February 18, 2015

Multiplying confusion

Comment on 'Abba Lerner on Functional Finance and Ricardian equivalence'


To beginn with, there are two fundamentally different configurations:
(1) the pure consumption economy,
(2) the investment economy.

And there are three scenarios:
(a) income tax = gov spending in period t,
(b) no tax; but household saving=gov spending; H deposits=Gov overdrafts,
(c) no tax, no saving; but business profit=gov spending; B deposits=Gov overdrafts.

These are six different configurations. Ricardian equivalence refers to configurations (1a) and (1b).

The national debt payoff causes losses and depression in configuration (1c) but not in (1a) and (1b). Note that we conveniently start with full employment. Otherwise, the additional discrimination between full employment (F) and unemployment (U) has to be introduced. This then makes in total 12 configurations.

Functional finance refers to (2aU), (2bU) and (2cU).

In the discussion, the twelve configurations are constantly played out against each other. With no useful result, of course.

Lerner's approach suffers from the same error/mistake as Keynes's approach. Both do not correctly discriminate between profit and income and therefore apply I=S, which is the worst fallacy of all. For details see (2014; 2015).

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Aggregate Demand. SSRN Working Paper Series, 2564590: 1–23. URL

See also the preceding post.