July 4, 2015

An exercise in futility

Comment on Mark Thoma on ‘Stability of a Market Economy’


You correctly say that it is a belief that the market system is inherently stable. As a matter of fact, this belief is either ultimately derived from Walrasian general equilibrium theory, which has been thoroughly refuted (Ackerman and Nadal, 2004), or from wishful thinking. The opposite belief is not any better founded. The lethal defect of Keynes, Hicks, Kaldor, Kalecki, etcetera, is that the subjacent profit theory is false (2011). Hence, neither belief has a sound theoretical foundation. A multitude of models is no substitute for a comprehensive theory but gives only rise to utterly confused discussions.

In order to show that the market economy is stable/unstable, first of all, a consistent formal description of the structure has to be given. In the second step, it has to be shown that this structure supports positive feedback. You argue instead that human behavior has a tendency for self-reinforcement. This is a psycho-sociological hypothesis and not a structural hypothesis.

In sum, your analysis lacks a sound theoretical foundation.

The correct structural approach (2015) leads to the result that the market economy is inherently unstable. This result is, of course, formally consistent and directly testable. This makes the usual inconclusive wish-wash redundant.

Egmont Kakarot-Handtke

Ackerman, F., and Nadal, A. (Eds.) (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. London, New York: Routledge.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL