Debunking Economics

Debunking Economics
The Naked Emperor Dethroned?

supplement
Steve Keen
Zed Books
London|New York
This supplement to Debunking Economics Revised and Expanded

Edition: The Naked Emperor Dethroned? was first published in 2011 by
Zed Books Ltd, 7 Cynthia Street, London N1 9 jf , uk and Room 400,
175 Fifth Avenue, New York, ny 10010, usa
The first edition of Debunking Economics was first published in the
United Kingdom and the United States of America in 2001 by Zed
Books Ltd, and in Australia by Pluto Press Australia Ltd.
www.zedbooks.co.uk/debunking_economics
www.debunkingeconomics.com
www.debtdeflation.com
Copyright Steve Keen 2011
The right of Steve Keen to be identified as the author of this work
has been asserted by him in accordance with the Copyright, Designs
and Patents Act, 1988
Artwork by Philip Armstrong
Set in Monotype Plantin and FontFont Kievit by Ewan Smith, London
All rights reserved. No part of this publication may be reproduced,
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supplement| 3
16
14
Inflation
12
Unemployment
Percent
10
8
6
4
2
0
1US inflation and un

employment from 1955
-2
-4
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
16
14
Pecent of GDP
12
10
8
6
4
2 Bernanke doubles
base money in five
months
2
0
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
1980
1990
2000
2010
300
Percent of GDP
250
3Private debt peaked

at 1.7 times the 1930
level in 2009
200
1930 level
150
100
50
0
1920
1930
1940
1950
1960
1970
4 |debunking economics
Utils
Change in utils
20
18
16
Utils
14
12
10
8
6
4Rising total utils

and falling marginal
utils from consuming
one commodity
4
2
0
5 Total utils from the

consumption of two
commodities
Utils
8 16
24
Bananas
2
Bi
sc
2
1
na
Bana
Utils
8 16
24
1
uit
s
2.4
6 Total utils repres
ented as a utility hill
1.8
Bi
1.8
1.2
sc
uit
0.6
0.6
0
1.2
as
anan
2.4
3.0
Utils
8 16
24
supplement| 5
3.0
0
2.4
1.8
Bi
1.2
sc
uit
1.8
0.6
0 0
1.2
0.6
2.4
nas
Bana
7 The contours of the

utility hill
2
Biscuits
.7
20
1
.8
13
Bananas
Z
X
Biscuits
8 Indifference curves:
the contours of the
utility hill shown in
two dimensions
17
.2
Y
W
Bananas
9A rational con
sumers indifference
map
Z
Biscuits
X
B
10 Indifference curves,
the budget constraint,
and consumption
W
Bananas
C
Z
Biscuits
Y
q1
11Deriving the
demand curve
q2
q3
II
Price of Bananas
III
Bananas
p1
p2
p3
q1
q2
q3
Bananas
supplement| 7
Z
Y
X
Biscuits
Price of bananas
q1
12Upward-sloping
demand curve
q2 q3
Bananas
p3
p2
p1
q1 q2 q3
Bananas
Biscuits
AC
Bananas
13Separating out the

substitution effect
from the income effect
All other goods
a) Necessity
b) Inferior
Bananas
Bananas
c) Luxury
d) Neutral
14Engel curves show

how spending patterns
change with increases
in income
Bananas
Bananas
Biscuits
II
III
15Straight-line Engel
curves
Bananas
16Economic theory
cannot rule out the
possibility that a mar
ket demand curve may
have a shape like this,
rather than a smooth,
downward-sloping
curve
Price and marginal revenue
1200
900
Marginal revenue
600
Marginal
cost
300
Demand
-300
0
100
200
300
400
Bananas
500
600
700
800
supplement| 9
8000
Monopoly
quantity
Thousand dollars
7000
Total cost
6000
Total revenue
5000
4000
Maximum
profit
3000
Monopoly
profit
2000
1000
Profit
17Profit maximization for a

