“What is the Austrian Theory of the Business Cycle and why is it important today?” (In Gold We Trust)
— AXEC (@EgmontHandtke) September 19, 2026
Austrianism has always been failed/fake science. It has been refuted and replaced by the following.
The foundational error of legacy economics consists of the fact that the… pic.twitter.com/aayOLdfJNk
Showing posts with label Business cycle. Show all posts
Showing posts with label Business cycle. Show all posts
September 19, 2026
Occasional X: How it works (DXVIII)
August 9, 2026
Occasional X: How it works (DI)
“Eugen von Böhm-Bawerk sat in Vienna in 1884 and published Capital and Interest, and in doing so dismantled every socialist theory of exploitation that Karl Marx spent decades constructing. His weapon was time preference. You value a dollar today more than a dollar next year.… pic.twitter.com/NnXyjdekOS
— AXEC (@EgmontHandtke) August 9, 2026
July 30, 2026
Occasional X: How it works (CDXCVI)
“Muh profit is theft!!!! Whereas in the real world, Marx’s own labor theory of value was dead by volume 3 of Capital after treating it as iron law in volume 1. Böhm-Bawerk asked a simple question: why does capital earn a return at all?” (Rothmus)
— AXEC (@EgmontHandtke) July 30, 2026
The short answer is that both… pic.twitter.com/8iBg6rcYtJ
Notice: Improved version
August 17, 2020
Fake America great again
Comment on Barkley Rosser on ‘The End Of Special Fiscal Stimulus’
Blog-Reference
Barkley Rosser reports on the actual state of the economy: “Dems indicated that they were willing to compromise on many issues. To pick a big symbolic one has to do with the total spending level. Going into this the Dems were pushing $3+ trillion and the GOP was pushing $1 trillion. Gosh, looks like $ 2 trillion would be an obvious compromise, and the Dems have publicly indicated they would be willing to go to that, but, no, … As it is, Meadows left town and the Senate has gone on leave until after Labor Day. No deal.”
This is Barkley Rosser’s usual newspaper digest. Not one small crumb of real economic analysis. That is regrettable because what unfolds before our eyes is the spectacular finale of the so-called free-market economy.
In the elementary production-consumption economy with a state sector, macroeconomic profit comes ultimately from the household and state sector’s deficit-spending/money-creation, i.e. Qm≡(G−T)−Sm.#1
For Sm=0 this boils down to (G−T)=Qm, i.e. public deficit equals private profit. The profit of the monetary economy is in this analytical limiting case produced entirely by the state. This case is at odds with the popular ideas of a free-market economy and Laissez-faire but it is practically the new normal.
The greater part of the profit in the United States is actually produced by the state. The US economy hangs for a long time already on the state ventilator for its survival. With the current boost of deficit-spending, the situation becomes even more extreme.
The policy of deficit-spending/money-creation is ultimately a means of postponing the breakdown of the US economy. Deficit-spending/money-creation is a free lunch for the Oligarchy. Financial wealth grows in lockstep with public debt. While employment and wage income go down, Mr. Trump’s current policy will blow up macroeconomic profit to hitherto unimaginable proportions. This profit will nearly 100 percent be state-produced.
Say, economists, what exactly has always been the strong point of Laissez-faire capitalism?
Egmont Kakarot-Handtke
#1 Wikipedia, economics, scientific knowledge, or political agenda pushing?
You say: “Second you have the oddity that while you claim profits are tied to budget deficits, why is it that it is pro-business Republicans who are now opposing larger deficits thereby endangering business profits?”
Economics is about how the economy works and NOT about how the brains of GOP Senators work.
Btw. this question has already been dealt with. See
Stephanie Kelton and the self-destructive stupidity of the super-rich
You say: “Yo are one of those caricatures of an economist who when confronted with facts that do not coincide with his theory declare that the facts are either wrong or irrelevant because the theory is true.”
The voting behavior of GOP Senators is NOT part of any economic theory but your re-telling of what you have read in the newspapers, which is obviously your main intellectual occupation.
What I told you is that profit in the US economy is nowadays entirely produced by the state and that the exploding deficit-spending will explode profit within a short time span.
This perverse correlation of high unemployment and high state-produced profit is a bit at odds with the popular idea of a free-market economy and should, therefore, provoke the interest of the professional economist.
I realize that it is impossible to get you above the newspaper level.
Anyway, I take the opportunity and, in order to honor myself as the author of the Axiomatic Profit Law, I call the correlation of exploding unemployment, exploding public debt, and exploding profit Handtke’s Law of Exitus Capitalism. It replaces the Law of the Tendency of the Rate of Profit to Fall.
