My paper for INET’s Berlin 2012 Conference

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My paper “Instability in Financial Markets: Sources and Remedies” for the INET conference “Paradigm Lost: Rethinking Economics and Politics“, to be held in Berlin on April 12-14, is now available via the INET website.

If you’d like to download it, you can get it either from my INET page, or from a link on the conference program. For copyright reasons I can’t reproduce it here, but I can provide a quick synopsis and some excerpts, so here goes.

A Primer on Minsky

The paper starts with a synopsis on Minsky, since his “Financial Instability Hypothesis” is one of the key foundations of my approach to economics. He has come into vogue these days of course, but to people who’ve known his work for several decades rather than ever since the “Minsky Moment” of late 2007, a better expression would be that he’s “come into vague”. I read papers like Krugman’s “Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo approach”, and for the life of me, I can’t see Minsky there. As I note in my paper:

Now, after the crisis that his theory anticipated, neoclassical economists are paying some attention to his hypothesis, and there has been at least one attempt to build a New Keynesian model of a key phenomenon in Minsky’s hypothesis, a debt-deflation (Krugman and Eggertsson 2010). However, to those of us who are not new to Minsky, it is hard to recognise any vestige of the Financial Instability Hypothesis in Krugman’s work.

My good friend and long term fellow rebel in economics Professor Rod O’Donnell once remarked that neoclassical economists are incapable of reading Keynes: they look at his words and then spout Walras instead. A similar phenomenon applies here: neoclassicals like Krugman read Minsky, and then proceed to build equilibrium models without banks, and think they’re modelling Minsky.

No they’re not: they’re creating an equilibrium-obsessed Walrasian hand puppet and calling it Minsky—just as they did to Keynes with DSGE modelling.


I used the word “equilibrium” twice above, because one clear methodological aspect of Minsky’s thinking is that macroeconomics is about disequilibrium. Neoclassical economists have the world precisely (to use an evocative piece of Australian slang) arse about tit. They believe that if it’s not an equilibrium model it’s not economics.

Nonsense! The precise opposite is the case: if it isn’t disequilbrium, then it isn’t economics.

There’s nothing “radical” about this, which is often the way that neoclassical economists react when I press this point: “assume disequilibrium? How dare you!?”. I dare because “disequilibrium” is so common in real sciences that they don’t even call it that: they call it dynamics. Any dynamic model of a process must start away from its equilibrium, because if you start it in its equilibrium, nothing happens. It’s about time that economists woke up to the need to model the economy dynamically—and to give Krugman his due here, he does admit at the end of his paper that his dynamics are dreadful, and need to be improved:

The major limitation of this analysis, as we see it, is its reliance on strategically crude dynamics. To simplify the analysis, we think of all the action as taking place within a single, aggregated short run, with debt paid down to sustainable levels and prices returned to full ex ante flexibility by the time the next period begins. This sidesteps the important question of just how fast debtors are required to deleverage; it also rules out any consideration of the effects of changes in inflation expectations during the period when the zero lower bound remains binding, a major theme of recent work by Eggertsson (2010a), Christiano et. al. (2009), and others. In future work we hope to get more realistic about the dynamics.

Hurry up Paul: you’re already eight decades behind Irving Fisher, who put the case for dynamics even for those who assume that equilibrium is stable:

‘We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, toward a stable equilibrium… But … New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium…

Theoretically there may be—in fact, at most times there must be—over-or under-production, over- or under-consumption, over- or under-spending, over- or under-saving, over- or under-investment, and over or under everything else. It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will “stay put,” in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave.’ (Fisher 1933, p. 339)

Endogenous Money

One key component of Minsky’s thought is the capacity for the banking sector to create spending power “out of nothing”—to quote Schumpeter. As well as explaining endogenous money, I show that Minsky’s analysis leads to the conclusion that aggregate demand is greater than aggregate supply arising from the sale of goods and services alone—and therefore that rising debt plays a crucial role in a capitalist economy:

If income is to grow, the financial markets, where the various plans to save and invest are reconciled, must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, . . . it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. (Minsky 1963; Minsky 1982) (Minsky 1982, p. 6)