monopolist: marginal cost equals
marginal revenue, while price
exceeds marginal cost
5000
10000
15000
20000
25000
Output
1200
Monopoly
quantity
1000
De
an
Dollars
800
dc
ur
ve
600
Marginal
cost
Monopoly
profit
Monopoly
price
l
na
gi e
ar u
M ven
re
400
Average
cost
Monopoly
cost
200
0
0
5000
10000
15000
20000
25000
Output
Firm revenue, cost and profit
18Profit maximization for a perfectly com

petitive firm: m
arginal cost equals marginal
revenue, which also equals price
80000
qPC
70000
Dollars
60000
The procedure:
50000
Total cost
40000
Total revenue
20000
2 Price taking firm sets marginal

revenue equal to marginal cost
10000
3 Profit maximized
0
50
The firm
100
150
Firm output
200
250
The firm
1000
QPC
qPC
800
600
Demand
Dollars
800
Dollars
ProfitPC
Profit
1000
Maximum
profit
30000
1 Market sets equilibrium price
Supply
400
PPC
200
0
600
Marginal cost
400
Competitive price
200
0
5000
10000
15000
Market quantity
20000
25000
50
100
150
Firm output
200
250
S1
Price
(b)
Price
(a)
Marginal
cost
S2
S1
S2
D1
Marginal
cost
D2
19A supply curve

can be derived for a
competitive firm, but
not for a monopoly
D2
D1
MR1
MR2
Quantity
Quantity
The market
1200
QM
QPC
Dollars per unit
1000
Price
800
PM
600
400
qPC
Billions dollars
600
10000
15000
Output
QM
800
Dollars per unit
5000
20000
25000
Market revenue, cost and profit levels
The competitive firm

1000
PPC
Marginal
revenue
200
20A competitive industry produces a higher

output at a lower cost than a monopoly
Marginal cost
(Supply)
Marginal cost
400 Price = Marginal revenue
Total cost
6
5
Total revenue
Maximum
profit
4
3
Profit
200
QPC
1
0
0
0
50
100
150
Firm quantity
200
250
5000
21 The standard
supply and demand
explanation for price
determination is
valid only in perfect
competition
Supply
20000
25000
b) Monopoly
Price
Price
a) Perfect competition
10000
15000
Output
Marginal cost
Pe
Pe
Demand
Demand
Marginal revenue
Qe
Quantity
Qe
Quantity
supplement| 11
Farm (a)
Area 1 square mile
Fence 4 miles long
Farm (b)
Area 4 square miles
Fence 8 miles long
Four times the area;
twice the fencing cost
22Double the size,

double the costs, but
four times the output
1200
Monopoly prediction
1000
Monopoly outcome
100 firms prediction
Price
800
100 firms outcome
600
Marginal
revenue
400
200
23Predictions of the
models and results at
the market level
Marginal
cost
Demand
0
0
5000
10000
15000
20000
25000
Output
140
Neoclassical
Firm 1
Firm's output
120
Mean
100
Keen
Firm 2
80
24Output behavior
of three r andomly
selected firms
Firm 3
60
0
20
40
60
Iterations
80
100
40000
Keen
36000
Firm 96
Firm's output
32000
Average of all firms

28000
Firm 76
Neoclassical
24000
20000
25Profit outcomes
for three randomly
selected firms
Firm 66
16000
0
20
40
60
80
100
Iterations
500
26Product per
additional worker
falls as the number of
workers hired rises
Output
300
200
100
Marginal product
0
0
200
400
600
800
Marginal product 000s
Output 000s
400
0
1000
Labor
1000
800
Labor
600
400
200
27Swap the axes

to graph labor input
against quantity
0
0
100
200
300
Output
400
500
supplement| 13
1200
Total cost and total revenue 000s
1000
800
Total revenue
600
Total cost
400
28Multiply labor
input by the wage to
convert Y-axis into
monetary terms, and
add the sales revenue
200
0
0
100
200
Output 000s
300
400
1200
300
Total revenue
800
200
100
Total cost
600
Profit/loss
Total cost and revenue
1000
400
-100
Profit/loss
200
-200
-300
0
100
200
300
29Maximum profit
occurs where the gap
between total cost and
total revenue is at a
maximum
400
1000
20
800
16
600
12
Total variable cost

