I have been a bit slow in posting about this subject. As many people probably already know, there has been something of an epic debate between Paul Krugman and Steve Keen, on a number of issues, but, above all, the subject of endogenous money.
One annoying thing I find: Steve Keen is a Post Keynesian, influenced by Hyman Minsky’s financial instability hypothesis. Steve Keen is not, strictly speaking, an MMT macro-economist, though it is true that there is a great deal of overlap between Post Keynesianism and MMT (for the emergence of MMT from Post Keynesianism, see here). Nor is endogenous money theory an invention of MMT: it goes right back to the 19th-century Banking school (Wray 1998: 32–33), was held by Wicksell and Schumpeter, entered Post Keynesian economics as early as the work of Joan Robinson and Nicholas Kaldor (although the classic text is the later work of Moore 1988), and is of course supported by MMT too. There is no doubt that a number of the old American Institutionalists (like John Kenneth Galbraith) supported endogenous money theory as well, as do many other modern heterodox economists (e.g., James Galbraith). (As a matter of historical interest, the great Post Keynesian economist Nicholas Kaldor used endogenous money theory to smash the monetarism of Milton Friedman and its vulgar supporters.)
A review of the debate in this video on RT, with an interview with Steve Keen. Some silly stuff at the beginning, but one can skip through this and start at 1.59.
For those interested in following the actual debate, see these links:
Steve Keen, “Instability in Financial Markets: Sources and Remedies,” INET Conference Paper, April 12-14, 2012.
Paul Krugman, “Minsky and Methodology,” 27 March, 2012.
Krugman’s comments on Keen’s paper.
Paul Krugman, “Banking Mysticism,” 27 March, 2012.
Krugman’s second comment on Keen’s paper and banking.
Steve Keen, “Krugman on (or maybe off) Keen,” Steve Keen’s Debt Deflation, 29 March, 2012.
Keen’s first response.
Nick Rowe, “The Supply of Money is Demand-Determined,” 1 April, 2012.
Scott Fullwiler, “Krugman’s Flashing Neon Sign,” 2 April, 2012.
Paul Krugman, “Things I Should Not Be Wasting Time On,” 2 April, 2012.
Paul Krugman, “A Teachable Money Moment,” 2 April, 2012.
Steve Keen, “Ptolemaic Economics in the Age of Einstein,” 2 April, 2012.
Keen’s second response.
Paul Krugman, “Oh My, Steve Keen Edition,” 2 April, 2012
Steve Keen, “Oh My, Paul Krugman,” 3 April, 2012.
Keen’s third response.
John Carney, “Paul Krugman vs. MMT: The Great Debate,” NetNet, 3 April, 2012.
“The Keen/Krugman Debate: A Summary,” Unlearning Economics, 3 April, 2012.
An excellent review of the debate from Unlearningeconomics. Very useful.
Dan Kervick, “Bring Back Fiscal Policy,” April 4, 2012.
“Not so Keen on Krugman,” Naked Keynesianism, April 4, 2012.
Moore, B. J. 1988. Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, Cambridge and New York.
Wray, L. R., 1998, Understanding Modern Money: The Key to Full Employment and Price Stability, Edward Elgar, Cheltenham.
The more I read about this, the more respect I loose for Keen. Mainstream economists don't consider out of equilibrium behavior? Mainstream economists don't incorporate banking, debt, and money? This guy is not looking very good, LK.ReplyDelete
Plus, RT gives me the creeps. It seems strange to get a blog review from a news station anyway, much less one with an apparently long-standing position on neoclassical economics. RT has always bugged me given its Kremlin backing.
Franklin Fisher is a mainstream economist who studies out-of-equilibrium behavior, building on the of, for example, Hahn. And his demonstration that there need be no tendency towards equilibrium. Furthermore, if there is a tendency towards equilibrium, the equilibrium established is typically not one of those consistent with the data (techniques, tastes, and initial endowments) in existence at the start of the disequilibrium process.Delete
Fisher's work is roundly ignored by mainstream economists who, mostly, teach garbage. Keen knows (and has said so) that many of the demonstrations of the incoherence of neoclassical economics were generated by (ignored) mainstream economists themselves.
