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 a professional economist 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 debts accumulated in Australia, and our very low rate of inflation.
Bookmark the permalink.

26 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.

Leave a Reply