400
200
Marginal cost
0
0
100
200
300
Output
400
Marginal cost
Workers hired times wage
Output
0
500
30Deriving marginal
cost from total cost
20
Price
Average fixed cost
16
Marginal cost
Average variable cost
31 The whole
caboodle: average and
marginal costs, and
marginal revenue
Marginal cost
12
0
0
100
200
300
400
Price
Output
Supply
ve
Re
Total cost revenue
Quantity
32 The upward-sloping
supply curve is derived
by aggregating the
marginal cost curves of
numerous competitive
firms
nu
Demand
sts
le
b
ria
Va
l co
ta
To
sts
co
Fixed costs
Wheat output
33Economic theory doesnt work if Sraffa

is right
Average cost & revenue
Average cost
Marginal revenue
Marginal cost
qmin
Wheat output
Price/ bushel
supplement| 15
Dq2
Supply
Dq3
Dq1
?
?
Price?
34Multiple demand
curves with a broad
definition of an
industry
Q1 Q 2 Q 3
Quantity?
Wheat
500
400
Sraffa output
Output
300
35A farmer who

behaved as economists
advise would forgo the
output shown in the
gap between the two
curves
Neoclassical output
200
100
0
0
200
400
600
Labour input
800
1000
100
100 minus unemployment rate
Percent
90
80
Capacity utilization
70
36 Capacity utilization
and employment move
together
60
1967 1971 1975 1979 1983 1987 1991 1995 1999
2003 2007 2011
Price/bushel
De
an
Supply
Equilibrium
price
37 Costs determine price and demand determines

quantity
Equilibrium
quantity
Wheat
38A graphical representation of Sraffas (1926)

preferred model of the normal firm
Average cost & revenue
Average cost
Price
Marketing
costs
Target
markup
Wheat output
Marginal cost
Target
output
B Labor
Mar
gin
al p
rod
uc
to
fl
or
ab
Marginal product/Real wage
Real wage
B Labor
Output
39 The economic theory of income distribution argues

that the wage equals the marginal product of labor
Wheat output
supplement| 17
40Economics has no explanation of wage

determination or anything else with constant returns
Revenue from sales
Marginal product/Real wage
Labor input with

constant labor/land ratio
Marginal product of labor
Real wage
Labor
Price
Labor
Marginal
revenue
Demand
inal rev
arg
enu
M
e
pr
od
uc
t
RW1
RW2
or
lab
of
Marginal revenue product/Real wage
Quantity
E1
E2
B
Labor
41 The demand for labor curve is the marginal

revenue product of labor
Income
W3
y3
W2
y2
W1
42 The individuals incomeleisure trade-off
determines how many hours of labor he supplies
y1
h 3 h2
Work
Labor s
upply
W3
W2
W2
43An upward-sloping
individual labor supply
curve
Time (24 hours)
Wage
Income
Leisure
h1
W1
W1
h3 h 2 h 1
24-h2
24-h3
Wage
24-h1
Supply
Demand
44Supply and demand determine the equilibrium
wage in the labor market
Labor
Wage
supplement| 19
Supply
Wm
We
Demand
Le
Ls
Labor
Wage
Ld
45Minimum wage laws cause

unemployment
Supply
Wp
Wa
Demand
46Demand management policies

cant shift the supply of or demand
for labor
Labor
Income
Lf
W3
W2
y3
y2
W1
y1
47 Indifference curves that result in

less work as the wage rises
h1
Leisure
h2
h3
Time (24 hours)

Work
W3
Labor supply
Income
Wage
W3
W2
W2
W1
W1
48Labor supply falls
as the wage rises
h 1 h2 h3
Leisure
Time (24 hours)

