One of the first posts of this blog describes the potential for a Keynesian economic collapse due to persistent policy application, over decades, of the Keynesian fallacy. The fallacy originated from simple mathematical errors in Keynes’ General Theory which have never been corrected. Instead, they have been perpetuated in basic economic textbooks and form the foundation of government macroeconomic policy.
It is now so important to point out this fallacy that it is worthwhile repeating the argument and its refutation as simply and clearly as possible. On page 115 of the General Theory, Keynes (1936) wrote (suppressing inessential subscript symbols):
For , where and are the increments of consumption and investment; so that we can write , where is equal to the marginal propensity to consume.
Let us call k the investment multiplier. It tells us that, when there is an increment of aggregate investment, income will increase by an amount which is k times the increment of investment.