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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