Work
24-h3
W3
24-h2
Hours
24-h1
Labor supply
Wage
Income
W3
W2
W2
49An individual labor

supply curve derived
from extreme and
midrange wage levels
W1
W1
h1
h2
Wage
Leisure
h3
24-h3
24-h2 24-h1
Work
Demand
Supply
We
Wm
50An unstable labor

market stabilized by
minimum wage legis
lation
Le Ldm Lsm
Labor
Hours
Wage
supplement| 21
Equilibrium
wage?
DE3
Labor
supply
DE2
DE1
?
?
?
Demand
for labor
51 Interdependence of labor supply

and demand via the income dis
tributional effects of wage changes
E1
E2
E3
Labor
Output
Equilibrium
employment?
Price
Capital
Profit rate
52 The rate of profit equals the

marginal product of capital
Quantity
Marginal revenue
product of capital
PR1
PR2
C1
C2
Capital
Profit rate
Supply
Demand
53Supply and demand

determine the rate of
profit
Capital
Actual profit rate
0.3
0.2
0.1
54 The wage/profit
frontier measured
using the standard
commodity
0.0
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Price
Wages (fraction of surplus)
Supply
P2
P1
D2
D1
55Standard neo
classical comparative
statics
Q1
Q2
Quantity
0.9
1.0
supplement| 23
X with .01% different Y
X displacement
X displacement
-5
56Sensitive
dependence on initial
conditions
10
20
Time
30
Z displacement
16.0 24.0
8.0
10
Y
58 Cycles in
employment and
income shares
Employment rate and wages as a fraction of output
57Unstable
equilibria
.0
di 5.0
sp
la 0.0
ce
m -5
en .0
t
-4.0
8.0
4.0
t
e
m n
0.0
place
X dis
1.1
1.0
0.9
0.8
0.7
Wages share
Employment rate
0
10
20
30
Years
40
50
1.1
Wages share
1.0
0.9
0.8
59A closed loop

in employment and
wages share of output
0.7
0.85
0.87
0.89
0.91
0.93
0.95
0.97
Ix =
S(I)
I (income)
Savings a function
of income
I (income)
Employment rate
Savings
60Derivation of the
downward-sloping IS
curve
rve
cu
Investment a function
of interest rate
IS
Interest rate
Multiplier
C(
i)
Ix (Investment)
I (output)
0.99
1.01
supplement| 25
Interest rate
Interest rate
Exogenous
money supply
The LM curve
Md2 (I2)
61Derivation of the
upward-sloping LM
curve
Md1 (I1)
I1
Money
I2 Income
Interest rate
LM
IS
Keynesian region
62Reconciling
Keynes with the
Classics
Classical region
I (output)
10
9 9 9
9
9
9
9
9
99
6 6 6 9 6 6 66
l
9
6
u 66
u
66
66
66 66
6
6
6
6
6
6
66
9 66
66
66
669 9 9
69
6 9 9
6
9
6 6 999 9
6
9
9
99
66 999
s 6
9
66
9
6
6
6
9
99 9 9
966 9
9 99
9
96 9
6
69
99
969
9
6
9
9
6
6
6
6
9
66
6
6 666966
9
9
9
66
6
6
6
6
6
6
6
6
6
66
999 99
9 6669
9
66669
66
6
6699
699
9 99 9
99
9
9
99
6
66
99
99999
9
9 966
9
99
99 9
9
9
9 9
9
9 99 9
99
6 19601970
l Jan 1970
u Lucas 9
Inflation
63Unemployment
inflation data in the
USA, 195072
19501960
June 1972
5
Unemployment
-5
2
15
9
H
9
9
9
9 99
9
n
9 9
9
9
9 99 9
9
9
9 9
9
99
9
9
99
9
9
9
99
9
9
9
9
9
9
99 9
9
9
9 9 9 99
9
9
9
9
9
9
99 9
9
9
9
6
l 6 6 6 6 6 69
66
999 9
9
66
u
6 66
u
9
6
99
6 6
66
9
9
6
99
6
6
6
9
6
66
6
6 66
66
6
9
99 9999 6 9 9
666
6
66
9
9
9
s
99 9
9
66
9
66
9
9
666
9 9 99
6
66666
9 9
6 69
6
6
6
6
6 666 66
966669
69 6 6
6
66666
66
6669
669
669
69
9
9 9 966 6 6 6
Inflation
10
64Unemployment
inflation data in the
USA, 196080
0
2
6
Unemployment
19601972
Jan 70
Lucas
19721980
Jun 72
Jan 75
Rate of interest
Supply
Demand
65Supply and
demand in the market
for money
Risk
Quantity
Capital market line
66 The capital market