I'll give another example. John Geanakoplos and Jess Benhabib are examples of two mainstream economists who understand that simple mainstream models can give rise to cycles, complex dynamics, and even chaos. Nevertheless, most mainstream economists explain cycles as system response to external shocks, not potentially endogenous dynamics arising out of complex dynamic systems. Once again, my example is one of mainstream economists showing conventional practices of mainstream economists to be unfounded.Delete
One way of thinking about it is that two schools of economics exist: good and bad. Those who still hold fast to the notion of a rate of interest ultimately determined by the forces of thrift and productivity (e.g., Krugman explicitly, at the start of this debate) are in the school of bad economics.
Seriously - isn't that stuff about banking/money/debt enough to convince you he isn't really understanding the neoclassical position?ReplyDelete
Seriously, it convinces me he does. In order to treat money, banks and debts, Neoclassicals (in the particular version of New Keynesians, because New Classicals don't even bother) have to add ad hoc situations that are in deep conflict with their methodological approach (an optimizing representative agent)etc etc. Why do you believe that neoclassicals still teach Modigliani-Miller? A great exposition of why the introduction of money and debt is incompatible with the core neoclassical assumptions is a series of post (and a book) by Phil Mirowski. You can find it in the blog naked capitalism.Delete
"Mainstream economists don't incorporate banking, debt, and money? "ReplyDelete
(1) do you understand endogenous money theory, and what is your opinion of it?
(2) Do you understand Hyman Minsky’s financial instability hypothesis, and what is your opinion of it?
(3) "RT has always bugged me given its Kremlin backing."
Whatever one thinks of RT (actually, I am not that impressed with it either), that is irrelevant to the issues at hand.
I don't see how they speak to the point, but:Delete
1. Well whenever people talk about endogenous money it always seems slippery to me. Yes, I've always understood money creation to be endogenous. But sometimes people talk as if that means monetary bases don't matter. I don't think that's true.
2. I understand financial instability and I think very highly of it.
3. No, it's not irrelevant. It's entirely reasonable to be bothered by an ideological or nationalist motivation of a news organization posing as otherwise, particularly a left-leaning Russian one. I'm not Joe McCarthy - they have every right to broadcast - but I do think this is something that merits being bothered by.
(1) and (2)Delete
If one really accepts (a) endogenous money and (b) FIH, then the substantive issues are already settled, in Keen's favour, by the way.
"But sometimes people talk as if that means monetary bases don't matter."
Of course the monetary base matters. The statement that money supply is endogenous and monetary base is important are both perfectly consistent.
(3) then ignore the RT interview and concentrate on the blog posts.
OK... getting into the second half and Keen is saying that Krugman said the buildup in debt didn't matter for the crisis. WTF?!?!?ReplyDelete
How can you guys take Keen seriously? I've never had time to look into him before, but I always assumed the best of him because so many people have spoken so highly of him. This first exposure to him has not reflected on him at all. He strikes me as being uninformed about what he's arguing against and extremely caustic.
He kind of reminds me of some market monetarists out there - he's probably extremely intelligent, he just has a laser focus on one point and a strange insistence on dumbing down everyone else's claims in order to turn them into enemies.
"getting into the second half and Keen is saying that Krugman said the buildup in debt didn't matter for the crisis."Delete
I am sure Krugman acknowledges the debt problem now, the question is did he in the years before 2007?
It's only in early 2009 that
Krugman made this comment on his blog after reading Hyman Minsky:
"I really am gravitating toward a Keynes-Fisher-Minsky view of macro, although of the three I’d much rather read Keynes."
