comments on rwer issue no 73

real-world economics review issue no. 73  – 11/12/15
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  1. James W. McGillivray
    December 11, 2015 at 8:50 pm

    Please know that your writing is appreciated. It is a bit depressing to realise that the religion of economics has gained such a hold upon the people with power, [the rich], and that they are allowing the world to be made uninhabitable while they worship Growth.
    J.W.McGillivray FRCSC. Collingwood Canada

  2. December 11, 2015 at 8:52 pm

    Hello Donald,

    Thank you for an interesting commentary on Paul Mason’s recent book

    You are probably aware that Paul Mason is not the first to predict the demise of capitalism. Jeremy Rifkin in his ‘Third Industrial Revolution’, and more recently ‘Zero Marginal cost’, has shown that centralised energy systems can gradually be replaced by distributed energy production, vis. Germany. A smart grid allows direct exchange between ‘prosumers’, creating people power and thereby transforming social relationships and our connection to the biosphere. A Basic Income would resolve the problem of digital goods being freely available.

    However when constant warfare is used to create huge profits for the arms trade, and the constant destruction of infrastructure provides opportunities for construction firms, it seems capitalism finds other ways to shore up its profits. Prisons remain a good source of income, now that automation is rendering the workforce superfluous. Moreover global warming brings freak weather, storms and floods, drought and fires, food shortages and livelihoods destroyed, against which the possibility of digital abundance promised by the Internet seems irrelevant.

    However much I am inspired by Paul Mason’s ideas, and Jeremy Rifkin before him, it seems there are always alternative areas for capitalism to exploit.


    • December 13, 2015 at 12:03 pm

      Dear Anna,

      Thank you very much for your comment. I didn’t know of Jeremy Rifkin’s work, and will certainly look into it. I cannot, however, agree that “the possibility of digital abundance promised by the internet seems irrelevant”. To take your example of global warming, this can only be solved by a lot of scientific and technological developments. Scientific and technological knowledge, however, are digital products, and belong to the digital economy.


  3. December 12, 2015 at 2:02 pm

    For David Richardson,

    I would agree with the general argument that the implications of debt and deficits are commonly misunderstood and that studying SFC models can provide greater insight into how and why these matter.

    However, there seems to be some suggestion in your paper that it is stock-flow consistency itself that is lacking in mainstream models and that is the cause of the misunderstanding. I do not think this is correct. In general, mainstream models are fully stock-flow consistent and can be set out in standard SFC format to produce the same results. Indeed, I have done this exercise for the Diamond growth model ( Diamond’s model, of course, is set out in a context of a paper specifically showing the formal crowding out argument you describe on page 4.

    The reasons for questioning the conventional wisdom on national debt are much more subtle. They have to do with the behavioural assumptions that are made and, even more importantly, how policy is conceived.

  4. December 16, 2015 at 8:44 am

    It is shrinking debt which eventually explodes the market economy
    Comment on David R. Richardson on ‘What does “too much government debt” mean in a stock-flow consistent model?

    You are right, of course, in summarizing that representative agent models are worse than dilettantish. How anybody at the IMF could ever have taken this stuff seriously is a mystery. What can be observed with the naked eye is what you call a ‘failure of the instincts of many economists and others’.

    You are right, of course, to point out that Godley and Lavoie’s approach is the correct one and that every economic model has to satisfy stock-flow consistency. There can be absolutely no doubt and no discussion about this. The two well-known criteria of science are formal and material consistency.

    The sad fact is, though, that there is a logical flaw in how Godley and Lavoie define stock-flow consistency. To be precise the fundamental error/mistake is to be found on page 8: “Over any accounting period expenditure has to be equal to income and, as a consequence in a simple model investment must be equal to savings.”

    This blunder goes back to Keynes and After-Keynesians have not realized until this very day that Keynes had messed up the formal foundations of the General Theory with this two-liner “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.” (1973, p. 63)

    The fatal flaw of Keynes’s and Godley and Lavoie’s approach is that the underlying profit theory is false (2011). And it should be beyond any doubt that if one gets the pivotal concept of economics wrong all the rest of one’s theory is vacuous, to say the least. For the rectification of the accounting approach see (2012).

