Not only humans but animals, too, know how to use levers of all forms and sizes since time immemorial. And it is certainly possible to write a history of the use of levers from the Stone Age to the Egyptians and beyond. However, this history of the practical use of levers will never arrive a the Law of the Lever as put down by Archimedes.#1 Obviously, there are different views of the lever: the practical, the historico-genetic, and the scientific.
The historian can write a history of levers without knowing the Law of the Lever, that is, without a deeper understanding of the essence/principle/nature of the lever which is abstract and independent of concrete historical time/space but holds for every concrete application of the lever whether the user knows this or not.
The same holds for economic phenomena like money and debt. We have the history of money and the theory of money. The point is that both are related but methodologically entirely different. So, we have to differentiate between the historico-genetic and the axiomatic-deductive method. The drawback of the former is that it remains on the commonsensical surface and easily gets lost in scattered historical details that have no relevance for the here and now, the drawback of the latter is that reality easily gets totally out of sight, that is, the abstraction is eventually entirely disconnected from the real counterpart.
The common danger for both approaches, though, is to get hijacked by politics: “Some years ago, a German Assyriologist told me why so many members of that discipline choose to publish in German or French instead of in English. The reason is that so many Americans (and also Englishmen) take documentation out of context to force into “crazy” theories.” (See intro) This is a good example of what political economics has been all about since Adam Smith and Karl Marx. Political economics and theoretical economics are entirely different things. Political economics is scientifically worthless.
It seems that Goetzmann tried to use the history of money and debt to push an agenda and it is absolutely necessary to point out his distortions and omissions. This is the positivum of Hudson’s contribution.
The negativum of the Goetzmann-Hudson historical discourse is that it is (i) theoretically unfounded, and (ii), not relevant for the understanding of the working of the actual monetary economy.
First of all, the theory of money/debt cannot stand alone but must be embedded in what Keynes called the monetary theory of production, which in turn must be based on macrofoundations.
In the following, a sketch of the formally and empirically correct theory is given. The most elementary version of the objective structural Employment Law (2012) is shown on Wikimedia AXEC62a:
From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment (the letter ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates credit expansion, a ratio ρE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.
The complete AND testable Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.
Item (i) and (ii) cover Keynes’ arguments about aggregate demand. Item (i) establishes the connection between employment and the growth of household sector debt. It holds that growing debt is good for employment and shrinking debt is bad for employment.
Household sector debt has nothing to do with the financing of investment expenditures I. Household sector financing and business sector financing have to be strictly kept apart (2011).
The factor cost ratio ρF as defined in (iii) embodies the price mechanism which, however, does not work as the representative economist hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.
For the relationship between real wage, productivity, profit, and real shares see (2015, Sec. 10)
The correct Profit Law reads Qm≡Yd+I−Sm (2014b, p. 8, eq. (18)).#2 Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure.
The Profit Law gets a bit longer when import/export and government are included.
The Employment Law and the Profit Law have some variables in common. And this has an important consequence. Roughly speaking, what happens in the monetary economy is this: the profit of the business sector as a WHOLE does NOT depend on productivity or low wages or the greed of capitalists or the smartness of managers but on the growth of the household sector’s debt. Therefore, as long as this debt grows employment and profit are fine. Needless to add that this implies the existence of a banking sector with the capacity of credit/money creation. Things become worrisome, though, as soon as credit expansion stops and nasty as soon as the household sector as a whole pays the debt back. In this case, profit turns into loss and the business sector breaks down (2014a). Note well, this happens without any debt crisis or market failure, or wrongdoing of the banking sector. It SUFFICES that the households eventually pay back their debt as they are supposed to do. This is because the growing/shrinking household sector debt immediately translates into profit/loss of the business sector. Economists cannot see this because the standard price and profit theory is false.
What the macrofounded theory of employment, money/debt, and profit tell us is: The breakdown of the monetary economy is not a bug but a feature. It should be obvious, that one can never find this out by studying the debt policy of Hammurabi.
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014a). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
#3 See Wikimedia AXEC09 or Wikimedia AXEC08 or Wikimedia AXEC42.