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Fallacies of financial fundamentalism

from Lars Syll

Fallacy 2
Urging or providing incentives for individuals to try to save more is said to stimulate investment and economic growth.

Again, actually the exact reverse is true. In a money economy, for most individuals a decision to try to save more means a decision to spend less; less spending by a saver means less income and less saving for the vendors and producers, and aggregate saving is not increased, but diminished as vendors in turn reduce their purchases, national income is reduced and with it national saving. A given individual may indeed succeed in increasing his own saving, but only at the expense of reducing the income and saving of others by even more …

Saving does not create “loanable funds” out of thin air. There is no presumption that the additional bank balance of the saver will increase the ability of his bank to extend credit by more than the credit supplying ability of the vendor’s bank will be reduced … Attempted saving, with corresponding reduction in spending, does nothing to enhance the willingness of banks and other lenders to finance adequately promising investment projects. With unemployed resources available, saving is neither a prerequisite nor a stimulus to, but a consequence of capital formation, as the income generated by capital formation provides a source of additional savings.

Fallacy 3 
Government borrowing is supposed to “crowd out” private investment.

The current reality is that on the contrary, the expenditure of the borrowed funds (unlike the expenditure of tax revenues) will generate added disposable income, enhance the demand for the products of private industry, and make private investment more profitable. As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit) those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “Supply creates its own demand” fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.

William Vickrey Fifteen Fatal Fallacies of Financial Fundamentalism

  1. Robert Locke
    February 7, 2019 at 9:01 am

    Lars, I am not sure what your strategy is in these articles, other than to show that economics is not an applied science, and that horse has been beaten to death long ago. I assume that you have another motive, to advance economic reform. But I do not see how that can be done by criticizing an economic theory that is jealously protected by the academic establishment. Do you have any other ideas about where to look in order to be more effective in your criticism?

    • Frank Salter
      February 8, 2019 at 3:47 pm

      I am in total agreement with what you say. However it would be helpful if you would say what valid theory that Lars should promote.

      • Robert Locke
        February 8, 2019 at 5:53 pm

        Frank your suggestion that theory needs to drive economic knowledge is quite alarming. I have spent the past 50 years trying to cope with the impact of theory driven economics on our society, i.e., the application of Newtonian Mechanics to neoclassical market economics. I have a lot less confidence than you do in the ability of theories applied to economics being able to solve our problems.

        With economics I start with problems and people who are engaged in an economic process. Let the people identify the problems, i.e., decline of manufacturing, the financialization of the global economy, etc., which requires an investigation that is much boarder in scope than economists, and consider how the institution (educational, governmental, legal, labor, etc) in which people are embedded affect how people go about identifying economic problems and solving them. It requires lots of research in periodical literature and books, sometimes for years before you identify problems. It requires a knowledge of foreign languages and historical specificities.

      • Frank Salter
        February 8, 2019 at 7:38 pm

        I take your point but you may have noted that I have said repeatedly that there are NO conventional abstract analyses available. But the Buckmaster Fuller quote (See Craig below) is absolutely true.

        I do not believe that continuing in the same old way will ever resolve anything. 250 years without developing valid abstract descriptions surely prove this.

      • Robert Locke
        February 9, 2019 at 10:56 am

        I sympathize, because there is something innate in scientific trained people that makes them want to use theory to explain reality, i.e. “To change something, build a new model that makes the existing model obsolete.” But, remember Occam, when there are two explanations, the one that requires the least speculation is the better.” Trying to map theories of natural science on to economics is a dangerous game because of what they do to our appreciation of events in the real world. Theory can be useful, but it must always be checked in the real world, and if found wanting, discarded, the danger is not to become so enamored with theory, that the real world is discarded, which is what has been going on for over a century now. It’s a bore.

  2. Jan Milch
    February 7, 2019 at 3:10 pm

    Here is the full article for any interested to read.I strongly recommend it!
    Fifteen Fatal Fallacies of Financial Fundamentalism
    A Disquisition on Demand Side Economics- William Vickrey ,awarded with the 1996 Nobel Memorial Prize in Economic Sciences http://www.columbia.edu/dlc/wp/econ/vickrey.html

  3. Craig
    February 7, 2019 at 6:15 pm

    “You never change things by fighting the existing reality.
    To change something, build a new model that makes the existing model obsolete.”

    R. Buckminster Fuller

  4. Econoclast
    February 7, 2019 at 11:39 pm

    I want Lars to continue with these articles. The horse isn’t dead.

    I am constantly encountering people who have taken basic economics at some level and who use the term “it is not economical to … .” What they really mean is what I call cost engineering, because the “economics” they think they know is some version of market fundamentalism.

    For example, I work on forestry issues and I constantly see that this entire profession (at least in the United States) uses a set of forest management practices that is barely based upon ecology and dominated by commodity-driven market fundamentalist economics. The result is not rational resource management, it is mining the forest ecosystem.

    Also I recently reviewed the course offerings in the nation’s top 2 dozen economics departments and found the neoclassical orthodoxy alive, well, and dominant. It is wonderful to see the exceptions at such as Levy Institute, Vermont and University of Missouri Kansas City, but they are exceptions. Market fundamentalism has both right-wing (e.g., Friedman) and left-wing (e.g., John Galbraith) versions, but they share the same many flaws.

    When I talk to people, they are surprised that they were so badly educated. I hand over one or more articles for further education, including RWER postings such as Lars’. Y’all keep it up, it is very helpful in what I try to do.

    • Calgacus
      February 9, 2019 at 12:15 pm

      How was John Kenneth Galbraith a market fundamentalist?
      I mean, I would say he one of the extreme opposites of that belief.

      Hey, I was impressed that you studied under Abba Lerner.

      I do think Lars goes a little too far, when he criticizes mathematical reasoning and rigor. These are always good things. But non-mathematicians are often unable to see that a paper or book with a lot of fancy symbols and equations can be just anti-mathematical BS that would make a mathematician vomit. While one which is solely in words, like much of Keynes or Lerner, is pure math. Non-mathematicians can’t tell what is math and what is not math, what is rigor and what is not rigor.

      • Robert Locke
        February 9, 2019 at 4:51 pm

        Yes, but nonmathematicians can understand when a brilliant mathematician, like John von Neuman writes that the mathematics in neoclassical economics hasn’t accomplished very much. We can’t know everything, so we turn to authorities in a field for advance. Neuman said that the mathematics used in neoclassical economics was not rigorous. I don’t need to know mathamatics to know Walras was wrong, when a Neuman says so.

      • Calgacus
        February 9, 2019 at 9:43 pm

        I agree, I would usually take on faith what a von Neumann was saying. Nobody has the time to check everything. But if I were taking or teaching a class on something, I would check through everything myself, until I fell asleep, or until I proved to my own satisfaction I could snow the students into believing I had.

        Incidentally, studies have shown that (neoclassical-dominated) mainstream economics is something of a walled garden in academia, with less interaction than one would expect from neighboring fields like mathematics.

        We need more von Neumans who can knowledgeably criticize (“mathematical”) economics. The late (& great) Jacob Schwartz was another one who wrote about the “unreasonable ineffectiveness of mathematics in economics”. It is hard to think of anyone else who measures up to these. I’ll try. I wish Lars would read or take Schwarz’s critiques as a model.

        Arrow-Debreu rigorized Walras. But they made clearer how unrealistic it is. It’s an extreme, extreme, special case that by definition posits away everything that is almost always of primary interest in the economy. Poincare also criticized Walras to his face, saying his assumptions were a bit much.

        I mean what Walras, Arrow, Debreu did was interesting enough, people should know about it. They deserved to get tenured academic jobs for it. But to center whole academic fields on it!? That’s as mad as saying the only physics which should be studied is black hole physics and keeping anybody who studies any physics that occurs outside of black holes, like on Earth or in the Solar System – from getting a job.

        The sensible aim is to spend most of academia’s effort on making theories that fit Earth – and also make sense when applied to the Walras-Arrow-Debreu black hole, which occasionally, but only occasionally may give a bit of insight to Earth.

      • Robert Locke
        February 10, 2019 at 1:57 pm

        Doing all that math with students seems an ardent and difficult thing to do. I prefer and have taken a different tack. I have selected a group that is dedicated to the application of mathematical models to the real world, and inquire of them, how well they have accomplished the mission.

        The group I chose was the Operational Research Society. On the masthead of their journal is written:

        Operational Research is the application of the methods of science to complex problems… The distinctive approach is to develop a scientific model of the system, incorporating measurements of the factors..with which to predict and compare the outcomes of alternate decision strategies or controls. The purpose is to help management determine its policies and actions scientifically.”

        I then looked at the Journal of the Operational Research Society, starting page one of the first issue and then reading the issues over the next 20 years. At first, there were no doubts in the journal about the efficacy of the methods, and then, in the second decade, doubts began to grow about the efficacy of the mathematical modeling project. See “The New Paradigm Revisited, in my Management and Higher Education Since 1940, Cambridge UP, 1989, and the doubts culminating in the 1989 article by Russell Ackoff, “The future of Operations Research is Past.”

  5. February 9, 2019 at 10:50 am

    Having studied the Vickrey article, Jan, I am still sympathetic to Robert’s criticism of Lars continually “flogging a dead horse”. I do believe Frank is right insofar as his criticism is of statics (e.g. assumed equilibrium) and his advocacy is of a dynamic theory (in his the limits of what is physically possible, assuming evidence somewhat like that of weather forecasting). I don’t agree with him that there are NO conventional abstract analyses available (it is just that those trained in economics seem unaware of them), but with him and Craig I totally agree with Buckmaster Fuller’s observation, hence like Econoclast (in his moving post) I keep trying to “hand over one or more articles for further education”. See my contribution at


    Whereas static equilibrium theory assumes the economy will arrive at a particular state, a dynamic theory may aim for that, but it is all about trying to get there. The dynamic theory is actually relatively new (not published undel after Keynes had died), and it came out in two forms: one “the application of Newtonian Mechanics [to neoclassical market economics]” and another based on the application of information feedback to arriving where one is aiming for, no matter what happens on the way.

    To give a suitably German example for Robert, the original flying bombs were just blasted off at London after a guess as to which way the wind was blowing. Modern guided missiles and autopilots continually detect what is happening and make adjustments accordingly. The design objective is no longer to get the sums right beforehand but to see what sensors are needed and build them and appropriate computation into the system.

    It looks like we are going to see driverless cars roaming about our streets soon. Economists need to step back from working out what effect that will have on our present failed economy and think seriously about how to enable the economy to safely run itself.

    February 9, 2019 at 9:35 pm

    Once again I am now in my eighties but unlike most of the commenters my only educational qualification was a humble mature age qualification. Poor old Lars Syll often cops a bit of flack for not offering an alternative to what he is rightsizing From my perception his blogs promote a great deal of useful discussion, for example the above posts to his blogs above. Having said that I also have to congratulate the authors of the posts who agree with some comment and disagree with others, then give reasons why.

    To me this approach contrasts with the dogmatic rhetoric of the politically driven main-stream economists who inturn are driven by those seeking to increase their wealth. Here I think of C.T.Kurien’s concept of education is about learning how to think, not what to think.
    So thank all you thinkers for your understandable invigorating conversations. Ted

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