New Zealand Seminar: Schumpeter, Minsky & Endogenous Money
Sep12
on September 12, 2012
at 11:14 pm
This is probably the most detailed seminar I have given on my views on monetary macroeconomics. I begin with the data that, back in December 2005, led me to expect that a huge economic crisis was imminent: the ratio of private debt to GDP. Then I explain why this ratio matters, in contrast to the arguments that Neoclassical economists put that only the distribution of debt matters. This takes me through the empirical data, the theories of Schumpeter and Minsky, and the mathematics needed to prove that “aggregate demand equals income plus the change in debt” is correct, and that this does not involve double-counting.
Second section
The second lecture is interesting. Correct me if I am wrong, but even with the Minsky positive outcomes this is actually only a corporate return to profitability and “good times” and is also only possible after a jubilee reset of the economy. Even with that jubilee you could still be looking at an austere neo-feudalist future as wages fall at least as much as prices and just the repetition of economic history as time goes on.
If you factored in an inherent (and ever present) monetary scarcity in comparison to prices with every dollar actually entering or re-entering the economy, which is an economic and commercial reality which undercuts and nullifies theories like quantity and velocity, and then designed policies to correct that like a citizen’s dividend and a compensated retail discount to deal with any inflation….it would continually compensate for the inherent scarcity and make the system more free flowing….and free.
Income plus profit is for businesses not individuals, at least for the vast majority. The ever present effect of scarcity of purchasing power for the mass of individuals enforced by cost accounting are still not being factored in. It’s another fly in the ointment thingy and fits in nicely with the quote by Huxley about “a beautiful theory being negated by an ugly fact.” Many an “emergent” quality in macro is simply forgetting about the individual and failing to immerse oneself in the micro-economic REALITIES of the subset of accounting namely cost accounting.
@steve
LIked the explanation of why adding debt to GDP is not double countin g and how assets has shioftef in the equations.
Is this going to be written up in peer review form that might convince Lavoie and Krugman?
A question on your fund/flow post keynsian price formula – can it be modified to cover the price of money – interest? A necessary step I think in your work with Hudson and Bezemer.
More complicated as its not just a single price but a whole yield curve and their is a ‘durability gap’ at each point on that curve which creates the ‘demand’ for funding by banks – but there are multiple channels available not just one.
I dont know if you have seen the new paper by Piti Disyatat of BIS http://www.bis.org/publ/work297.pdf on this issue – though purporting to demolish loanable funds to my mind it tries to reassurect it by missing the point that the need for the ‘funding channel’ arises from asset-liability gaps and liquidity preferences both by banks and individuals.
Complexity in theory, especially in a moral science like economics is it’s soft under belly. Not that I’m against science or math, or complexity for that matter they’re all great tools and goads for discovery, but the elegant, the simple and the enlightening of the too often considered mundane/unimportant factor is probably a more promising route to truth. If we sought the insights of the most powerful tool in the control of the temporal universe powers of money and economics, namely accounting, synthesized them with the most powerful insights of human wisdom and then made policy based on the result, that empirical/intuitive route might be just as productive of solutions.
More pseudo-science. Another beautiful theory destroyed by an ugly fact. The enodgenous money assumption fundamental to the theory is contradicted by the simple fact of quantitative easing. Is the enormous money printing currently to provide reserves to “catch up” to the debt money which has already been created “out of thin air”, according to the theory? But debt money has actually been rapidly contracting, making the need for reserves even less relevant. Is the theory a description of how the world should work (designed by regulation) or how the world actually works (dictated by data) or how the world must work (regardless of design)?
That’s bit harsh, Lyonwiss. We live in a complex economy containing both endogenous money and exogenous money created by the government. That means that we need to understand the behaviour of both types.
I don’t follow you at all here Lyonwiss. Endogenous money argues that QE won’t have any impact on actual lending to the private sector. And it’s not playing catch-up.
I think what you’re arguing is that endogenous money means that reserves follow changes in private lending, and the fact that QE is occurring shows that this mechanism is false–is that what you’re proposing?
The “reserves follow loans” side of endogenous money talks about what the Fed must do if loan creation happens to result in reserves being inadequate, given a reserve requirement. But that doesn’t mean that the Fed is not at liberty to throw extra reserves in as a discretionary policy whenever it likes as well.
I actually agree that the endogenous money mechanism exists in reality, it’s fairly obvious and logical that it does. However it is not the only mechanism and certainly not always the dominant one. Hence conclusions drawn from a simple endogenous money model are not accurate (such as banks lend first and create deposits later, which is provably false) as they do not capture the array of other mechanism which exist in reality.
In other words, just because it provably exists, doesn’t mean that it exists in isolation and does not exclude other mechanisms. Reality is made up of an interaction of many and ever changing mechanism of which endogenous money is but one.
Also the existence of other mechanisms that prove the conclusions of the simple endogenous model to be false, do not prove that the mechanism does not exist. It proves that it does not exist in isolation. One model fits all is single dimension thinking.
