Rate of Interest and Public Debt in a Sraffian-Keynesian Model

There is a nexus between the actual economic crisis, which started in 2008, and economic theory. Economic theory not only failed to predict the crisis, but seems to be a long way from discussing it in plain terms. There are two main impediments to this. One is increasing returns, whereas economic discussion is centred on decreasing returns. The other impediment is the removal of Keynesian subjects, or, at least, the specific removal of any discussion on the rate of interest being zero in the long run, that Keynes formulated, although he did not explicitly theorize on it. This paper starts from basic Sraffian economic theory to reconstruct the essence of Keynesianism, after a passage through a pre-Keynesian model. The role of the interest rate is particularly focussed on. When this is positive, especially if very much so, no problem arises. When this is small or nil, due to low levels of Investment and high levels of Savings, an economic crisis develops. The same crisis may be reinforced by increasing returns and their effects on Savings. This is unless public debt grows through the increase of public deficits. There is the balance of payments surplus which absorbs Savings, but this is helpless in solving the crisis at a global level, since it corresponds unavoidably to balance of payments deficits. That is why it is folly for the EU to put a halt to public deficits. On the contrary allowing deficits to grow becomes vital, after sterilizing through fiscal means their effects on the interest rate, including the private. Excess profits must also be hit at international level.