This aggregate demand is spent not just on goods and services, but also on buying financial assets—hence economics and finance are inextricably linked, in opposition to the failed neoclassical attempt to keep them separate in two hermetically sealed jars. This in turn transcends Walras’ Law to give us what I call the Walras-Schumpeter-Minsky Law:

Aggregate demand is income plus the change in debt, and this is expended on both goods and services and financial assets. Therefore in a credit-based economy, there are three sources of aggregate demand, and three ways in which this demand is expended:

1.    Demand from income earned by selling goods and services, which primarily finances consumption of goods and services;

2.    Demand from rising entrepreneurial debt, which primarily finances investment; and

3.    Demand from rising Ponzi debt, which primarily finances the purchase of existing assets.

Neoclassical Misinterpretations of Fisher, Minsky & Banking

“How do you misinterpret me? Let me count the ways…”

There are so many ways in which neoclassical economists misinterpret non-neoclassical thinkers like Fisher and Minsky that I could write a book on the topic. This section focuses on just one facet of how they get it wrong: by ignoring banks, and treating loans as transfers from “savers” to “spenders” with no bank in between.

This is precisely how Krugman models debt in his recent paper:

In what follows, we begin by setting out a flexible-price endowment model in which “impatient” agents borrow from “patient” agents, but are subject to a debt limit. If this debt limit is, for some reason, suddenly reduced, the impatient agents are forced to cut spending… (Krugman and Eggertsson 2010, p. 3)

This is debt without banks—and without the endogenous creation of money—and it explains why neoclassical economists don’t think that the level of private debt matters.

With that vision of debt, a change in the level of debt isn’t important, because the borrower’s increase in spending power is counteracted by the lender’s fall in spending power. Here’s the lending process as neoclassicals like Krugman see it:

Assets Deposits (Liabilities)
Action/Actor Patient Impatient
Make Loan +Lend -Lend

Krugman therefore reassures his blog readers that there’s nothing to worry about when private debt levels rise or fall:

People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. (Krugman 2011)

That would be reassuring if true, since we could then ignore data like this:

Unfortunately, real lending is better described by the next table:

Bank Assets Bank Deposits (Liabilities)
Action/Actor Patient Impatient
Make Loan +Lend -Lend

In the real world, a bank loan increases “Impatient”‘s spending power without reducing “Patient”‘s, so that the level of private debt does matter.

Applying Minsky to Macroeconomic Data

In particular, the rate of change of debt matters because that tells us how much of demand is debt financed. When you add the change in debt to GDP, you get total aggregate demand, and that makes it exceedingly clear why the economic crisis occurred: the growth of debt collapsed, and took the economy with it:

Since change in debt is part of aggregate demand, the acceleration of debt—the rate of change of its rate of change—affects change in aggregate demand. This in turn has impacts on the change in employment.

It also impacts on change in asset prices. The relationship between accelerating debt and rising asset prices is clear even in the very volatile world of the stock market:

It is undeniable in the property market:


Since asset market volatility is driven by the acceleration of private debt, the Minskian solution to instability in finance markets is to somehow sever the link between debt and asset prices. I put forward two ideas.

Jubilee Shares

Currently, shares last for the life of the issuing company, and 99% of the trade on the stock market is in the secondary market. The Jubilee Shares proposal would allow shares to last forever as now when purchased on the primary issue market, but would have them switch to a defined life of (say) 50 years after a limited number of sales on the secondary market (say 7 sales). This would encourage primary share purchases, and also make it highly unlikely that anyone would use borrow money to buy Jubilee shares on the secondary market.

Property Income Limited Leverage

Currently lending to buy property is allegedly based on the income of the borrower—which gives borrowers an incentive to actually want higher leverage over time. “The PILL” would limit the amount that can be lent to some multiple (say 10 times) of the income generating capacity of the property itself.

End of Synopsis

There’s much more detail in the paper itself, and when the conference is held my talk on it will also be available on the INET website.

Attending the conference

The conference itself has only 300 invitees, and INET had overwhelming demand from students for the 25 places they reserved for them. Rather than letting the over 500 other applicants miss out, these other applicants can watch the conference live from a special live video broadcast room at the Adlon Hotel, right next to the conference venue itself in Berlin. Click here for details if you’re one of those 563 applicants.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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81 Responses to My paper for INET’s Berlin 2012 Conference

  1. Steve Hummel says:

    The point is not that it cannot be paid back, but that it IS NOT paid back. And perhaps that if it is paid back, the effect that might have.

