February 13, 2015

Better precisely right than roughly wrong

Comment on 'Public debt and Keynes’ paradox of thrift'


Allais characterized the phenomenon Keynes as follows:
“L’intuition de Keynes lui a fait sentir où se trouvaient les difficultés, mais son insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” (1993, p. 70)

In other words:
“Keynes's intuition led him directly to the crucial difficulties but his logical shortcomings prevented the solution of the problems he encountered.” (rough translation)

Keynes felt that there was something wrong with the classical theory of saving. But in the General Theory he ended up with the equality/identity of saving and investment:
“Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

Unfortunately, this apparently simple syllogism is false. Loosely speaking there is something wrong with profit, which is missing in the syllogism. The correct relationship is given with this formula.

The formula points the way to the consistent theory of aggregate demand, public debt, and debt deflation (see 2015).

The paradox of Keynesianism is that Keynes has never been recognized as the real great benefactor of the market economy.

In the pure consumption economy, the stabilization of aggregate demand directly benefits the business sector through loss prevention and indirectly stabilizes employment at the given level. Taken the process as a whole, the compensatory actions of the public households save the life of the business sector and redistribute income from non-savers to savers, that is, to those who have triggered the chain reaction of problems in the first place. The whole process is a bit more complex, but not essentially different, in the general case of an investment economy. Saving not only reduces aggregate demand but is the exact complementary of loss. The theory of saving is false because the profit theory is false.

Egmont Kakarot-Handtke

Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Aggregate Demand. SSRN Working Paper Series, 2564590: 1–22. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.