You say: “Sorry, Egmont, but your claim tha profit is produced by the state is simply wrong, so wrong that it is not even wrong, as they say.”
What “they” say is absolutely irrelevant, because it is known by now that “they” are scientifically incompetent. Economics is a failed science. That is a fact.
The macroeconomic Profit Law for a closed economy is given by Qm≡Yd+(I−Sm)+(G−T) and this implies Qm=(G−T), i.e. macroeconomic profit is equal to the state’s budget deficit.#1 In order that there is a surplus in the business sector, there must be a deficit in the state sector. Balances always add up to zero.
So, I am right and you and “they”, i.e. the rest of American academics, are wrong. This is elementary algebra, the proof is in the public domain, and you can do NOTHING against it.
#1 Wikipedia, economics, scientific knowledge, or political agenda pushing?
Blog-Reference
Barkley Rosser reports on the actual state of the economy: “Dems indicated that they were willing to compromise on many issues. To pick a big symbolic one has to do with the total spending level. Going into this the Dems were pushing $3+ trillion and the GOP was pushing $1 trillion. Gosh, looks like $ 2 trillion would be an obvious compromise, and the Dems have publicly indicated they would be willing to go to that, but, no, … As it is, Meadows left town and the Senate has gone on leave until after Labor Day. No deal.”
This is Barkley Rosser’s usual newspaper digest. Not one small crumb of real economic analysis. That is regrettable because what unfolds before our eyes is the spectacular finale of the so-called free-market economy.
In the elementary production-consumption economy with a state sector, macroeconomic profit comes ultimately from the household and state sector’s deficit-spending/money-creation, i.e. Qm≡(G−T)−Sm.#1
For Sm=0 this boils down to (G−T)=Qm, i.e. public deficit equals private profit. The profit of the monetary economy is in this analytical limiting case produced entirely by the state. This case is at odds with the popular ideas of a free-market economy and Laissez-faire but it is practically the new normal.
The greater part of the profit in the United States is actually produced by the state. The US economy hangs for a long time already on the state ventilator for its survival. With the current boost of deficit-spending, the situation becomes even more extreme.
The policy of deficit-spending/money-creation is ultimately a means of postponing the breakdown of the US economy. Deficit-spending/money-creation is a free lunch for the Oligarchy. Financial wealth grows in lockstep with public debt. While employment and wage income go down, Mr. Trump’s current policy will blow up macroeconomic profit to hitherto unimaginable proportions. This profit will nearly 100 percent be state-produced.
Say, economists, what exactly has always been the strong point of Laissez-faire capitalism?
Egmont Kakarot-Handtke
#1 Wikipedia, economics, scientific knowledge, or political agenda pushing?
***
REPLY to Barkley Rosser Aug 18You say: “Second you have the oddity that while you claim profits are tied to budget deficits, why is it that it is pro-business Republicans who are now opposing larger deficits thereby endangering business profits?”
Economics is about how the economy works and NOT about how the brains of GOP Senators work.
Btw. this question has already been dealt with. See
Stephanie Kelton and the self-destructive stupidity of the super-rich
***
REPLY to Barkley RosserYou say: “Yo are one of those caricatures of an economist who when confronted with facts that do not coincide with his theory declare that the facts are either wrong or irrelevant because the theory is true.”
The voting behavior of GOP Senators is NOT part of any economic theory but your re-telling of what you have read in the newspapers, which is obviously your main intellectual occupation.
What I told you is that profit in the US economy is nowadays entirely produced by the state and that the exploding deficit-spending will explode profit within a short time span.
This perverse correlation of high unemployment and high state-produced profit is a bit at odds with the popular idea of a free-market economy and should, therefore, provoke the interest of the professional economist.
I realize that it is impossible to get you above the newspaper level.
Anyway, I take the opportunity and, in order to honor myself as the author of the Axiomatic Profit Law, I call the correlation of exploding unemployment, exploding public debt, and exploding profit Handtke’s Law of Exitus Capitalism. It replaces the Law of the Tendency of the Rate of Profit to Fall.
***
REPLY to Barkley Rosser Aug 19You say: “Sorry, Egmont, but your claim tha profit is produced by the state is simply wrong, so wrong that it is not even wrong, as they say.”
What “they” say is absolutely irrelevant, because it is known by now that “they” are scientifically incompetent. Economics is a failed science. That is a fact.