  2. Pingback: There are three sources of aggregate demand, and three ways in which this demand is expended: Production of goods and services which finances consumption of goods and services; rising entrepreneurial debt financing investment; and rising Ponzi debt which

  3. Steve Hummel says:

    And the problem I am usually pointing at even more so than the instability of the economic system is the ideas, values and psychology upon which economics itself is based. Change those and you’ve not only tended to make the system more stable, you’ve enabled the entire culture to evolve instead of being trapped in some backwater, back alley dead end which actually inhibits positive evolution.

  4. alainton says:


    Ive always had an issue with the universality of Minskys statement

    ‘it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets.’

    The bit which is most anti-walrasian

    The issue is where growth is due to an increase in the purchasing power of money – through investment in a lower energy process or reduction in labour costs – such as through offshoring, then the surplus demand need not require an external injection, and of course firms might be able to fund this through building up their balance sheets. Of course a small firm without large balance sheets might go down the credit route.

    Such cost reducing/market expanding innovation can also avoid a firm piling on debt forever as increased profits enable them to delever, however during the great moderation this didnt happen, low inflation, in part cause by the deflationary impacts of innovation and offshoring allowed debts to accumulate, whilst the honey pot effect of high profits tempted ‘under levered’ firms to expand their balance sheets – a toxic combination.

  5. Steve Hummel says:


    I know you are addressing Steve K. but I’m goiung to address it anyway. The problem you are stating cannot be resolved with any kind of “fix”. It requires no less than a change in the CONSUMER financial paradigm to direct and adequate/sufficient from once removed and insufficient like it is now. The business financial paradigm can remain the same because by changing the consumer financial paradigm you make it possible for businesses to make a profit without having to manically pursue exports/off shoring because they must due to insufficient domestic effective demand .

    Your Minsky statement is exactly the same problem addressed in the Keynes plagiarization of Douglas statement I posted upthread. Douglas needs to be revisited. Actual paradigm changes resolve more problems than lesser economic fixes by philosophically undercuting them and they also enable transformation of structures instead of their destruction.

  6. alainton says:

    Steve H – So your a neo-social creditor – now I can see where you are coming from. You are attempting to squeeze Minsky into a variant of A+B gap theory.

    Two points

    1) Probably no idea in economics has been more discredited that A+B – the maths dont work – Hawtry is the best critique because he had an endogenous theory of money, & Hugh Gaitskill in ‘What everyone wants to know about money’ – with his diagrammatic explantion of value added and continuous production. Later in life the good major came up with a different explanation which essentially was the same as Marx and Minksy above$+%2B+B$+and+All+That+by+Victor+Bridger–complete+.pdf – but because Major Douglas never resiled from his original flawed idea the movement floundered

    2) One of the people who have disproved that interest must always lead to infinite expansion in debt is Steve K in his modelling which shows that you can get positive growth and repayment of interest.

    Minksy above is in effect recasting Marx’s M>C>M’ attack on Says Law for the post walrasian age, but there is a flaw in causal reason. It is not that there is a ‘gap’ in demand for money which creates a need for credit, or as in the social creditors a gap caused by the need to pay interest, rather it is that when investment is paid for by credit then this creates disequilibrium dynamics in the demand structure, the monetary circuit and the capital structure.

    It is useful to quote Hawtry’s robinson crusoe argument here from the Birmingham Debate with the Major because I think Minksy in this quote and possibly even Steve if he isn’t careful is falling into the Douglas ‘gap trap’

