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Loanable funds ― no hoax, just breathtaking stupidity Comment on Lars Syll on ‘The loanable funds hoax’
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 that 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 junk, 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 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=0 or 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 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 accuracy of two decimal places.
The orthodox loanable funds theory is false but the heterodox alternatives are also false.#4 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 https://axecorg.blogspot.de/2017/08/there-is-no-such-thing-as-supply-demand.html
#2 The tiny little problem with economics https://axecorg.blogspot.de/2016/05/the-tiny-little-problem-with-economics.html
#3 See also ‘Macro for dummies’ https://axecorg.blogspot.de/2017/07/macro-for-dummies.html
#4 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856
#5 Economists: just too stupid for counting https://axecorg.blogspot.de/2017/07/economists-just-too-stupid-for-counting.html
#6 Fact of life: your econ prof is scientifically incompetent https://axecorg.blogspot.de/2017/08/fact-of-life-your-econ-prof-is.html
So if they believe in loanable funds, when have they ever applied it?
It's part of the argument against deficit spending in stimulative fiscal policy because bond issuance "crowds out" private investment through the government competing for loanable funds.
4 comments:
I'd forgotten how great William Vickery's Fifteen Fatal Fallacies of Financial Fundamentalism were, referenced in the 2nd Syl article.
So if they believe in loanable funds, when have they ever applied it?
Loanable funds ― no hoax, just breathtaking stupidity
Comment on Lars Syll on ‘The loanable funds hoax’
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 that 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 junk, 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 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=0 or 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 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 accuracy of two decimal places.
The orthodox loanable funds theory is false but the heterodox alternatives are also false.#4 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
https://axecorg.blogspot.de/2017/08/there-is-no-such-thing-as-supply-demand.html
#2 The tiny little problem with economics
https://axecorg.blogspot.de/2016/05/the-tiny-little-problem-with-economics.html
#3 See also ‘Macro for dummies’
https://axecorg.blogspot.de/2017/07/macro-for-dummies.html
#4 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856
#5 Economists: just too stupid for counting
https://axecorg.blogspot.de/2017/07/economists-just-too-stupid-for-counting.html
#6 Fact of life: your econ prof is scientifically incompetent
https://axecorg.blogspot.de/2017/08/fact-of-life-your-econ-prof-is.html
So if they believe in loanable funds, when have they ever applied it?
It's part of the argument against deficit spending in stimulative fiscal policy because bond issuance "crowds out" private investment through the government competing for loanable funds.
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