Now, I answered your questions - I'm interested in you answering mine: Do you think that it demonstrates that Keen is either uninformed about mainstream economics or lying about mainstream economics for him to say that they think you can understand the macroeconomy without money, debt, and banks?ReplyDelete
This is really bad LK - this is Austrian-botching-Keynesianism bad.
"Do you think that it demonstrates that Keen is either uninformed about mainstream economics or lying about mainstream economics for him to say that they think you can understand the macroeconomy without money, debt, and banks"
Daniel, there is a bit of rhetoric and over the top comments in this public debate from both Keen and Kurgman.
Obviously, there is no doubt mainstream economics DOES have much to say about money, debt, and banks, but the issue for me is: how good in its analysis?
We can talk about simple mainstream economics (i.e, what you get in your first year text book) and the higher level, neoclassical literature.
Steve Keen - far from mouthing off ignorantly about neoclassical economics as if neoclassicals know nothing - has a great deal of praise for some of the higher-level neoclassical literature: he cites it and uses it, and agrees with it.
I suspect you haven't read him properly. Try this:
Steve Keen, 2011, Debunking Economics: The Naked Emperor Dethroned?.
The key point here is that Krugman put forward this argument.ReplyDelete
" 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."
That is the central argument - because it implies that banks can't lend ahead of time.
Banks lending first in the causal chain is the key issue of our time.
Exactly. How can Daniel expect us to take his claims of straw manning seriously when he says this?Delete
Being an economics student, I *know* that it's not a straw man. Finance is discussed as a 'link' between savers with too much and borrowers with too little, no more.
"That is the central argument - because it implies that banks can't lend ahead of time."Delete
How in the world does saying that banks lend in response to deposits imply that they don't lend before deposits.
I'm predisposed to think your "key issue of our time" overstates the significance of this point, but regardless of that you've done an awful job parsing Krugman.
Unless I'm misunderstanding how his statement implies this.
When Krugman writes:
"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."
The "them" that the bank lends out refers to the deposits that Krugman himself stashed there. This makes deposits logically prior to lending, implying that without those deposits the bank couldn't have made the loan.
And that's the loanable funds theory, not endogenous money.
The loanable funds view is then the basis for Krugman's rejection of Keen's claim that change in private debt impacts aggregate demand.
It's worth considering, also, that according to the endogenous money story, banks don't even lend "in response to deposits."
On the endogenous money view, deposits are desirable to banks because they are a cheap source of funding. They enable higher bank profits by increasing the spread between bank assets and liabilities.
That's all they do.
Keen is prickly. But I think he's right on this (along with the rest of the post-Keynesians).
'Response' implies a definite causal relationship (usually temporal, btw.) and thus, in your specific use, perfect foresight. But the future is uncertain. No cause, only guessing...Delete
With due respect, I believe either you did not read Krugman's first blog (Minsky and Methodology) or you did not pay any attention to what Krugman said there.
These are LK's three questions (Apr 4, 2012 10:13 PM)
(1) do you understand endogenous money theory, and what is your opinion of it?
(2) Do you understand Hyman Minsky’s financial instability hypothesis, and what is your opinion of it?
(3) "RT has always bugged me given its Kremlin backing."
You answered the two first questions in the positive.
Well, Krugman actually answered the two first questions in that first blog (and a bit in the second).
To the second question, about Minsky, Krugman answered that he (PK) is not interested in what Minsky said: Yes, it's good, blah-blah... but "I don't care".
He gave a hint about his posture about banks, debt and leverage (that's related to the first question). Something to the effect that he doesn't understand why banks are relevant to a story about debt and leverage! That makes about as much sense as saying that one doesn't believe animals or plants are relevant in a story about evolution.
But that's not the end of the story. In the following blog, he went on to say that, yes, banks do create money... by the money multiplier!
For crying out loud: if there is something that is proven beyond reasonable doubt is that the money multiplier is a myth.
