December 31, 2014

Who takes Orthodoxy or Heterodoxy seriously?

Comment on  'The real winner: economics which takes money and debt serious'


True: Money and debt have to be taken seriously. False: Keynes was the first to have done so, therefore Keynes will be the new Keynes.

As a matter of fact, Political Economy started with the debt problem:“Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by political economy  a branch of the science of the statesman or legislator, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt trough the conquest of her colonial Empire.” (Halévy, 1960, pp. 104-105)

From classical Political Economy onwards the debt problem was solved by demanding that government debt should be close to zero. Households should be savers and prudent lenders. Business sector debt that was backed by productive capital has always been regarded as unobjectionable. Since saving and investment are always equal, in a sound economy the financial assets of the household sector are equal to the business sector's liabilities. Money was handled with the Quantity Theory and made neutral by assumption. No systemic problems in this big picture. To be sure, nobody denied that there could be disturbances because of all sorts of human failure and folly. And economists were always well aware that financial and economic crises go hand in hand.

It is not so much ignorance of the phenomena that is the problem but theoretical misconceptions. And in this respect Keynes was not much better than the classicals.

The key point is that economists are not aware of the relationship between debt and profit. Only if the household sector's consumption expenditures are greater than wage income, i.e. partly financed by credit, the business sector as a whole can make the initial monetary profit in the pure consumption economy (the complete formula is here). The relationship between growing debt and profit becomes a bit more complex when investment, government and foreign trade are included but this does not alter the elementary relationship. For the wider implications see (2013b; 2014b).

True: Neither the classicals, nor the neoclassicals, nor their actual reincarnations got the relationship between debt and profit right. However, this does not make Heterodoxy the winner by default. The profit theories of Marx, Schumpeter, Keynes, Kalecki, Davidson, Minsky, Keen, all on the list of the 20 top heterodox economists, are also demonstrably false (2014d; 2011a; 2011c; 2011b; 2013a).

Finally: after he wandered a lifetime in the wrong direction (2014a; 2014c) how can anyone take Krugman's actual musings about the future of economics seriously?

Egmont Kakarot-Handtke

Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon Press.
Kakarot-Handtke, E. (2011a). Schumpeter and the Essence of Profit. SSRN Working Paper Series, 1845771: 1–26. URL
Kakarot-Handtke, E. (2011b). What is Wrong With Heterodox Economics? Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
Kakarot-Handtke, E. (2011c). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–15. URL
Kakarot-Handtke, E. (2013a). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2013b). Redemption and Depression. SSRN Working Paper Series, 2343561: 1–28. URL
Kakarot-Handtke, E. (2014a). Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right. SSRN Working Paper Series, 2389341: 1–17. URL
Kakarot-Handtke, E. (2014b). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2014c). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2014d). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL