December 14, 2015

Monetary policy: no sound theoretical foundation

Comment on Ann Pettifor on ‘Central bank policy rates and the real economy’


That Lawrence Summer’s theory of the “neutral rate of interest” cannot be taken seriously goes without saying. The crux of the matter is that the Keynesian alternative is not much better.

After-Keynesians have not realized until this very day that Keynes had messed up the formal foundations of the General Theory which is given with this two-liner “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

The fatal flaw of Keynesianism is that the underlying profit theory is false (2011). And it should be beyond any doubt that if one gets the pivotal concept of economics wrong all the rest of one’s theory is vacuous. From this follows that Keynesian policy proposals have no sound theoretical foundation — just like neoclassical policy advice.

A recent discussion of the theory of interest on David Glasner’s blog Uneasy Money focused on these issues: Keynes and Accounting Identities, Keynes on the Theory of Interest, The Well-Defined, but Nearly Useless, Natural Rate of Interest, Thinking about Interest and Irving Fisher. For my posts see also here:

Keynes and the logical brilliance of Bedlam
End of confusion
Interest and profit
Accounting basics
Humpty Dumpty is back again
Down and out
Are economists methodological retards?
Debunking the natural rate of interest
How economic thinkers think they think about interest
The Fisher Effect — a specimen of scientific incompetence

You conclude: “Until Keynes’s understanding of monetary theory and his associated policies are revived, central bank impotence will continue to be a feature of financial crises.”

There is absolutely no need to revive a logically and materially inconsistent approach. This cannot cure central bank impotence which is the very consequence of the scientific incompetence of economists of all stripes.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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.