line
Pure interest rate
Expected rate of return
10
Jan 80
Risk (r)
supplement| 27
I
Z
II
C
D
B
III
IO
A
67 Investor preferences and the investment

opportunity cloud
Expected rate of return (ER)
(r)
C*
F
B*
IO
68Multiple investors (with identical

expectations)
A*
P
(ER)
(r)
IO
C
A
69 Flattening the IOC

(ER)
12
Change in M0
Percent
-4
-8
70 Inflation and base

money in the 1920s
-12
1924
Inflation
1925
1926
1927
1928
1929
1930
1931
1932
20
Grey area indicates periods of recession
Percent p.a.
10
-10
71 Inflation and base

money in the post-war
period
-20
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
12
Percent p.a.
Nominal
4
72Bernankes
massive injection of
base money in QE1
After inflation
-4
2005
2006
2007
2008
2009
2010
2011
supplement| 29
30
Unemployment
20
12
0
18
-10
Change in M1
24
-20
73 Change in M1
and unemployment,
192040
-30
1920
Percent
Percent p.a.
10
1922
1924
1926
1928
1930
1932
1934
1936
1938
30
1940
30
Change in M0
20
Percent p.a.
Change in M1
10
-10
74 Change in M0
and M1, 192040
-20
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
0.5
0.4
0.3
0.2
75M0M1 correlation
during the Roaring
Twenties
0.1
-12
-8
-4
0
Lag in months
12
0.6
0.4
0.2
0.0
-0.2
76M0M1 correlation during the Great

Depression
-0.4
-12
-8
-4
0
4
Lag in months
12
16
120
100
Percent p.a.
80
60
40
20
78 Change in M1
and inflation before
and during the Great
Recession
0
-20
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
120
12
100
10
Change in M0
80
60
40
Inflation rate
20
-20
2002
2003
2004
2005
2006
2007
2008
2009
2010
-2
2011
Inflation percent p.a.
Change in M0 percent p.a.
77Bernankes
quantitative easing in
historical perspective
supplement| 31
2500
M0
$ billion
2000
1500
M1
Currency
1000
500
79 The money supply

goes haywire
0
2007
2008
Percent change
4th qtr to 4th qtr
10
80Lindsey,
Orphanides, Rasche
2005,p. 213
2009
2010
2011
Actual growth
8
6
Target range
4
2
1976
1977
1978
1979
16
14
M3
Ratio to M0
12
M2
10
8
6
4
81 The empirical
Money Multiplier,
19602012
M1
2
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
40
M0
30
M1
Percent p.a.
20
10
M 2 M1
82 The disconnect
between private and
fiat money during the
Great Recession
Private debt
-10
M 3 M2
-20
2008
2009
1.0
Wage Share
Output
25
20
15
10
5
0.9
0.8
0.7
0.6
20
40
60
80
0.85
100
Year
Wage Share of Outut
0.95
0.90
0.85
10
15
20
Year
83 Goodwins growth cycle model
0.90
0.95
Employment
Wage Share Cycle
Employment Cycle
Employment Rate
2011
Employment-Wages Share Cycle
Growth of output
30
2010
25
30
1.0
0.9
0.8
0.7
0.6
10
15
20
Year
25
30
supplement| 33
Followed by a Breakdown
A Great Moderation?
500
Output (billion)
1000
Output
400
300
200
100
10
15
Year
20
25
800
600
400
200
250
30
0.9
0.8
0.7
0.6
0
50
100 150
Year
200
250
270
280
Year
290
300
Wage Cycle with Debt
1.0
Wage Share of Output
Employment Rate
Employment Cycle with Debt
260
300
0.9
0.8
0.7
0.6
0
50
100
150 200
Year
250
300
84My 1995 Minsky model
Wages
0.9
0.8
0.7
85 Cyclical stability
with a counter-cyclical
government sector
0.6
0.86
0.88
0.90
0.92
Employment
0.94
0.96
0.98
140
100
Ratio
80
Exponential fit
60
86Australias private
debt-to-GDP ratio,
19752005
40
Debt ratio percent of GDP
1980
1985
1990
1995
2000
300
60000
250
50000
Debt ratio
200
40000
150
30000
Debt level
100
20000
50
87US private debt
2005
Debt level US$ billion
Percent
120
10000
0
0
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
30
88 The correlation of
debt-financed demand
and unemployment
20
10
-10
Unemployment rate
-20
-30
1970
10
12
1975
1980
1985
1990
1995
2000
2005
2010
U-3 unemployment rate
Percent of GDP
Debt financed demand
supplement| 35
Correlation coefficient
0.8
89 Correlation of
credit impulse and
change in employment
and GDP
0.6
Employment
0.4
GDP
0.2
0
-12
-10
-8
-6
-4
-2
10
12
20
16
Average 19552008
Percent p.a.
12
8
4
0
-4
90Relatively constant
growth in debt
-8
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
30
Percent of GDP
20
91 Growing level of
debt-financed demand
as debt grew faster
than GDP
10
-10
-20
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
20
15
10
19992011
Percent p.a.
5
0
-5
-10
19201940
-15
92 Change in nominal
GDP growth then and
now
-20
-25
0
10
12
14
16
18
20
Years since 1920 and 1999