The macroeconomic Profit Law for a closed economy is given by Qm≡Yd+(I−Sm)+(G−T) and this implies Qm=(G−T), i.e. macroeconomic profit is equal to the state’s budget deficit.#1 In order that there is a surplus in the business sector, there must be a deficit in the state sector. Balances always add up to zero.
So, I am right and you and “they”, i.e. the rest of American academics, are wrong. This is elementary algebra, the proof is in the public domain, and you can do NOTHING against it.
#1 Wikipedia, economics, scientific knowledge, or political agenda pushing?
June 26, 2017
A note on Marshall's Magic Wand
Comment on Sandwichman on ‘Marshall's Magic Confidence-Wand’
Blog-Reference and Blog-Reference
Marshall explains commercial depression: “The chief cause of the evil is a want of confidence.” and “In short there is but little occupation in any of the trades which make Fixed capital.”
No taxi driver could explain it better. This kind of “explanation” is paradigmatic for the level of economic science and for these brain-dead trivialities Marshall is still acknowledged as a great economist. One trembles to contemplate what the economics of his peers had looked like.
Update for students: Marshall’s economics has already been dead in the cradle in 1890. That he and his Principles are not buried and forgotten is a sure indication of the utter scientific incompetence of later generations of scholars. Marshall’s supply-demand-equilibrium is one of the most ridiculous constructs in the history of the sciences but still the centerpiece of every economics textbook.
For details see:
► Marshall: a monument of scientific incompetence
► Marshall and the Cambridge school of plain economic gibberish
► Essentials of Constructive Heterodoxy: The Market
Egmont Kakarot-Handtke
Blog-Reference and Blog-Reference
Marshall explains commercial depression: “The chief cause of the evil is a want of confidence.” and “In short there is but little occupation in any of the trades which make Fixed capital.”
No taxi driver could explain it better. This kind of “explanation” is paradigmatic for the level of economic science and for these brain-dead trivialities Marshall is still acknowledged as a great economist. One trembles to contemplate what the economics of his peers had looked like.
Update for students: Marshall’s economics has already been dead in the cradle in 1890. That he and his Principles are not buried and forgotten is a sure indication of the utter scientific incompetence of later generations of scholars. Marshall’s supply-demand-equilibrium is one of the most ridiculous constructs in the history of the sciences but still the centerpiece of every economics textbook.
For details see:
► Marshall: a monument of scientific incompetence
► Marshall and the Cambridge school of plain economic gibberish
► Essentials of Constructive Heterodoxy: The Market
Egmont Kakarot-Handtke
November 9, 2015
The irreparable unreality of all ‘real’ models
Comment on David Glasner on ‘The Well-Defined, but Nearly Useless, Natural Rate of Interest’
Blog-Reference
Keynes had a great methodological insight: “In 1933, Keynes wrote a short contribution to a Festschrift for the German economist Arthur Spiethoff. He there attacked classical economists for not providing an adequate monetary theory. He then embarked upon the development of what he termed a monetary theory of production, a theory in which the interdependence of money and uncertainty, and their effects on economic behavior, could be properly investigated.” (Fontana, 2000, p. 40)
Keynes’ insight has been that the proper subject matter of economics is the monetary economy. Many economists have not got this point until today but still maintain that the ‘real’ economy is the real economy. It is definitively not.
And for one simple reason: the phenomenon of profit cannot appear at all in a ‘real’ economy (2011b). Because of this all ‘real’ models miss the essence of the market economy and are a priori worthless. This includes approaches like Ricardo, Sraffa, or RBC. This is Keynes’ lasting contribution to the advancement of theoretical economics: all ‘real’ models have to go out of the window because they are deeply and irreparably flawed.
The real-world economy manifests itself in the interaction of real and nominal variables. Because of this, the theory of saving, investment, and interest have to be developed within the framework of what Keynes called the ‘monetary theory of production’.
The real time travel, i.e. inventory accumulation/decumulation, is entirely disconnected from nominal time travel, i.e. saving/dissaving (2013). The same holds for capital accumulation/decumulation and saving/dissaving. And, most important of all, saving/dissaving is intimately connected with loss/profit. This connection is obviously important, yet it is entirely missing in the familiar theories of interest.
The crucial point is that the representative economist needs to understand what profit is (2011a). Because of this, the theory of interest is false by implication. The worst blunder consists of conceptualizing the natural rate as a real magnitude and in the futile attempt to derive interest from an apples-now-apples-later time preference model.
