. “When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master — that’s all.” (Carroll, Through the Looking-Glass)

    This quasi-feudal Freedom-of-Definition privilege constitutes the different schools and has been sanctioned by the likes of Schumpeter. “For, on principle, we may call things what we please.” (1994, p. 598)

    Of course, the freedom of definition is a methodological illusion. It applies only to the first definition. Subsequently, one has to make sure that every new definition is consistent with the preceding ones. Overall consistency cannot be achieved in the economist’s cavalier fashion: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen, 2009, p. 344)

    Institutionalized economics never seriously aimed at, and therefore never arrived at, a coherent language, not to speak of an axiomatic framework of primitive concepts. Thus, debates between schools resemble nothing so much as ‘Babylonian incoherent babble’ (cf. Dow, 2005, p. 385). Without a common frame of reference perpetual cross-talk is guaranteed. Economics fits the format of a sitcom.

    The lack of a minimalistic common ground explains the secular stagnation of economics. “We know from the history of science that entrenched classificatory schemes and misleading descriptive vocabularies have impeded scientific advance as much or more than the complexities and observational inaccessibility of the subject matter.” (Rosenberg, 1980, p. 114)

    What, then, is the — minimalistic, objective, consistent, testable — common conceptual ground of all of economics?

    Total period income in an extremely simple monetary economy with only one firm is given by the sum of wage income and distributed profit, i.e. (1) Y=Yw+Yd. Total consumption expenditures are equal to the product of price and quantity sold, i.e. (2) C=PX. That’s all for a start.

    Monetary profit of the business sector as a whole is then defined as difference between consumption expenditures and wage costs, i.e. Q=C-Yw. Monetary saving of the household sector is then defined as difference between total income and consumption expenditure S=Y-C. Hence, S=-Q if, for a start, Yd=0. In simple words: saving S is equal to loss -Q, or, dissaving -S is equal to profit Q. From this follows immediately that all I=S or IS-LM models from Keynes, to Hicks, to Krugman and all the blogging rest are false — irrevocably in all eternity.

    Generally speaking, it holds for the pure consumption economy that Qre=-S, i.e. retained profit Qre is equal to dissaving -S. And for the investment economy holds Qre=I-S, i.e. retained profit is equal to the difference between investment and saving (for details see 2014). No accounting trick and no ex ante/ex post filibuster and no expected/unexpected stock changes and no equilibrium verbiage and no natural rate of interest will ever make the household sector’s saving equal to the business sector’s investment expenditures. Never ever! No way! No!

    Saving-equals-investment is the epitome of conceptual and logical incompetence of economists of all schools. In science, there is no ecological niche between true/false and no pluralism of false theories. Humpty Dumpty’s methodological no-man’s land is an uninhabitable morass for every thinking human being.

    The root cause of the IS error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income an profit but of wage income and distributed profit (2013). The profit theory is false since Adam Smith. This in turn means that economists have failed to capture the essence of the market system. Neither attack nor defense of the market economy ever had a sound theoretical foundation (2015). Political economics has been a complete waste of time.

    Economics of the last 200 years is the most embarrassing failure in the history of modern science.

    Egmont Kakarot-Handtke

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