Wednesday, November 14, 2018

Lars P. Syll — Kalecki and Keynes on the loanable funds fallacy

Banks are not intermediaries between savers and borrowers, and finance is not allocating existing savings to future investment.

The opposite is true. Bank credit is self-funding; in credit extension, loans (assets) create deposits (liabilities). In finance as allocation of capital, investment creates saving.

Lars P. Syll’s Blog
Kalecki and Keynes on the loanable funds fallacy
Lars P. Syll | Professor, Malmo University


Andrew Anderson said...

Banks are not intermediaries between savers and borrowers, Tom Hickey

Yet they could be if the entire economy were allowed to use fiat and not just banks and other depository institutions.

And the reason the entire economy is NOT allowed to use fiat, except for mere coins and bills, is that under the Gold Standard fiat was too expensive for the entire economy to use but only the banks and other depository institutions.

So bank credit is a relic of the Gold Standard and is thus obsolete along with all government privileges for the banks.

Andrew Anderson said...

is that under the Gold Standard fiat was too expensive for the entire economy to use aa

That is, without eventually making gold too expensive for any other use than backing fiat.

So, under a Gold Standard, the choices are:
1) Limit fiat use to government privileged depository institutions, i.e. to "the banks."
2) Make gold too expensive for ordinary use such as for wedding bands while giving gold owners and miners HUGE windfall profits.

The Gold Standard is thus a huge scam as is the current banking model which is meant to solve a problem that should not exist in the first place: needlessly expensive fiat.

Ralph Musgrave said...

Syll’s opening paragraph makes the common claim that because commercial banks create money from thin air, that therefor banks do not need pre-existing savings in order to fund investments. As Syll puts it (quoting Kalecki, I think), “investment, once carried out, automatically provides the savings necessary to finance it.” Well there’s a problem with that idea, as follows.

Suppose an economy is at capacity and a firm wants to borrow from a bank and invest. The bank will provide the money and the investment gets made. But wait a moment: if the economy is at capacity, no more demand is permissible. Moreover, if that money IS SPENT, it will end up in the bank accounts of A, B & C etc. But A,B,C, etc will then have more than their preferred stock of money at the going rate of interest. They will therefor try to spend away that excess. Thus quite apart from the excess demand caused by the latter investment spending, there is a CONTINUOUS excess demand problem.

The result is the central bank will raise interest rates, which will snuff out at least some of the above extra investment spending. Plus the higher rate of interest will make A,B,C etc more willing to hold onto their newly acquired money, rather than spend it away.

In short, the fact that commercial banks create money out of thin air does not invalidate the idea that the supply of and demand for savings works much the same way as supply for and demand for apples. At least that’s true where the economy is at capacity.

AXEC / E.K-H said...

Kalecki and Keynes: The double macroeconomic false start
Comment on Lars Syll on ‘Kalecki and Keynes on the loanable funds fallacy’

Like Keynes, Kalecki got the foundational concepts of profit/income/saving wrong. Lars Syll and the rest of retarded After-Keynesians, though, have not realized anything to this day.

Lars Syll quotes Kalecki: “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. In the present conception investment, once carried out, automatically provides the savings necessary to finance it. Indeed, in our simplified model, profits in a given period are the direct outcome of capitalists’ consumption and investment in that period. If investment increases by a certain amount, savings out of profits are pro tanto higher …”

There NEVER was and NEVER will be an equality of saving and investment. This is one of the greatest blunders in the history of the cargo cult science of economics.#1

Keynes defined the formal foundations of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63) This elementary two-liner is conceptually and logically defective because Keynes never came to grips with profit. (Tómasson et. al)

The elementary version of the axiomatically correct macroeconomic Profit Law reads Qm=I−Sm with Qm as monetary profit and Sm as monetary saving. And this means that since Keynes/Hicks ALL I=S/IS-LM models are false.

Kalecki added profit and distributed profit to the macroeconomic equations. With profit distribution and the consumption/saving out of distributed profit, the expanded Profit Law reads Qm=Yd+I−Sm.#2 Again, investment and saving are NEVER equal. There NEVER has been or will be such a thing as an equilibrium or an accounting identity I=S. Both Kalecki and Keynes were too stupid for the elementary mathematics that underlies macroeconomics.#3

Kalecki’s and Keynes’ macroeconomics is proto-scientific garbage. Because the profit theory is false, the whole analytical superstructure is false, including, of course, the theory of employment, interest, and money.

Because of this, both Kaleckian and Keynesian policy guidance NEVER had sound scientific foundations.#4

Egmont Kakarot-Handtke

#1 For details of the big picture see cross-references Refutation of I=S

#2 For details see cross-references Kalecki

#3 Wikipedia and the promotion of economists’ idiotism (II)

#4 Keynes, Kalecki, MMT and the invention of the perpetual profit machine

Andrew Anderson said...

Bank credit is self-funding; in credit extension, loans (assets) create deposits (liabilities). Tom Hickey

Except the liabilities are largely a sham toward the non-bank private sector since the non-bank private sector may not even use fiat except for mere, grubby, unsafe physical fiat, coins and bills, and even that usage is limited.

I've pointed this out numerous times to, it now seems, deaf and/or corrupt ears.

Kaivey said...

How does that work in housing bubbles, Matt? The banks create the money and people seem to be able to service it by working longer hours, doing a second job, and going without. But when they go without the economy suffers, but when they do a second job they provide more output for society. Economics and money are difficult to understand. Not even many economists can agree on anything!