    ‘[capitalists] do not wait for the retail sales, but are paid at the moment of sale with money created by the banks, and then when the final sale to the consumers takes place, the money advanced by the banks has to be paid off. That part of the proceeds of sale is simply destroyed. For just as a bank advance creates money, so the repayment of an advance extinguishes money.
    If we suppose the production and sale of the boots, in all the successive stages, to form an isolated operation, then at the beginning there will be an excess of purchasing power and no goods to buy, and at the end an excess
    of goods and a shortage of purchasing power. Castaways thrown on an uninhabited island, with no salvage to help them, would be faced with the same kind of maladjustment. At first they would have to subsist on the
    products of unassisted nature, and would receive no other reward for their labour.
    If they devoted their efforts to making the island productive, the time would come at which their preparatory work would bear fruit, and thereafter they would receive the improved and increased output thereby made
    possible. If at last they were rescued, and left the island, the products then in course of production would find no buyers, and that part of the fruit of their early efforts and privations would be wasted.
    But the economic activity of a civilised community is continuous. The
    accumulation of the essential capital equipment goes back to the immemorial past, and there is no question of winding it up and liquidating it.
    At any moment all the various stages of production and all the various forms of
    In order that the goods produced in any interval of time may be sold, what is needed is that the incomes accruing in that same interval of time should be sufficient to buy the goods at remunerative prices. Incomes arise out of production; they are paid to people for services rendered by themselves or
    their property towards the productive process, and these services are the source of the value of the goods produced. Now a part of the value of the goods produced during the interval will be derived from incomes that accrued before the beginning of the interval. But on the other hand a part of the
    value representing the incomes accruing during the interval is embodied in goods still unsold or unfinished at the end of the interval. The goods in process or in stock at any time constitute the working capital of the community, and, if there is no change in this working capital, there need be no
    inequality between the incomes accruing during the interval and the goods placed on sale.
    So much for working capital. What of fixed capital? Industry starts at the beginning of the interval with a certain amount of fixed capital, plant, tools, etc., and the cost of the goods produced with the assistance of this equipment must contain a contribution towards its maintenance and depreciation.
    Major Douglas has laid special stress on depreciation as a constituent of cost, which does not appear in the form of incomes. But here he is mistaken. Depreciation is the provision, which the prudent manufacturer makes out of his gross profit against the time when his plant will have to be replaced,
    either because it is worn out, or because greater efficiency can be secured by plant of an improved type. If we imagine him to accumulate this provision during an interval of time in the form of a cash balance, and if we suppose no replacements have actually to be carried out during the interval, there
    will be a shortage of demand. So much of the proceeds of sale will have failed to reappear in the form of income. But if we view industry as a whole, we find once again that economic operations are continuous. In any interval of time there will always he some plant to be replaced in some concern, and the
    production of the new plant will generate incomes in just the same way as the production of new consumable good
    (Steve take note this is also Steve Kinsellas argument about why net-depreciation needs to be included in your Minsky demand formula)

    Keynes did however conclude that there was a glimpse of the truth in Social Credit in an idea whose structure he probably got from Kalecki.

    “Thus the problem of providing that new capital-investment shall always outrun capital-disinvestment sufficiently to fill the gap between net income and consumption, presents a problem which is increasingly difficult as capital increases. New capital-investment can only take place in excess of current capital-disinvestment if future expenditure on consumption is expected to increase. Each time we secure to-day’s equilibrium by increased investment we are aggravating the difficulty of securing equilibrium to-morrow.”

    In the light of this and discussions with Keynes Hawtry did amened his criticism in the 1952 edition of his book on Capital to accept that discontinuities and dynamics can effect the credit/investment cycle.

    Therefore an explanation of financial instability has to explain why there is a demand for credit to fund investment – and for that you have to look elsewhere in Minsky & Hawtry, as well as in Schumpeter, rather than assuming there is a flaw per se in Walras’s reasoning on the excess demand function, it is looking in the wrong place.

  7. Steve Hummel says:

    “It is not that there is a ‘gap’ in demand for money which creates a need for credit, or as in the social creditors a gap caused by the need to pay interest, rather it is that when investment is paid for by credit then this creates disequilibrium dynamics in the demand structure, the monetary circuit and the capital structure.”

    You’ve misinterpreted Douglas and Social Credit. Douglas never claimed that interest was the cause of the gap, merely the effect of it. That fiction was undoubtedly perpetrated by self interested financial authorities and their paid economists. As I posted earlier the “interest is the cause” cranks do not consider the “wheel of commerce” effect. Social Crediters acknowledge it. But the gap still exists and the cause is really very mundane. Its cost accountintg convention. A convention which insures that the CONSUMER lacks sufficient effective demand to liquidate prices and clear the market in each and every financial/productive cycle. Unlike with the “interest is the problem” thinking, there is no time or money multiplier invariant.