    From this follows that your treatment of the debt problem is not substantially better than what standard economics has delivered. The real crux of the debt problem lies in the stock-flow relationship between change of debt (household sector’s and government sector’s) and overall profit/loss of the business sector and that means that the market economy breaks down as soon as overall household and government sector’s debt is redeemed (2014; 2013).

    The present state of economics is that neither Orthodoxy nor Heterodoxy has an idea how the market economy works.

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
    Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
    Kakarot-Handtke, E. (2013). Redemption and Depression. SSRN Working Paper Series, 2343561: 1–28. URL
    Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

  5. December 18, 2015 at 8:34 pm

    “…The real crux of the debt problem lies in the stock-flow relationship between change of debt (household sector’s and government sector’s) and overall profit/loss of the business sector and that means that the market economy breaks down as soon as overall household and government sector’s debt is redeemed (2014; 2013).

    The present state of economics is that neither Orthodoxy nor Heterodoxy has an idea how the market economy works…” Egmont Kakarot-Handtke

    Frederick Soddy would disagree,
    “…the market economy breaks down as soon as overall household and government sector’s debt is redeemed (2014; 2013).”
    Household debt can not ever be fully redeemed because to redeem that debt, new debt must be created. The equation- Household debt (loans made by the private sector) = deposits.
    Because Household debt does not equal the deposit. E.G., A $1trillion private sector loan
    is a liability of over double ($2 trillion) the deposit if terms and conditions of the loans were for 30 yrs at a percentage greater than 3. The only means available for the private sector to redeem its debt is to increase its debt.
    As for the government sectors debt, redemption could occur and may be beneficial for the market economy (If nation is Monetary Sovereignty). E.G., USA debt… $18.5 trillion, loans
    in the form of Treasuries all with terms and conditions that can be changed to be beneficial
    (Proven by Bernanke). CALL all Treasuries redeem them in different time lengths at 0% interest (ZERO) allowing the holders of the debt the safety and security that they will have by “the full credit of the USA”.
    Why do not see that a Honest Central Bank does not OWN the money, it is the guardian of
    of the value of the total community ?

    Why do you deny Frederick Soddy his due?

    “There never was an idea stated
    that woke men out of their stupid indifference
    but its originator was spoken of as a crank.”
    — Oliver Wendell Holmes, Sr.
    (1809-1894) American Poet

    .*** BUT, why not read and challenge a Noble Laureate for Physics and challenge ? ******Excerpt from
    “In four books written from 1921 to 1934, Soddy carried on a “quixotic campaign for a radical restructuring of global monetary relationships”[this quote needs a citation], offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was “roundly dismissed as a crank”[this quote needs a citation]. While most of his proposals – “to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort” – are now conventional practice, his critique of fractional-reserve banking still “remains outside the bounds of conventional wisdom”[this quote needs a citation]. Soddy wrote that financial debts grew exponentially at compound interest…”

    Why do you deny?
    “So elaborately has the real nature of
    this ridiculous proceeding been surrounded with
    confusion by some of the cleverest and most
    skillful advocates the world has ever known, that
    it still is something of a mystery to ordinary
    people, who hold their heads and confess they
    are ” unable to understand finance “. It is not
    intended that they should.” Frederick Soddy (The Role Of Money)

    Egmont Kakarot-Handtke,
    PLEASE, …due examination and analysis.

    ***** “Believe nothing merely because you have been told it…But whatsoever,
    after due examination and analysis,you find to be kind, conducive to the good,
    the benefit,the welfare of all beings – that doctrine believe and cling to,and
    take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC),

  6. Van Geldstone (pen name)
    February 13, 2016 at 8:15 pm

    Lars I’m looking for constructive feedback from a professional economist. I argue in the following link there has never been a sound theory of economics: thank you

  7. Zerner
    February 14, 2016 at 5:53 pm

    This is a comment on Guerrien ad Gun’s review of Felipe and McCombie’s book about the production function.

    Shaykh’s differential and integral reasoning is surprising. As far as Solow’s model is concerned, it is perfect. In a different setting it is somewhat strange to introduce a continuous parameter and to differentiate with respect to it, only to integrate back after a small rearrangement of terms.