Egmont Kakarot-Handtke
References
Fontana, G. (2000). Post Keynesians and Circuitists on Money and Uncertainty: An Attempt at Generality. Journal of Post Keynesian Economics, 23(1): 27–48. URL
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). When Ricardo Saw Profit, He Called it Rent: On the Vice of Parochial Realism. SSRN Working Paper Series, 1932119: 1–19. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Related 'Debunking the natural rate of interest' and 'Are economists methodological retards?'.
Blog-Reference
Keynes had a great methodological insight: “In 1933, Keynes wrote a short contribution to a Festschrift for the German economist Arthur Spiethoff. He there attacked classical economists for not providing an adequate monetary theory. He then embarked upon the development of what he termed a monetary theory of production, a theory in which the interdependence of money and uncertainty, and their effects on economic behavior, could be properly investigated.” (Fontana, 2000, p. 40)
Keynes’ insight has been that the proper subject matter of economics is the monetary economy. Many economists have not got this point until today but still maintain that the ‘real’ economy is the real economy. It is definitively not.
And for one simple reason: the phenomenon of profit cannot appear at all in a ‘real’ economy (2011b). Because of this all ‘real’ models miss the essence of the market economy and are a priori worthless. This includes approaches like Ricardo, Sraffa, or RBC. This is Keynes’ lasting contribution to the advancement of theoretical economics: all ‘real’ models have to go out of the window because they are deeply and irreparably flawed.
The real-world economy manifests itself in the interaction of real and nominal variables. Because of this, the theory of saving, investment, and interest have to be developed within the framework of what Keynes called the ‘monetary theory of production’.
The real time travel, i.e. inventory accumulation/decumulation, is entirely disconnected from nominal time travel, i.e. saving/dissaving (2013). The same holds for capital accumulation/decumulation and saving/dissaving. And, most important of all, saving/dissaving is intimately connected with loss/profit. This connection is obviously important, yet it is entirely missing in the familiar theories of interest.
The crucial point is that the representative economist needs to understand what profit is (2011a). Because of this, the theory of interest is false by implication. The worst blunder consists of conceptualizing the natural rate as a real magnitude and in the futile attempt to derive interest from an apples-now-apples-later time preference model.
Egmont Kakarot-Handtke
References
Fontana, G. (2000). Post Keynesians and Circuitists on Money and Uncertainty: An Attempt at Generality. Journal of Post Keynesian Economics, 23(1): 27–48. URL
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). When Ricardo Saw Profit, He Called it Rent: On the Vice of Parochial Realism. SSRN Working Paper Series, 1932119: 1–19. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Related 'Debunking the natural rate of interest' and 'Are economists methodological retards?'.
July 27, 2015
What comes after debunking?
Comment on Lars Syll on ‘Why Real Business Cycle models can’t be taken seriously’
Blog-Reference and Blog-Reference
Orthodoxy is a failure and even laypersons understand intuitively that the behavior of the economy as a whole cannot be explained by the behavioral assumption of constrained optimization of individual agents. This has been a non-starter since Jevons-Walras-Menger and Heterodoxy have always said so. Yet, the question is not how this ‘pure nonsense’ ‘could be awarded The Sveriges Riksbank Prize in Economic Sciences’ but why traditional Heterodoxy could not produce something better than this ridiculous specimen of proto-science?
Orthodoxy is long dead but it has not been buried. Why is this scientific zombie (Quiggin, 2010) still around?
“The main reason for the considerable acceptance of the approach is that fundamental rule of scientific combat: it takes a theory to beat a theory. No amount of skepticism about the fertility of a theory can deter its use unless the skeptic can point to another route by which the scientific problem of regulation can be studied successfully.” (Stigler, 1983, p. 541)
So, this is the pork-barrel deal: Orthodoxy does not vanish because of proven scientific incompetence but only if Heterodoxy presents something better.
To do them a favor is the pleasant duty of Constructive Heterodoxy. Let us throw out the ‘real’ business cycle by advancing to the interaction of nominal and real variables which constitutes the business cycle of the economy we happen to live in (2012).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). Intertwined Real and Monetary Stochastic Business Cycles. SSRN Working Paper Series, 2173528: 1–27. URL
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Stigler, G. J. (1983). Nobel Lecture: The Process and Progress of Economics. Journal of Political Economy, 91(4): 529–545. URL
Blog-Reference and Blog-Reference
Orthodoxy is a failure and even laypersons understand intuitively that the behavior of the economy as a whole cannot be explained by the behavioral assumption of constrained optimization of individual agents. This has been a non-starter since Jevons-Walras-Menger and Heterodoxy have always said so. Yet, the question is not how this ‘pure nonsense’ ‘could be awarded The Sveriges Riksbank Prize in Economic Sciences’ but why traditional Heterodoxy could not produce something better than this ridiculous specimen of proto-science?