    The most godawfulest moralisms have arisen out of suggestions for financing consumption, but it is exactly what needs to be done IN A DIRECT DISTRIBUTIST MONETARY MODEL FOR CONSUMER FINANCE. And remember chronic and continual insufficient effective demand ENFORCES monetary scarcity on both consumer and business, and is at the root of businesses’ export mania and over production in pursuit of its sufficiency. There is the cause of instability…..enforced monetary scarcity. Finance consumption of the gap for individuals with a citizen’s dividend and keep any inflationary effect to the consumer countered with a compensated retail discount and stability will be greatly enhanced. Sure we’ll need some regulations/and or other mechanisms to discourage speculation, but enforced scarcity still has probably more to do with speculation, at least for the mass of individuals, than any other factor. And so monetary scarcity’s elimination in perpetuity would undoubtedly equilibrate that problem greatly. Let us have an end to scarcity as a monetary value and hence the end of a milleniums long rule of the oligarchy over the polis. Then we will finally be able to align personal and systemic values and have the chance to evolve past homo economicus and toward true homo sapiens.

  8. alainton says:

    You misintrepreted me my criticism was aimed at all ‘gap’ theorys including shortages in demand create a need for credit.

    Credit is never demanded because there is a shortfall of money v goods in the totality of the economy, an explanation that completely leaves out pricing as treats accounts as if they mechanically determine prices. Rather credit is only and always demanded because either there is an opportunity to make profit or because of need to alter the time structure of consumption v expenditure. In a barter or pure says law economy there is never a demand problem – so what is the thing about a monetary economy which creates the issue. Douglas argues that the accounting ‘gap’ creates the need for banks, but misses out what makes monetary economies different from barter – BANKS. The answer was staring him in the face and he missed it the causation was the other way around from what he said. If Douglas was right how come no A+B gap emerges in barter systems run for profit? (there are examples in history, esp 17th-18th C maritime trade).

  9. Steve Hummel says:

    “an explanation that completely leaves out pricing and treats accounts as if they mechanically determine prices.”

    Pricing indeed may not be wholly mechanical, but so far as bottom line profitability in each and every financial cycle cost accounting IS mechanical

    “Credit is never demanded because there is a shortfall of money v goods in the totality of the economy,…”

    I disagree. For the INDIVIDUAL it certainly is at the very least induced and their inherent shortage of demand certainly does foster a hunt for demand via exports and all of the resulting consequences of overproduction, waste and the need for finance. Your “because of need to alter the time structure of consumption v expenditure” is really just again the problem of the need for capital investment outstripping disinvestment in a technologically modern economy and with a drawn out productive process.

    “If Douglas was right how come no A+B gap emerges in barter systems run for profit? (there are examples in history, esp 17th-18th C maritime trade).”

    First, I don’t know that such period was without a gap or imbalances or the problems these create. Second, it was not anything like the modern technological economy/drawn out productive process we have today.

    “Free” market economic theory will forever be beset with its recurring problems so long as it does not economically free the individual within it, even if the business entities within it make profit galore.

    A gap exists. A + B still stands. Time and these other factors insure it. A dividend is the appropriate supplement and eventually largely the replacement of the wage.

  10. vk says:

    @Steve Hummel, March 26, 2012 at 1:16 pm

    A dividend is the appropriate supplement and eventually largely the replacement of the wage

    What you suggest look pretty similar to what has been suggested by Marx:

    In a higher phase of communist society, after the enslaving subordination of the individual to the division of labor, and therewith also the antithesis between mental and physical labor, has vanished; after labor has become not only a means of life but life’s prime want; after the productive forces have also increased with the all-around development of the individual, and all the springs of co-operative wealth flow more abundantly — only then then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe on its banners: From each according to his ability, to each according to his needs!

    To bad it failed mizerably the first 15-is times. Any takers to try that again?

  11. Steve Hummel says:

    Social Credit is communism? Not! It will however make a profit making system function well probably for the first time…for everyone. Its a funny kind of communism which includes private property, free enterprise, profit, finance (in its proper non-dominating place) and that FINALLY makes technology our ally and benefactor instead of an inheritance whose productive factor is usurped and negated by finance.