Endogenous money is an observable accounting fact. That’s not where the pseudo-science lies. Its in the refusal to confront cost accounting REALITY which invalidates velocity and quantity THEORY. Realities will always trump Theories. Theory is once removed from reality, which is an immersive experience. Theory as often as not misses relevant data and its effects because of its abstract nature. Money is basically accountancy. When abstraction invades it obscures more than enlightens. This is a hard thing for theorists to to stomach and confront.
And effective policy by the way is basically BOTH common sense, i.e. wisdom and the intention to set BOTH the individual AND the system free. That’s why a jubilee when debts are unpayable is so effective and right. You can trust wisdom…a hell of a lot more than theory, more than dogma and even more than realities. Cost accounting is a reality. A comprehensive policy of monetary Grace however, is wisdom….and the ONLY way around the REALITIES that cost accounting enforces. Wisdom is so much more powerful than puny abstractions and blithe orthodoxies and theories. Its the DEEPER reality. Inner reality is deeper and more powerful than outer reality. Always has been, always will be. That fact, if it is honored, makes one individually powerful, and applied to policy has powerful systemic effects as well.
History rhymes, and the insight of wisdom is eternally relevant.
From C. H. Douglas’s Control and Distribution of production pg 22-24
There is, I think, a widespread idea that if agitators would only stop
agitating, and reformers stop trying to reform, the world would settle
down. For myself, I am quite convinced that both agitation and
reformism are merely symptoms of a grave and quite possibly fatal
disease in our social and economic system, and that unless an adequate
remedy is administered there will be an irreparable breakdown. I am
emphasizing this lest anyone should imagine that mere laisser-faire or,
on the other hand, a vigorous suppression of symptoms is all that is
necessary to cause things to ‘come right’.
The roots of this disease, then, are as follows:
1. Wages salaries, and dividends will not purchase total production.
This difficulty is cumulative.
2. The only sources of the purchasing power necessary to make up the
difference are loan and export credits.
3. All industrial nations are competing for export credits. The end of
that is war.
4. The major distribution of purchasing power to individuals is through
the media of wages and salaries. The preponderating factor in
production is improving process and the utilization of solar energy.
5. This latter tends to displace wages and salaries and the consequent
distribution of the product to individuals. The credit factor in
purchasing power thus increases in importance and dominates
production.
6. This production is consequently of a character demanded by those in
control of credit and is capital production.
7. The fundamental derivation of credit is from the community of
individuals, and because individuals are ceasing to benefit by its use it
is breaking down.
The reality of fiat/endogenous money enables the possibility of a truly Distributive money system. All it takes after that to actually have an adult, i.e. wisely controlled monetary system….instead of the childish, elite selfishly interested, and orthodoxy ridden non-control we currently have….is the proper monetary distributive policies and the awareness of the vast majority of the their true self interests. Some (primarily the present operators of the money system and their orthodoxy blinded novitiates) would say that was just populist demagoguery, but they would have apparently missed the word TRUE in front of the word self in that sentence.
See how powerful the experience behind a single word can be? Yes, society is primarily meta-physical. Change an idea it’s actually based on and you actually change that part of society. Change the entire psychology of a discipline like economics from a false scarcity to the reality of abundance and then adopt/adapt appropriately wise policies and mechanisms….and you will have changed the nation and quite possibly the world.
Only the fanatically wigged out supernatural dogmatist or the equally wigged out atheistic dogmatist objects to wisdom.
Not sure where to add this, but I ran across it just now and it would seem to be of interest and apt for inclusion in some of the discussion.
http://query.nytimes.com/mem/archive-free/pdf?_r=3&res=9C04E0D7103EEE3ABC4E53DFB467838A639EDE
Henry Ford and Thomas Edison – on money – on debt backed money.
Before even my time….
Not bankers though – funny that.
I imagine Debt would just amplify all the economic activity in the country. This means more spending, investment, jobs. More successful ventures, to a ratio, of not successful ventures. The important part is that people are not overextending themselves, which means good banking regulation. ANyone can foresee a recession if you give them enough time… It is true some spending will be on final goods, and others to create those final goods(investment). But either way increases demand. If people spend borrowed money on an phones, phone companies will have to hire more people, perhaps pay their employees more money… Eventually the industry will get oversaturated and some companies will have to lay off and go bankrupt. Lower demand is caused by higher unemployment. This cycle goes on, one bubble goes to another. Bubbles arent a bad thing, we just need to make sure that when a bubble pops that the recessions are relatively light. Debt is not the issue. Responsible debt is.
Hi Steve,
Just watched your lecture series and observe your make quite a bit of use of some fairly complex mathematical models which must necessarily have a large number of unbound input variables. What would you say to your critics that you’re just curve fitting after the fact?
I’d simply say “read this 1995 paper” Jacob:
http://www.debtdeflation.com/blogs/wp-content/uploads/papers/Keen1995FinanceEconomicBreakdown_JPKE_OCRed.pdf
The model in it was developed in 1992, and the pattern it generated fitted not only the collapse that began in 2007 but also the “Great Moderation” that preceded it (in a very stylized way of course, because there was at that time no data to fit!).