Orthodoxy is long dead but it has not been buried. Why is this scientific zombie (Quiggin, 2010) still around?
“The main reason for the considerable acceptance of the approach is that fundamental rule of scientific combat: it takes a theory to beat a theory. No amount of skepticism about the fertility of a theory can deter its use unless the skeptic can point to another route by which the scientific problem of regulation can be studied successfully.” (Stigler, 1983, p. 541)
So, this is the pork-barrel deal: Orthodoxy does not vanish because of proven scientific incompetence but only if Heterodoxy presents something better.
To do them a favor is the pleasant duty of Constructive Heterodoxy. Let us throw out the ‘real’ business cycle by advancing to the interaction of nominal and real variables which constitutes the business cycle of the economy we happen to live in (2012).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). Intertwined Real and Monetary Stochastic Business Cycles. SSRN Working Paper Series, 2173528: 1–27. URL
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Stigler, G. J. (1983). Nobel Lecture: The Process and Progress of Economics. Journal of Political Economy, 91(4): 529–545. URL
October 23, 2013
Redemption and depression {45}
Working paper at SSRN
Working paper at ARCHIVE
Abstract According to prevailing methodological criteria, standard economics is definitively refuted. Joan Robinson's wake-up call “Scrap the lot and start again” has therefore lost nothing of its original freshness and urgency. Yet, how can the restart succeed? This inquiry builds on structural axioms. First, conceptual consistency is assured and the confusion about profit and income is dissolved. The question of interest is then how a recession or depression develops as a result of the normal functioning of the monetary economy. This involves the identification of positive feedback. A very effective mechanism consists of the circular interaction of profit and distributed profit.
Abstract According to prevailing methodological criteria, standard economics is definitively refuted. Joan Robinson's wake-up call “Scrap the lot and start again” has therefore lost nothing of its original freshness and urgency. Yet, how can the restart succeed? This inquiry builds on structural axioms. First, conceptual consistency is assured and the confusion about profit and income is dissolved. The question of interest is then how a recession or depression develops as a result of the normal functioning of the monetary economy. This involves the identification of positive feedback. A very effective mechanism consists of the circular interaction of profit and distributed profit.
November 11, 2012
Intertwined real and monetary stochastic business cycles {36}
Working paper at SSRN
Working paper at ARCHIVE
Abstract There is no such thing as a ‘real’ economy. The task, therefore, is to consistently reconstruct the fluctuations of employment and output from the interactions of real and nominal variables. The present paper does exactly this. No nonempirical concepts like utility, equilibrium, rationality, decreasing returns or perfect competition are applied. The analysis runs rigorously in objective structural axiomatic terms. Therefrom follows that it is the factor cost ratio, i.e. the relation of the nominal variables wage rate and price and the real variable productivity that, for any given level of effective demand, drives the fluctuations of employment and output.
Working paper at ARCHIVE
Abstract There is no such thing as a ‘real’ economy. The task, therefore, is to consistently reconstruct the fluctuations of employment and output from the interactions of real and nominal variables. The present paper does exactly this. No nonempirical concepts like utility, equilibrium, rationality, decreasing returns or perfect competition are applied. The analysis runs rigorously in objective structural axiomatic terms. Therefrom follows that it is the factor cost ratio, i.e. the relation of the nominal variables wage rate and price and the real variable productivity that, for any given level of effective demand, drives the fluctuations of employment and output.
May 22, 2011
Schumpeter and the essence of profit {04}
Working paper at SSRN
Working paper at ARCHIVE
Abstract Schumpeter had a clear vision of the developing economy, but he did not formalize it. The quest for a germane formal basis is in the following guided by the general question: what is the minimum set of foundational propositions for a consistent reconstruction of the evolving money economy? We start with three structural axioms. The claim of generality entails that it should be possible to free Schumpeter's approach from its irksome Walrasian legacy and to give a consistent formal account of the elementary circular flow that served him as a backdrop for the analysis of the entrepreneur-driven market system.
Abstract Schumpeter had a clear vision of the developing economy, but he did not formalize it. The quest for a germane formal basis is in the following guided by the general question: what is the minimum set of foundational propositions for a consistent reconstruction of the evolving money economy? We start with three structural axioms. The claim of generality entails that it should be possible to free Schumpeter's approach from its irksome Walrasian legacy and to give a consistent formal account of the elementary circular flow that served him as a backdrop for the analysis of the entrepreneur-driven market system.
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