    Communism failed for the same reasons capitalism is failing now. Their elitist intentions are (and by definition always have been) for accumulation of wealth and power instead of freedom for the individual. Distributism will at least philosophically be aligned with the proper intention while including the best of both of the prior human idiocies.

  12. koonyeow says:

    Title: Steve Will Show You How Deep The Rabbit-hole Goes

    To mankind,

    Will you take the red pill as soon as possible?

  13. Tom McAlone says:

    Steve K – 

    Congratulations – Looks like your message is getting enough traction to warrant Krugman’s attention!  

     What was truly amazing to me was his position that what is needed is a simple model and a clear understanding of how the model works. Compared to standard DSGE models your ODE models are paragons of virtue in that regard. 

    Please take him up on his implied offer to debate as soon as his domestic responsibilities free him up.

  14. enorlin says:

    Two passages from Krugman’s post:

    In particular, he asserts that putting banks in the story is essential. Now, I’m all for including the banking sector in stories where it’s relevant; but why is it so crucial to a story about debt and leverage?

    Keen then goes on to assert that lending is, by definition (at least as I understand it), an addition to aggregate demand. I guess I don’t get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand.

    He seems to suggest that endogenous money creation in private banks does not take place. Has he written anything on that subject earlier?

  15. Steve Keen says:

    It’s an unbelievable post. Of course I’m writing a reply to it, but I’m under the gun for time: I have a meeting at UWS at 4pm, and tickets for tonight’s opera on the harbour in Sydney, then tomorrow I leave for England en route to the INET conference. I hope I’ll have a new blog post up here before I depart, but I can’t promise anything. Now it’s time to write!

  16. barrythompson says:


    Be polite to Krugman. He knows that banks create money as credit. His criticism is that anyone can do it – look at the ‘shadow banking system’, where Repo is a new form of fractional reserve built on top of credit.

    It seems Krugman does not appreciate that credit is now the accepted means of exchange, not just a fractional reserve built on top of cash.

    One thing Krugman is willing to concede is that IS-LM is an over-simplification. That might be the right angle to approach him on. Your models aim to improve on IS-LM, by adding in banks and making the accounting correct.

  17. barrythompson says:

    I would respond to Krugman like this:

    IS-LM is a good rough guide to things. It says we need fiscal stimulus in a depression.

    But IS-LM is not perfect, as Krugman himself admits. So we need better models that include banks and dynamics. That is what you are trying to build.

  18. TruthIsThereIsNoTruth says:

    I wouldn’t get too emotional about it and take to it like a bull to a red cape.

    Krugman open admission that he doesn’t understand some of the finer details of your work is an opportunity to make your case to a wider audience.

    He makes a good, maybe irrelevant, point about the dogmatic interpretation of Keynes and Minsky.

    The biggest take away, possibly hidden behind some less than subtle taunts, is the point about implicit assumptions. Any assumption which is not explicit is implicit and there are a few of those in your work. There’s a few people, of which evidently Krugman is one of, who believe the strength of a model comes from the explicity and justification of it’s assumptions

  19. Ted Stead says:

    Good to see so many of the comments on PK’s blog supporting Steve’s view. Krugman’s Banking Mysticism follow-up is a classic too: “Banks don’t create demand out of thin air…” which is why PK and his ilk couldn’t predict the crisis.

  20. NeilW says:

    “There’s a few people, of which evidently Krugman is one of, who believe the strength of a model comes from the explicity and justification of it’s assumptions”

    Where does Krugman explicitly deal with the SMD conditions in any of his models?

  21. barrythompson says:

    Re: Krugman on implicit/explicit assumptions.

    Steve can really say that he approves of Krugman’s desire to be simple and explicit and that the Keen model is built exactly in this spirit.

  22. barrythompson says:

    And Steve does read Keynes and Minsky for insight. Steve just found some insights that many mainstream economists have missed.

  23. Steve Roth says:

    Steve, if it’s any help to you, here’s my distillation of the flaw in Krugman’s reply:

    Krugman assumes that people need to save in order for others to borrow.

    Keen points out that they don’t.

    Krugman explains that Keen is wrong by … assuming that people need to save in order for others to borrow.

    More here:

  24. Pingback: Krugman on (or maybe off) Keen | Steve Keen's Debtwatch

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