My paper for INET’s Berlin 2012 Conference

flattr this!

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.

Dis­e­qui­lib­rium

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:

Reme­dies

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 a professional economist 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 debts accumulated in Australia, and our very low rate of inflation.
Bookmark the permalink.

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:

    @steve

    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:

    Alain­ton,

    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 http://xa.yimg.com/kq/groups/18648543/1622732410/name/A$+%2B+B$+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?

    http://en.wikipedia.org/wiki/Red_pill_and_blue_pill

  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:

    Steve,

    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:

    http://www.asymptosis.com/the-central-flaw-in-krugmans-argument-against-keen.html

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

Leave a Reply