January 18, 2015

Refocusing the debt/profit issue

Comment on Arthurian on 'The first of the great powers to reduce private debt will be the world's next hegemon'


The two Figures in Debunking Squared (2013) have been characterized in the text as 'straightforward graphical demonstration'. Whether you call the four-quadrant representation of the elementary production-consumption economy a model or a graph is of no great importance.

It is a bit unfortunate that you obviously cannot interpret the Figures. However, if you prefer a strictly formal argument you could turn to the working papers that have been listed in the References. You find the elementary equations that underlie the graphical representation also here and there (2015, p. 2) and here.

You say you like the summary: 'Total income is the sum of wage income and distributed profit and not of wage income and profit.' However, that is not a matter of personal taste but of the correct formal representation of the pure consumption economy. If you do not get this most elementary case right you are lost.

The key argument is that because total income is not (i) the sum of wages and profits but of (ii) wages and distributed profit all approaches that are based on (i) are untenable and this includes Keen's approach (and Keynes', and Kaldor's, and Kalecki's, and Minsky's, and so on).

The fact of the matter is that both orthodox and heterodox economists cannot tell the difference between the fundamental economic magnitudes of income and profit. This means that they are outside of science.

From the formally correct approach follows for the elementary production-consumption economy: As soon as private/public households pay off their debts the economy breaks down. It does not matter whether the debt consists of overdrafts, mortgages, bonds, or any other of the myriad forms. The consistent inclusion of the banking sector is an entirely separate issue (2011a; 2011b).

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011a). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–26. URL
Kakarot-Handtke, E. (2011b). Reconstructing the Quantity Theory (II). SSRN Working Paper Series, 1903663: 1–19. URL
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL