July 20, 2017

Intellectual deficit spending

Comment on Lars Syll on ‘The balanced budget paradox’

Blog-Reference and Blog-Reference on Jul 24

Lars Syll gives a vivid description of the utterly confused state economists are in since 200+ years: “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. One has as a rule not even been able to agree on whether public debt is a problem, and if — when it is or how to best tackle it. Some of the more prominent reasons for this non-consensus are the complexity of the issue, the mingling of vested interests, ideology, psychological fears, the uncertainty of calculating ad estimating inter-generational effects, etc., etc.”

Lars Syll gives the catch-all reason for the failure of economists — complexity of the issue#1 — and thus remains true to the custom of solidarity among fellow economists to avoid the real issue, which is all-around scientific incompetence.

It is not only the question of public debt which is stuck in the swamp where ‘nothing is clear and everything is possible’ (Keynes), it is ALL of economics. The fact is that the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.

Isn’t it curious that in Lars Syll’s comprehensive discussion of public deficit spending and functional finance the word profit does not appear once? The simple reason is that the profit theory is false since Adam Smith, therefore profit either does not at all appear in the models or in misspecified form.

The problem is that economists in general and Lars Syll, in particular, do not understand the elementary mathematics of macroeconomic accounting.#2 Let us make matters short here. The balances of the business sector, the household sector, the government sector and the rest of the world are interrelated as follows: Qm≡-Sm+I+Yd+(G-T)+(X-M). This boils down to Qm≡-Sm+(G-T) for I, Yd, X, M = 0.

So, there are two limiting cases: (i) If the household sector’s saving Sm goes up and the government’s deficit (G-T) goes up by the same amount the monetary profit of the business sector Qm remains unchanged. (ii) If the household sector’s saving Sm remains unchanged and the government’s deficit (G-T) goes up the profit of the business sector Qm goes up by the same amount.

So, the counterpart of an increased public deficit is either increased saving of the households or increased profits of the firms or some combination of the two. Therefore, to say that the counterpart of an increased public deficit is an increased surplus of the ‘private sector’ obscures important real world differences.

What is entirely missing in Lars Syll’s discussion of public debt is that public deficit spending is, first of all, a profit machine.#3 This is not different from private deficit spending. In the past decades the US households increased their debt, that is, they were dissaving. So, BOTH the private and public households ran deficits. From the formula above follows that this boosts profit Qm TWICE. And this is exactly what has been observed and criticized as a catastrophic deterioration of the income distribution.

The interrelation between changes of public debt and profit is obscured by lumping together the business sector and the household sector to the ‘private sector’ and repeating the idiocy ‘We owe the debt to ourselves’.

Egmont Kakarot-Handtke

#1 See also ‘Failed economics: The losers’ long list of lame excuses
#2 ‘Macro for dummies
#3 See also ‘Keynesianism as ultimate profit machine

Related 'New Economic Thinking: the 10 crucial points' and 'You are fired!' and 'Austerity and the idiocy of political economists' and 'Replacing sand by granite' and 'First Lecture in New Economic Thinking' and 'Macrofounded labor market theory' and 'The minimum wage debate: a showpiece of economists’ hereditary idiocy'