Explain­ing Richard Koo to Paul Krug­man

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A sud­den erup­tion, and the sur­prise of real­is­ing that the world he under­stands is not the one he actu­ally inhab­its. – Paolo Baci­galupi, The Windup Girl

This time really is dif­fer­ent.

Stock mar­kets are crash­ing after a run­away boom. Again. And the finan­cial sec­tor is ped­dling com­plex deriv­a­tive prod­ucts. Again. (Check out the US satir­i­cal rag The Onion’s bril­liant take on this: Finan­cial Sec­tor Thinks It’s About Ready To Ruin World Again)

But whereas pre­vi­ous peri­ods of Wall Street may­hem have been pre­ceded by a Main Street boom, this one hasn’t. We’ve re-entered a period of finan­cial mar­ket volatil­ity with unem­ploy­ment still within cooee of its peak dur­ing the 1990s reces­sion (see fig­ure 1– which doesn’t fac­tor in the changes in the def­i­n­i­tion of unem­ploy­ment since 1990, and the fall in the par­tic­i­pa­tion rate dur­ing this down­turn).

Fig­ure 1: A Wall Street boom with­out a Main Street recov­ery

Read more: http://www.businessspectator.com.au/article/2013/6/24/economy/gasping-krugman%E2%80%99s-ocean-theory#ixzz2X7BUcGTL

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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  • Steve Hum­mel

    Explain­ing C. H. Dou­glas to Richard Koo, Paul Krug­man, et al:

    You can­not omit or abstract out the con­text within which every dol­lar that enters or re-enters (that is re-cir­cu­lates back into) the econ­omy. And that con­text is the world of com­merce itself which has effects that must be accounted for. Those effects are costs. Fur­ther­more the rela­tion­ships between those costs and their rela­tion­ship to total costs also have mean­ings and effects…and those effects can­not be ignored. The ratio rela­tion­ship between labor costs and total costs for any given period of time will show a scarcity of total indi­vid­ual incomes to total prices need­ing to be liq­ui­dated if pro­duc­tion is to clear. This is the ongo­ing under­ly­ing real­ity of com­merce and of the entirety of the pro­duc­tive process itself from ini­tial pro­duc­tion of a prod­uct or ser­vice to its con­sump­tion by an indi­vid­ual and only by an indi­vid­ual at retail sale…because that is where and with whom all costs are once and for all finally con­cluded, and so cor­rectly may be and should be summed. 

    No mat­ter how much money is re-cir­cu­lated or how many times money is re-cir­cu­lated back through commerce/the econ­omy this effect of cost is applied to it….and results in a simul­ta­ne­ous indi­vid­ual mon­e­tary scarcity in com­par­i­son to total prices once again, and through­out the entirety of the pro­duc­tive

    Hence not only is there “no free lunch” in economics…the indi­vid­ual is short­changed con­tin­u­ally as well. Thus A will not pay for A + B, and P = In < Pr (The act of Pro­duc­tion equals a scarcity of total indi­vid­ual incomes in ratio to total prices that are cre­ated and need to be liq­ui­dated for the mar­ket to clear). 

    These are basic, ongo­ing and desta­bi­liz­ing eco­nomic real­i­ties that can­not be reme­died with­out rais­ing indi­vid­ual incomes in a man­ner that does not also raise the costs of com­merce. The only way this can be accom­plished is an ongo­ing direct pay­ment to indi­vid­u­als first instead of only inject­ing money into
    the econ­omy which will result in addi­tional costs.

    Again and by the actual physics of the pro­duc­tive process, the fact of money’s re-cir­cu­la­tion is irrel­e­vant as shown above because no mat­ter how much money is re-cir­cu­lated there is also more than that amount in prices that is simul­ta­ne­ously cre­ated and must to be liquidated.…if the econ­omy is to be sta­ble. The SEEMING mon­e­tary effect of Veloc­ity is actu­ally com­pletely and merely a crea­ture of the con­tin­ual injec­tion of loans into the econ­omy because the moment that con­tin­u­ous injec­tion slows or stops a reces­sion or depres­sion occurs. That is 1.0 cor­re­la­tion.

  • Steve Hum­mel

    Post to Azi­zo­nom­ics who is a reg­u­lar poster here also:

    Azi­zo­nom­ics: The prob­lem is veloc­ity is actu­ally wholly a crea­ture (and an inad­e­quate one at that) of the con­tin­ual build up of debt, and QE is just another even more inad­e­quate means of re-stok­ing that pal­lia­tive dur­ing a depres­sion like we find our­selves in presently. Bet­ter that we did some­thing
    actu­ally dif­fer­ent and much, much more effec­tive like issu­ing a citizen’s div­i­dend in per­pe­tu­ity which solves both the liq­uid­ity prob­lem for the indi­vid­ual and the sol­vency prob­lem for busi­nesses and the econ­omy as a whole. 

    This is anath­ema to the pri­vate Banks whose bot­tom line would be dra­mat­i­cally reduced by a credit cre­at­ing agency that issued that addi­tional GIFT of money. More mon­e­tary Grace, less lending.…that is the cor­rect, enlight­en­ing and un-hyp­no­tized way for­ward.

  • Steve Hum­mel

    It isn’t that the re-cir­cu­la­tion of money does not occur, it’s that its re-cir­cu­la­tion is irrel­e­vant to the res­o­lu­tion of the actual most basic eco­nomic prob­lem we face which is the con­tin­ual cre­ation by the pro­duc­tive process itself of a scarcity of total indi­vid­ual incomes in ratio to the total prices simul­ta­ne­ously created…and need­ing to be liquidated…if the econ­omy is to be sta­ble. If money, no mat­ter what amount re-cir­cu­lat­ing, still cre­ates this scarcity of incomes to prices the moment it is a part of the pro­duc­tive process….then the most basic flaw exists some­where in the pro­duc­tive process itself not nec­es­sar­ily in the tool of money or an aspect money cre­ation. Econ­o­mists and financiers must resolve this most basic of prob­lems. Econ­o­mists are sup­pos­edly prob­lem solvers so let them resolve this most basic prob­lem of the eco­nomic sys­tem. Banks and financiers cer­tainly have the right to exist, but they do not have the right to enforce a sys­tem which dom­i­nates and ulti­mately enslaves the indi­vid­ual.

    Con­tin­u­ously equate the rate of flow of total incomes with the rate of flow of total prices and you will have cre­ated the equiv­a­lent of the “Holy Grail” of economics…equilibrium. If that means new think­ing and new poli­cies, then so be it. If it means a break up of the monop­oly on credit cre­ation as well as the broad­en­ing of the kind of credit that is cre­ated and the pur­poses for which credit itself is granted, so be IT…as well.

  • Brian Sto­bie

    Steve, the file ‘LFvEM.mky’ linked in the arti­cle gives me an error “xml_pack:XML file trun­cated?” when load­ing it into Min­sky 1.D017.
    Tried down­load­ing it twice, same result ?

  • There could have been a file upload cor­rup­tion prob­lem Brian. Does the other file load OK? You can swap from one to the other very eas­ily by rear­rang­ing the lend­ing entries on the God­ley table, and flick­ing the switch on LM on the palette.

  • Brian Sto­bie

    Thanks — The other file does work OK — I tried again after updat­ing to 1.D018 — same prob­lem. How­ever, I’ll rearrange the entries as you did in your Bor­deaux video.

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