    There is another way, drastically simpler and with a more general result. It is best seen geometrically. Let us take the output V, the payroll wL and the interests served rJ as coordinates in a three-dimensional vector space. The accounting identity V = wL+rJ restricts the data to a two dimensional plane. If the ration a=wL/V is fixed, then they are further restricted to a half straight line from the origin (taking into account that all the numbers involved are positive). But on such a line, all homogeneous functions of degree one are equal to within a constant multiplicative factor. As special cases, Cobb-Douglas relations are satisfied with exponents b and 1-b, with any b, not only a. I give below the very simple regular algebraic proof, keeping the notation of the economic discussion though we are now dealing with pure mathematics.

    Let the six real numbers V, L, J, w, r and a satisfy the two relations:

    V = wL+rJ (accounting identity)

    wL = aV (stylized fact).

    Then the relation:
    -b b-1 b 1-b b 1-b
    V = a (1-a) w r L J

    holds true for every real number b.
    We first prove something a bit more general. Let F be a positively homogeneous function of two positive variables of degree one. The relations:

    z = x+y and x = az

    z = F(a,1-a) F(x,y) .


    y = (1-a)z and F(a,1-a) z = F(az,(1-a)z) .

    Now, let us take:
    b 1-b
    F(x,y) = x y , x = wL, y = rJ and z = V ,

    and we are done.

  8. July 4, 2017 at 8:05 am

    This is a comment on Kevin Albertson and others’ Globalisation and Sticky Prices:‘Con’or conundrum?

    It is possible that in this short paper the authors cannot express fully what they are thinking. The biggest trouble with this paper would be adopting too simplistic model to argue a problem which requires sophisticated examinations.

    The model they use as “an indicative case study” (p.96 in Real-World Economics Review #73.) is a the old (or classical) two-country, two-commodity Ricardian economy. This model has a very peculiar characteristic that has been misleading theory of international trade. The root of this confusion is very old, because it goes back to John Stuart Mill. When one wants to analyze trade and terms of trade, one is led to consider either a fixed price economy where one country cannot enjoy gains from trade or either a flexible price economy where two countries’ volume of production is uniquely determined. John Stuart Mill concentrated his attention on the latter and it opened the way to neoclassical economics. For more details, please read
    An Origin of the Neoclassical Revolution: Mill’s “Reversion” and Its Consequences

    The authors should know that there is now more general and at the same time more realistic trade theory in the m-country, n-commodity economy with trade of intermediate goods. The authors generously mentioned my paper in 2007, but the message of the new theory was not yet clear there. I have re-written an introduction to the new theory of international values:
    The New Theory of International Values: An Overview

    The readers may get a rough idea by the draft version of these two papers in my contribution page in ResearchGate.

    With the new theory, the question of price stickiness may be formulated in a more refined way.

    (1) Prices do not necessarily change when the demand changes. Quantity adjustment process may function (within a certain limit) without any change in prices.

    (2) Price index can be different by Balassa-Samuelson effect.

    (3) International price difference must be decomposed into several causes that my induce price differences.

    3-1. Transport and transaction costs and tariffs
    Transport and transaction costs and tariffs may cause price differences. If the difference reflects the differences of these costs, the price difference itself does not reflect price stickiness.

    3-2. Difference of qualities
    For example, Japan imports sweaters at 150 dollars a piece from Italy and at 10 ten dollars a piece from China and exports from Japan at 30 dollars a piece. This reflects the difference of qualities and loyalties and has no direct relation to price stickiness.

    3-3. The same item that was produced by the same firm may have different prices when the competitive situation is different between countries.

    (4) True stickiness
    True stickiness of prices can be detected by observing the same prices before and after the big change of exchange ratio. In the case of Japan, the domestic prices remained constant despite the huge increase of imported materials and input goods after Japanese Yen was depreciated from 80 Yen per dollar to 120 Yen per dollar around the fist half of 2013.

    I am afraid that Kevin Albertson and others are confusing all these differences of prices as a manifestation of price stickiness. In fact they reflect differences of production conditions. Price discrepancies caused by (1) to (3) do not show exactly how prices are sticky. The true problem of price stickiness should be measured around phenomenon (4).

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