November 19, 2016

How to get out of the deflation trap

Comment on Andrew Gamble on ‘Deflation trap’


The usual policy proposals are at best commonsensically true because economics is a failed science, that is, the four main approaches Walrasianism, Keynesianism, Marxianism, Austrianism are axiomatically false and have to be fully replaced. The replacement is called paradigm shift and it is accomplished by moving from false Walrasian microfoundations and false Keynesian macrofoundations to the correct macrofoundations.#1

The elementary macroeconomic Law of Supply and Demand is shown on Wikimedia.#2 This price formula gets, of course, longer with the increasing complexity of the economy.#3 All these details are not needed at the moment.

The elementary Law of Supply and Demand says:
(i) An increase of the expenditure ratio rhoE=C/Y leads to a higher market clearing price (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction. Credit expansion/ contraction in turn affects the quantity of money.
(ii) An increase of the ratio of wage rate to productivity W/R leads to a higher market clearing price.

If the goal is to get a continuous rate of price increase of say 2 percent then there must be either (i) deficit spending of the household or the government sector, i.e. rhoE must be greater than 1, or (ii), the wage rate W must increase faster than the productivity R.

Alternative (i) has two drawbacks: (1) a continuous increase of private/public debt, (2) a direct increase of overall monetary profit because the Profit Law is coupled with the Law of Supply and Demand via the ratio rhoE.#4 So alternative (i) causes heavy distributional collateral damage.#5

From the correct economic theory follows that alternative (ii), i.e. the worldwide increase of wage rate relative to productivity, is the correct policy measure.

Egmont Kakarot-Handtke

#1 For details see cross-references Paradigm shift
#2 Law of Supply and Demand: Pure consumption economy and
#3 Investment economy
#4 The Profit Law
#5 See ‘Keynesianism as ultimate profit machine