December 16, 2015

It is shrinking debt which eventually explodes the market economy

Comment on David Richardson on ‘What does “too much government debt” mean in a stock-flow consistent model?’


You are right, of course, in summarizing that representative agent models are worse than dilettantish. How anybody at the IMF could ever have taken this stuff seriously is a mystery. What can be observed with the naked eye is what you call a ‘failure of the instincts of many economists and others’.

You are right, of course, to point out that Godley and Lavoie’s approach is the correct one and that every economic model has to satisfy stock-flow consistency. There can be absolutely no doubt and no discussion about this. The two well-known criteria of science are formal and material consistency.

The sad fact is that there is a logical flaw in how Godley and Lavoie define stock-flow consistency. To be precise the fundamental error/mistake is to be found on page 8: “Over any accounting period expenditure has to be equal to income and, as a consequence in a simple model investment must be equal to savings.”

This blunder goes back to Keynes and After-Keynesians have not realized until this very day that Keynes had messed up the formal foundations of the General Theory with this simple syllogism “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

The fatal flaw of Keynes’ and Godley/Lavoie’s approach is that the underlying profit theory is false (2011). And it should be beyond doubt that if one gets the pivotal concept of economics wrong all the rest of one’s theory is vacuous, to say the least. For the rectification of the accounting approach see (2012).

From this follows that your treatment of the debt problem is not substantially better than what standard economics has delivered. The real crux of the debt problem lies in the stock-flow relationship between the change of debt (household sector and government sector) and overall profit/loss of the business sector and that means that the market economy breaks down as soon as overall household and government sector’s debt is redeemed (2014; 2013).

The present state of economics is that neither Orthodoxy nor Heterodoxy has an idea of how the market economy works.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2013). Redemption and Depression. SSRN Working Paper Series, 2343561: 1–28. URL
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

For details of the big picture see cross-references Refutation I=S.

For more about stock-flow consistency see AXECquery.


ADDENDUM  The brain-dead blunder with profit; comment on Nick Edmonds on ‘An SFC Version of the Diamond Growth Model’ on Dec 17

Your profit equation (6) is false and because profit is the pivotal concept in economics it holds without exception: if profit is ill-defined the whole theoretical superstructure falls apart.

For details see the related comment on David R. Richardson’s RWER No 73 article ‘What does “too much government debt” mean in a stock-flow consistent model?’ here.

For the comprehensive critique of the ubiquitous profit blunder and its final rectification see How the intelligent non-economist can refute every economist hands down.


REPLY  Urgent: your methodological check-up; reply to Nick Edmonds on Dec 18

You maintain: “You can’t say it’s false, because it’s no more than a definition.” This is what Humpty Dumpty always said — and it is pure methodological nonsense. See The Humpty Dumpty methodology and Humpty Dumpty is back again.

There is no such thing as freedom of definition. This freedom is restricted by the requirement of consistency. Logical consistency, though, has never been a strong point of economists. For more on scientific incompetence see cross-references Scientific Incompetence.

So, indeed, I can say it is false because it is provably false. No room for the usual wish wash.

REPLY  to Nick Edmonds on Dec 19

The common usage including SNA is provably false as demonstrated in The Common Error of Common Sense: An Essential Rectification of the Accounting Approach.

Your appeal to authority is beside the point. The fact of the matter is that ‘the EC, the IMF, the OECD, the UN, and the World Bank’ employ Humpty Dumpty economists who even messed up the elementary mathematics of accounting. Ever wondered why economics never got above the level of silly model bricolage?