PKT message, 'Debunking Economics'

Steve:

I just got around to reading Ch. 12 and pass on the following for your consideration.

GENERAL COMMENT

If we judge the 'General Theory' by the standard which Keynes applied to Say's "doctrine", namely, its suitability "for purposes of scientific prediction" (p. 132), then it should have been declared DOA back in 1936 on purely epistemological grounds.

Briefly, by ascribing causal relationships between its variables, Keynes disregarded the epistemological essence of ALL Scientific Models of empirical reality, which David Hume summarized with respect to that of Newtonian Orbital Mechanics etc. as follows:

"While Newton seemed to draw off the veil from some of the mysteries of nature, he shewed at the same time the imperfections of the mechanical philosophy; and thereby restored her ultimate secrets to that obscurity in which they ever did and ever will remain."

This is how Newton himself addressed related issues in the chapter on 'Definitions', with which he began his Principia:

"I likewise call attractions and impulses, in the same sense, accelerative, and motive; and use the words attraction, impulse, or propensity of any sort towards a centre, promiscuously, and indifferently, one for another; considering those forces not physically, but mathematically: wherefore the reader is not to imagine that by those words I anywhere take upon me to define the kind, or the manner of any action, the causes or the physical reason thereof, or that I attribute forces, in a true physical sense, to certain centres (which are only mathematical points); when at any time I happen to speak of centres as attracting, or as endued with attractive powers."

KEYNES ON WALRAS

You write: "Later in his life, Keynes indicated that he rejected the very basis of Walras' Law...when he praised the author of a textbook which he had once described as "not only erroneous but without relevance to the modern world...": Karl Marx." (p. 129)

Here is Skidelsky on related issues: "Moreover, Keynes never liked the general equilibrium method. There is a revealing letter to Hicks on 9 December 1934, in which he writes that 'Walras's theory and all others along those lines are little better than nonsense.' So Hicks's generalisation is not something Keynes would have done himself, and it imported elements alien to the original conception, though not formally inconsistent with it. On the other hand, Keynes was passionately concerned with policy; so were most of those who took up the General Theory. Embedded in this book was an operational model. Keynes was not opposed to its being extracted, formalised, made determinate by assumption." (JMK The Economist As Saviour, 1992, p. 615)

KEYNES ON HICKS

You write: "Clearly, Keynes's theory was substantially different to this [the IS-LM Equations]. But how did Hicks summarise Keynes? [You then present the IS-LM Graph]." (p. 135)

Judging by the record, it was as if Keynes could hardly be bothered to comment on Hicks' draft of 'Mr Keynes and the Classics'. When he finally did, some three months (?) after Hicks had sent it to him, Keynes (a) began by stating that he had next to nothing to say, and (b) went on to brand "inconsistent hotch-potch" the formal economics involved.

"The inconsistency creeps in, I suggest, as soon as it comes to be generally agreed that the increase in the quantity of money is capable of increasing employment." (Letter of March 31, 1937. Reproduced, inter alia, in J. R. Hicks' 'Recollections and Documents', Economica, February 1973, p. 9)

In this respect, Jeremy Bentham, who acknowledged intellectual debt to Adam Smith with respect to all his key monetary ideas, would have suggested that Keynes was hopelessly confused on the relationship between Money/Credit and Factor Employment, the Monetary/Creditary measure of which is also a measure of Factor Employment at constant Unit Factor Prices.

KEYNES' CONCEPTS OF 'INVESTMENT' AND 'SAVING' - "INCONSISTENT HOTCH-POTCH"?

Further to this, I recently had occasion to comment as follows on the concepts of Investment and Saving as defined by Keynes:

"I recall coming across it some 20 years ago but, in the interim, my own thinking on related issues has evolved to the point that I now feel confident in challenging Keynes' line of thought which he developed between 1931 and the time of the General Theory's publication in 1936.

"Briefly, the confused definitions of "income" and "investment" that Keynes set forth in the General Theory are the "mature" fruit of the intellectual seeds contained in the following paragraphs from the Harris Lecture:

""Entrepreneurs pay out in salaries, wages, rents, and INTEREST certain sums to the factors of production which I shall call their 'costs of production.' Some of these entrepreneurs are producing capital goods, some of them are producing consumption goods. These sums, these costs of production, represent in the aggregate the incomes of the individuals who own or are the FACTORS OF PRODUCTION. These individuals in their capacity of consumers expend part of these incomes on buying consumption goods from the entrepreneurs; and another part of their incomes, which part we shall call their savings, they put back, as we may express it, into the financial machine--that is to say, they deposit it with their banks or buy stock-exchange securities or real estate or repay instalments in respect of purchases previously made or the like.

""At the same time the financial machine will be enabling a different set of people to order and pay for various kinds of currently produced capital goods from the entrepreneurs who produce this class of goods, such as buildings, factories, machines, equipment for transport, and public utility enterprises and the like; and the aggregate of expenditures of this kind I find it convenient to call the 'value of current investment.'

""Thus there are two streams of money flowing back to the entrepreneurs; namely, that part of their incomes which the public spend on consumption and those expenditures on the purchases of capital goods which I have called the value of current investment. These two amounts added together make up the receipts or sale proceeds of the entrepreneurs."

"The capitalized words identify the source of the confusion which carried over into the General Theory, namely, the PRE-SCIENTIFIC notion that (a) Money is a Factor of Production and (b) Interest its Factor Income.

"In this respect, I recall Haberler's comments in a memorial article on Schumpeter to the effect that the latter (a) recognized that "interest" was an integral part of entrepreneurial costs in the real world, but (b) insisted that it was so by virtue of socio-economic arrangements rather than strict analytical necessity.

"In the 'General Theory', Keynes sought to integrate into a single framework the socio-economic phenomenon of interest on Production Credit and entrepreneurial outlays on Production Inputs in the form of non-monetary Factor Services.

"As Schumpeter pointed out in 'Theory of Economic Development', Interest on Production Credit is analytically indistinguishable from Entrepreneurial Profit - Keynes, by treating such Interest as part of the Factor Cost of Production, thereby got himself entangled in definitional problems that remained unresolved at the time of his death in 1946, some ten years after the publication of the 'General Theory'."

Gunnar

'Debunking Economics' - Ch. 12