25
20
19201940
15
Percent p.a.
10
19992011
5
0
-5
-10
93Real GDP growth

then and now
-15
-20
0
8
10
12
14
16
18
20
20
15
Percent p.a.
10
19201940
19992011
5
0
-5
-10
94 Inflation then and

now
-15
0
10
12
14
16
18
20
supplement| 37
30
25
19201940
Percent
20
15
U-6 rate 19992011
10
19992011
95Unemployment
then and now
0
0
8
10
12
14
16
18
200
50000
40000
19201940
100
30000
19992011
50
96 Nominal private
debt then and now
20000
10000
-10
-8
-6
-4
-2
10
190
19992011
180
19201940
Index start value = 100
170
160
150
140
130
120
110
97Real debt then

and now
100
90
0
8
10
12
14
16
18
20
$ billion
150
$ billion
20
300
19992011
Percent of GDP
250
19201940
200
150
98Debt to GDP then

and now
100
-10
-8
-6
-4
-2
10
Years relative to peak debt (1929 and 2009)

20
15
Percent p.a.
10
19201940
-5
99Real debt growth

then and now
19992011
-10
-10
-8
-6
-4
-2
0
2
4
6
8
Years after private debt growth stopped (1930 and Jun 2009)
10
160
140
Business
Percent of GDP
120
Finance
100
80
60
Households
40
100Debt by sector
business debt then,
household debt now
20
0
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
supplement| 39
10
5
Percent of GDP
19201940
-5
-10
-15
20002011
-20
-25
101 The Credit Impulse
then and now
-30
-10
-8
-6
-4
-2
10
Years after credit impulse hit zero (1928 and Jun 2008)
30
Unemployment rate
10
10
15
-10
-20
102Debt-financed
demand and unemploy
ment, 192040
-30
1921
20
Unemployment rate
Percent of GDP
20
25
30
1924
1927
1930
1933
1936
1939
30
103Debt-financed
demand and unemploy
ment, 19902011
10
10
Unemployment rate
0
15
-10
20
-20
25
-30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
30
U-6 unemployment rate
Percent of GDP
20
-90
Debt financed
demand
-30
0
30
-5
60
-10
90
Unemployment
104 Credit Impulse
and change in
unemployment,
192040
-60
120
-15
150
-20
1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932
10
-90
Percent of GDP
-60
Debt financed
demand
105 Credit Impulse

and change in
unemployment,
19902010
180
-30
Unemployment
30
-5
60
-10
90
120
-15
150
-20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
180
Correlation coefficient
-0.2
106 The Credit

