Keynesian Fallacy and Collapse

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 \Delta Y=\Delta C+\Delta I, where \Delta C and \Delta I are the increments of consumption and investment; so that we can write \Delta Y=k\Delta I, where 1-\frac{1}{k} 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.

Continue reading

Posted in Econoclasm, Economics | 8 Comments

Policy of Debt and Destruction

For several decades, the historical data show that the monetary policy of central banks has been to use debt to stimulate the global economy, constrained only by the possible emergence of high inflation. This post shows that the policy has been economically destructive for US economic growth and, with more audacious pursuit of such a monetary policy recently, the risk of a Keynesian economic collapse has increased substantially (Sy, 2014).

A few decades of US monetary stimulus has led to zero or negative interest rates and the accumulation of a mountain of debt, which economists confuse with money and consider as innocuous, because “debt is money we owe to ourselves” (Krugman, 2015) or “one person’s debt is another person’s asset” (Fatas, 2015). Of course, debt is harmless provided it does not lead to bad loans or credit defaults, which are assumed negligible and ignored in standard economic theories taught at universities. The reality is very different.

Continue reading

Posted in Economics | 6 Comments

Facts and Economic Science

It is clear that economics is in chaos when there are significant disagreements about basic facts of economics. There is an abundance of statistical data presented by the media, but there are few agreed facts. Is there too much government deficit spending or too little? Is there too much debt or not enough? Is the danger inflation or deflation? The lack of agreed facts about inflation has led to divergent monetary policies of central banks, as a senior OECD economist noted recently (White, 2014):

The Bundesbank, for example, is fighting the threat of high inflation, whereas the Fed is more concerned about the prospect of deflation.

White (2013) summed up the situation earlier:

there is, in practice, no body of scientific knowledge (evidence based beliefs) solid enough to have ensured agreement among central banks on the best way to conduct monetary policy.

Continue reading

Posted in Methodology, Science | 3 Comments

Optimal Aggregate Consumption

Over-consumption is not in the Keynesian lexicon. More consumption is assumed always to be better for economic growth (with few exceptions) in a Keynesian prescription of perpetual demand-stimulation policy of quasi-boom (Keynes, 1936, p. 322):

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms, and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keep us permanently in a quasi-boom.

Continue reading

Posted in Econoclasm, Economics | 2 Comments

Saving=Investment Fallacy

“Saving=Investment” is axiomatic in macroeconomics as it is taught in basic textbooks, found in advanced research and assumed in national statistics. Yet it is a fallacy which can be traced to Keynes (1936, p.63) where he defined saving as “the excess of income over consumption” in a framework of equilibrium circular flow of national income.

This is a fallacy because the economy is generally not in equilibrium in each period (i.e. income is not equal to expenditure). The excess of income over expenditure is adjusted in the national accounts by introducing a term called “statistical discrepancy” or “net borrowing or lending” (in the US) in order to force equality in the statistics. It is this important discrepancy which is actually the aggregate saving rate because it is defined by income minus expenditure for each period.

Continue reading

Posted in Econoclasm, Economics | 12 Comments