June 2, 2015

Totem, voodoo, and tabu

Comment on ‘Loanable funds’

Blog-Reference see also Blog-Reference

“Economic models that integrate banking with macroeconomics are clearly of the greatest practical relevance at the present time.” (See intro)

This is certainly a point we all can agree upon. The challenge for theoretical economics is, first of all, to explain how the undifferentiated product market, the labor market, the secondary market, and the financial market (including money) fits together.

Economists habitually think they can solve any problem by painting supply-demand-equilibrium and taking Walras's Law into account. In the apt characterization of Leijonhufvud economists either summon up the spirits of the ‘totem of the micro’ or the ‘totem of the macro’ with the mantra of market forces.

All this has nothing to do with a scientific explanation because (i) supply function, demand function, equilibrium are nonentities, and (ii) the markets are in intricate ways interlocked (the quantitative volume of the financial market is the numerical integral of flow-differences in the product market; the real wage is uno actu determined in the product market; etcetera).

The loanable funds theory is a case in point for the failure of supply-demand-equilibrium economics. The argument in the intro is a telling example for the actual state of theoretical ignorance and confusion.

What first has to be done is to taboo supply-demand-equilibrium. All equilibrium models are false. A set of equations is not the suitable mathematical tool, but a stochastic simulation is. Second, both Walrasian and Keynesian approaches have to be put aside as useless and misleading.

This clears the ground for Constructive Heterodoxy and the consistent and comprehensive theory of how the various financial markets emerge as integral parts of the monetary circuit which links all markets (2015).

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Financial Markets. SSRN Working Paper Series, 2607032: 1–31. URL

[The title alludes to the fallacy of animistic thinking which underlies all market force explanations.]