December 1, 2016

Rethinking deficit spending

Comment on Roger Farmer on ‘Three Facts about Debt and Deficits’


You say: “Economics has the reputation of being the dismal science.” The most dismal thing about economics is that it is NOT a science.#1

In order to understand the failure of economics in general and Walrasianism, Keynesianism, Marxianism, Austrianism in particular one has first of all to realize that there is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing).

It holds: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Economists do NOT have the true theory. This holds also for Keynesianism and the concept of deficit spending. What Keynes and the After-Keynesians never understood is the all important relationship between deficit and profit.

Keynes defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This two-liner is defective because Keynes never came to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of Keynesian macroeconomics falls apart.#2

But things are even worse. Because economists in general and Keynesians in particular do not understand profit they do not understand what deficit spending really means: “When government is added to the pure consumption economy then it holds under the condition of zero investment of the business sector and zero saving of the household sector Qm=G-T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus.”#3 In simple terms: government deficit = business profit.

Whatever Keynes intended or argued about deficit spending is irrelevant. Because he did not understand the elementary economic relationship between deficit and profit, he de facto initiated the greatest profit boost in the history of humankind. The actual distributional problems are ultimately the handiwork of Keynes. In fact, no economist has done more for the one-percenters than Keynes.#4

You cite three trivial facts about deficits and debt and have NO idea about the most important fact, that is, the relationship between deficit and profit.#5

Egmont Kakarot-Handtke

#1 See ‘FakeNews, FakeScience: economics in the information age
#2 See ‘From false micro to true macro: the new economic paradigm
#3 See ‘Wikipedia and the promotion of economists’ idiotism
#4 See ‘Keynesianism as ultimate profit machine
#5 For details about scientific incompetence see cross-references Incompetence

REPLY to franco on Dec 2

The paper you refer to (Levy et al., 2008) indeed addresses the fundamental issue of economics ‘Where Profits Come From’ but gives the wrong answer. For the formal refutation of the Levy approach see the working paper ‘Keynes’s Missing Axioms’ (2011b)

For the correct explanation see ‘The Emergence of Profit and Interest in the Monetary Circuit’ (2011a).

The lethal error/mistake/blunder of the Levy approach consists in starting with Saving = Investment (2008, p. 6).

For the most elementary explanation of why Saving = Investment has ALWAYS been false and of why Saving = Loss resp. Dissaving = Profit is true see (2015).*

Kakarot-Handtke, E. (2011a). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2011b). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2015). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL
Levy, D. A., Farnham, M. P., and Rajan, S. (2008). Where Profits Come From. pages 1–28. URL

* See also cross-references ‘Refutation of I=S’ and in particular ‘The final implosion of MMT