August 10, 2017

Loanable funds ― no hoax, just breathtaking stupidity

Comment on Lars Syll on ‘The loanable funds hoax’

Blog-Reference and Blog-Reference and Blog-Reference on Aug 12

Lars Syll states: “In the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks — the amount of loans and credit available for financing investment is constrained by how much saving is available. Saving is the supply of loanable funds, investment is the demand for loanable funds and assumed to be negatively related to the interest rate. Lowering households’ consumption means increasing savings via a lower interest. That view has been shown to have very little to do with reality. It’s nothing but an otherworldly neoclassical fantasy.”

This, of course, is true. Anytime an economist paints supply-curve—demand-curve—equilibrium it is proto-scientific garbage, no matter what is written on the axes.#1 The standard analytical tool, i.e. SS-curve―DD-curve―intersection, represents a NONENTITY. By consequence, any supply-demand-equilibrium discussion is as senseless as any dancing-angels-on-a-pinpoint discussion.

Lars Syll’s critique of the loanable funds theory is correct on all scores. The problem, though, is that BOTH orthodox and heterodox economists are scientifically incompetent. The proof is in the fact that heterodox alternatives are regularly just as crappy as the orthodox original. They look only different at the surface level.

Lars Syll quotes Kalecki approvingly: “It should be emphasized that the equality between savings and investment … will be valid under all circumstances. In particular, it will be independent of the level of the rate of interest which was customarily considered in economic theory to be the factor equilibrating the demand for and supply of new capital.”

Kalecki, of course, is wrong. Saving and investment are NEVER equal, neither ex-ante nor ex-post. Keynes, of course, got it also wrong: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

In order to prove this, one has to go back to the basics of what Keynes called ‘the monetary theory of production’. The pure production-consumption economy is for a start defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw), and two definitions (monetary profit Qm≡C−Yw, monetary saving Sm≡Yw−C).#2

It always holds Qm≡−Sm, in other words, the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It implies that saving and investment are NOT equal, simply because there is no investment in the pure consumption economy but there is saving/dissaving.#3

So, Kalecki is refuted, Keynes is refuted, and all the rest of the IS-LM crowd up to Krugman is refuted.#4

For the investment economy holds Qm=I−Sm. The DIFFERENCE between investment and saving, which exists at ANY moment on the time axis determines monetary profit Qm, which is measurable with the precision of two decimal places.

The orthodox loanable funds theory is false but the heterodox alternatives are also false. Economists are too stupid for elementary algebra.#5 This is NOT a hoax, this is real.#6

Egmont Kakarot-Handtke

#1 There is NO such thing as supply-demand-equilibrium
#2 The tiny little problem with economics
#3 See also ‘Macro for dummies
#4 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#5 Economists: just too stupid for counting
#6 Fact of life: your econ prof is scientifically incompetent

Related 'Fixing the loanable funds blunder'. For details of the big picture see cross-references Refutation of I=S