Oh my, Paul Krugman edition

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What a dif­fer­ence a year (and three-quarters) makes. Back in March of 2012, Paul Krug­man rejected the argu­ment I make that new debt cre­ates addi­tional demand:

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. Yes, in some (many) cases lend­ing is asso­ci­ated with higher demand, because resources are being trans­ferred to peo­ple with a higher propen­sity to spend; but Keen seems to be say­ing some­thing else, and I’m not sure what. I think it has some­thing to do with the notion that cre­at­ing money = cre­at­ing demand, but again that isn’t right in any model I under­stand.” (Min­sky and Method­ol­ogy (Wonk­ish), March 27, 2012)

Then ear­lier this month, this argu­ment turned up in his mus­ings about the sec­u­lar stag­na­tion hypothesis:

Start with the point I’ve raised sev­eral times, and oth­ers have raised as well: under­neath the appar­ent sta­bil­ity of the Great Mod­er­a­tion lurked a rapid rise in debt that is now being unwound … Debt was ris­ing by around 2 per cent of GDP annu­ally; that’s not going to hap­pen in future, which a naïve cal­cu­la­tion sug­gests means a reduc­tion in demand, other things equal, of around 2 per­cent of GDP.” (Sec­u­lar Stag­na­tion Arith­metic, Decem­ber 7, 2013)

Don’t get me wrong: I’m glad that Krug­man may finally be start­ing to sup­port the case that I (and some other endoge­nous money the­o­rists like Michael Hud­son and Dirk Beze­mer) have been mak­ing for many years: that ris­ing debt directly adds to aggre­gate demand. If he is, then wel­come aboard. Though there’s doubt as to whether John May­nard Keynes ever uttered the words attrib­uted to him that “when the facts change, I change my mind – what do you do sir?”, I’m happy to accept this shift in that spirit.

To read the rest of this post, click here.

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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27 Responses to Oh my, Paul Krugman edition

  1. Steve Hummel says:

    Simul­ta­ne­ously posted to Real World Eco­nomic Review blog and Ellen Brown’s forum:

    There is a high level and grand sym­me­try and align­ment between the mon­e­tary and eco­nomic poli­cies nec­es­sary to actu­ally solve, as opposed to pal­li­ate or even worse ignore, the cur­rent eco­nomic cri­sis as well as the gen­eral insta­bil­ity of the econ­omy for well over a century….and the most pow­er­ful and free­ing nat­ural, psy­cho­log­i­cal expe­ri­ence of human Wisdom.

    That align­ment is a pol­icy of mon­e­tary Grace as in the free gift of money to indi­vid­u­als and the psy­cho­log­i­cal state of Grace. This is not a call for super­nat­u­ral­ism in any way merely the recog­ni­tion that human sys­tems require holis­ti­cally human and actual solu­tions to their problems.

    The nat­ural, psy­cho­log­i­cal expe­ri­ence of Grace is one of both free­dom and abun­dance and that is pre­cisely what an ongo­ing com­pletely freely offered and unen­cum­bered indi­vid­ual div­i­dend would do for both the indi­vid­ual and sys­tem as tech­no­log­i­cal inno­va­tion wed to profit mak­ing eco­nomic sys­tems con­tinue to dimin­ish the ratio­nal need for work for pay while simul­ta­ne­ously increas­ing our abun­dant abil­ity to produce.

  2. Pingback: Debt and Demand | J. W. Mason

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