August 22, 2015

Buridan’s ass economics

Comment on ‘Krugman is right — public debt is good!’


Lars Syll resumes: “The pros and cons of public debt have been put forward for as long as the phenomenon itself has existed, but it has, notwithstanding that, not been possible to reach anything close to consensus on the issue — at least not in a long time-horizon perspective.” (See intro)

This is the perfect Buridan’s ass outcome of every grand economic debate (capital controversy, Phillips curve trade-off, saving-equals-investment, and so on). Hicks nicely formulated the one-size-fits-all résumé: “As far as I can make out, there are relevant and important senses in which all these statements are each of them right and each of them wrong.” (Hicks, 1939, p. 184) That's economics at its best.

When theoretical analysis is inconclusive, when true/false is no longer the ultimate criterion, when “nothing is clear and everything is possible” (Keynes, 1973, p. 292), then all becomes political. Knowledge goes out of the window and opinion takes over. Buridan’s theoretically inconclusive ass is simply politically kicked in one direction or the other.

The fact that economics has not arrived since its very beginning at a valid theory of public debt is taken by most economists as a sign that the whole matter is complex, vague, subjective, and therefore does not yield to a clear cut solution. In the midst of obvious failure, economists turn it into a triumph: “Given these difficulties it is extraordinary that economics has achieved as much as it has.” (Dow, 2006, p. 51)

This is a ridiculous self-delusion. Nothing has been achieved. What is truly extraordinary is the scientific incompetence of economists of all stripes over more than 200 years. The debate over public debt is a case in point.

The most telling fact is that the pivotal phenomenon of the monetary economy — profit — makes no appearance at all in the whole discussion. Actually, the interrelationships are as follows (for more details see 2015).

The employment equation is given in the simplest case by URL. The employment multiplier contains the expenditure ratio rhoE. If rhoE increases, employment L increases. An expenditure ratio rhoE>1 means deficit spending. Thus, the equation contains the Keynesian assertion that deficit spending increases employment.

The profit equation is in the simplest case given by URL. Overall monetary profit Qm of the business sector, too, depends on the expenditure ratio rhoE. Hence, this variable constitutes the link between changes of debt, employment, and the overall profit of the business sector.

With the correct profit theory we now arrive at the remarkable result that no other than Keynes, the most outspoken critic of the Laissez-faire order, has in effect stabilized this order more than anybody else, such that overall profit of the business sector increased exactly in step with the deficits of the private/public households.*

And, irony of ironies, the naive defenders of a pure market order, balanced public budgets, and austerity indeed argue against the very interests of the business sector as a whole (2013; 2014). They do not understand that deficit and profit is ultimately the same thing.

To paraphrase Krugman: public debt is not only good, it is the best thing that can ever happen to the business sector; and in turn promotes an accelerated concentration of income and wealth. After this straightforward lecture in theoretical economics Buridan’s ass hopefully knows where to turn now.

Egmont Kakarot-Handtke

Dow, S. C. (2006). Economic Methodology: An Inquiry. Oxford: Oxford University Press.
Hicks, J. R. (1939). Value and Capital. Oxford: Clarendon Press, 2nd edition.
Kakarot-Handtke, E. (2013). Redemption and Depression. SSRN Working Paper Series, 2343561: 1–28. URL
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. 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.

* See also the blog post ‘Keynesianism as ultimate profit machine