Impulse leads change
in unemployment
-0.4
-0.6
-0.8
-1
-12
-8
-4
Lag in months (with quarterly data)
12
% change in U-3 unemployment rate
Percent of GDP
% change in U-3 unemployment rate
10
supplement| 41
107A nineteenth-century private banknote
100
Loans
80
60
40
Vault
20
108A credit crunch

causes a fall in deposits
and a rise in reserves
in the banks vault
0
0
10
Years
12
14
16
18
20
100
80
Firm deposits
60
40
20
Worker deposits
Safe
0
0
10
Years
12
14
16
18
20
6
5
4
Bank bailout
Firm bailout
Worker bailout
1
0
109A bank bailouts

impact on loans
-1
10
12
14
16
18
20
40
Bank bailout
30
Firm bailout
Worker bailout
20
10
110A bank bailouts

impact on incomes
0
10
12
14
16
18
20
3.0
$ million p.a.
2.5
2.0
No bailout
Bank bailout
1.5
111A bank bailouts impact on

bank income
Firm bailout
Worker bailout
1.0
0
10
12
14
16
18
20
supplement| 43
120
100
Double repayment,
half creation/recycling
80
60
40
112 Bank income

grows if debt grows
more rapidly
20
Standard values
0
0
10
Years
12
14
16
18
20
150
No bailout
140
Bank bailout
Firm bailout
130
120
110
113Loans grow
more with a debtor
bailout
100
10
12
14
16
18
20
Years
200
No bailout
195
Bank bailout
Firm bailout
$/year
190
185
180
114Profits do
better with a debtor
bailout
175
170
10
11
12
13
14
15
Years
16
17
18
19
20
6.00
No bailout
5.75
Bank bailout
$/year
5.50
Firm bailout
5.25
5.00
4.75
115 Bank income

does better with a
bank bailout
4.50
10
11
12
13
14
15
Years
30
40
Date
16
17
18
19
20
$/year
10000
116Modeling the
Great Moderation and
the Great Recession
output
1000
100
0
10
20
50
60
70
120
100
Workers
Percent of GDP
80
60
40
Capitalists
20
117 Income dist

ribution workers
pay for the debt
Bankers
-20
0
10
15
20
25
30
35
40
45
50
55
60
supplement| 45
66
118Actual income
distribution matches
the model
Finance profits
Wages
62
60
58
56
1980
0
1985
1990
1995
2000
2005
1.5
1.3
1.1
Random
0.9
0.7
0.5
0.3
0.1
-0.1
119Lemming
population as a
constant subject to
exogenous shocks
-0.3
-0.5
0
20
40
60
80
100
120
140
160
180
120
140
160
180
Year
1.0
0.9
0.8
Formula
0.7
0.6
0.5
0.4
0.3
0.2
120Lemming
population as a
variable with unstable
dynamics
0.1
0.0
0
20
40
60
80
100
Year
FIRE profits share of GDP
Wages percent of GDP
64

Debunking Economics

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Debunking Economics

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Debunking Economics

The Naked Emperor Dethroned?

This supplement to Debunking Economics Revised and Expanded

1US inflation and un

3Private debt peaked

4Rising total utils

5 Total utils from the

7 The contours of the

13Separating out the

All other goods

14Engel curves show

Price and marginal revenue

17Profit maximization for a

Firm revenue, cost and profit

18Profit maximization for a perfectly com

2 Price taking firm sets marginal

1 Market sets equilibrium price

19A supply curve

Dollars per unit

Market revenue, cost and profit levels

The competitive firm

20A competitive industry produces a higher

400 Price = Marginal revenue

22Double the size,

100 firms outcome

Average of all firms

Marginal product 000s

27Swap the axes

Total cost and total revenue 000s

Total cost and revenue

Total variable cost

Workers hired times wage

Average variable cost

Total cost revenue

33Economic theory doesnt work if Sraffa

Average cost & revenue

35A farmer who

100 minus unemployment rate

2003 2007 2011

37 Costs determine price and demand determines

38A graphical representation of Sraffas (1926)

Average cost & revenue

Marginal product/Real wage

39 The economic theory of income distribution argues

40Economics has no explanation of wage

Revenue from sales

Marginal product/Real wage

Labor input with

Marginal product of labor

Marginal revenue product/Real wage

41 The demand for labor curve is the marginal

Time (24 hours)

45Minimum wage laws cause

46Demand management policies

47 Indifference curves that result in

Time (24 hours)

Time (24 hours)

49An individual labor

50An unstable labor

51 Interdependence of labor supply

52 The rate of profit equals the

53Supply and demand

Actual profit rate

Wages (fraction of surplus)