Oh my, Paul Krugman edition

Flattr this!

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.
Bookmark the permalink.

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

Leave a Reply