Keen himself (not to mention each and every MMTer I've ever read) has grown old showing that the money multiplier does not work, it has no empirical existence. And it doesn't work because banks don't need to have deposits in order to make loans: the order is the inverse, first they loan the money, then they get the deposits needed for reserves, either from depositors, from other banks or from the central bank.
Think about it: if you were a banker, would you just clutch my money tightly against your chest, with both hands, waiting anxiously until someone came in and asked for a loan? Obviously, you wouldn't: the time you wait for a loan to come, is a time you are paying me interests for that money.
And why would you loan only a fraction of the deposit, if you can loan whatever amount you can, knowing full well that you'll have no difficulty whatsoever in getting the reserves?
If you need it, and you didn't get from any other source, just ask the Fed!
And those two first blogs were the best Krugman produced in the whole exchange, because from there it all went downhill for him.
I don't know you, but I also lost a lot of respect for an economist in that debate: Krugman.
When you Keynesians finally decide upon the true nature and essence of your nasty funny money system, let us all know, ok? I find this dispute amazing because you guys cannot even agree upon what this thing you love really is. It is nothing but a regime that allows the surreptitious transfer of purchasing power without the victims realizing what hit them, just as it was intended to do. It is purposefully indecipherable precisely to hide its nature from average people who are its prime victims.ReplyDelete
Anyway, isn't this all just a question of fact, a matter of following the keystrokes, however difficult that might be in practice to accomplish? Just follow the "money", such as it is.
Here is an Austrian fanboy who declares that he has no problem with unregulated, free fractional reserve banking, a system that can create money out of thin air, just as the Fed does in open market operations.Delete
Therefore he is equally logically committed to what he erroneously calls a "nasty funny money system" (read endogenous money system) as any Keynesian.
This shows us the illogic, stupidity and double standard hypocrisy of your typical internet Austrian.
"It is nothing but a regime that allows the surreptitious transfer of purchasing power without the victims realizing what hit them, just as it was intended to do."
A FRB system, subject to the random shocks of commodity money production, would also be quite capable of generating excessive credit and inflation as well, allegedly causing "surreptitious transfer of purchasing power without the victims realizing what hit them."
Yet when challenged to say whether he supports or rejects free FRB, he says he supports it.
The usual double standard and hypocrisy.
The claim that I have “no problem with unregulated, free fractional reserve banking” is typically misleading. I don’t think free market fractional reserve banking can work. What I have said was that, pursuant to the non-aggression principle, if banks, depositors and payees have a contractual meeting-of-the minds to create such a commercial venture, I would not be in a position to interfere. It’s analogous to the relationship of pious religious types to a porn business: Stay away and avoid interaction.Delete
The problem I see for free market FRB is finding fully informed payees who will accept the notes. Will they? I don’t know and I don’t care. If it works, wonderful. If it doesn’t, they can’t say I didn’t warn them. Big deal.
However, the great difference between today’s machinery of theft and free market FRB is that in the free market, there are remedies for fraud. And just so you don’t go off half-cocked as usual, if there is indeed a contractual meeting-of-the minds by all parties to the FRB, there can be no fraud as a matter of definition.
Thus, the claim that I "support" FRB is typically misleading.
"I don’t think free market fractional reserve banking can work. What I have said was that, pursuant to the non-aggression principle, if banks, depositors and payees have a contractual meeting-of-the minds to create such a commercial venture, I would not be in a position to interfere."Delete
(1) LOL... In other words, you do not wish to ban it. You *accept* it as used by other free agents and cannot offer any significant arguments against it ("if there is indeed a contractual meeting-of-the minds by all parties to the FRB, there can be no fraud as a matter of definition").
(2) History shows us clearly the FRB arises on the market and becomes the dominant form of banking, so your belief "I don’t think free market fractional reserve banking can work" is based on nothing serious whatsoever, except an feverish Austrian imagination - certainly no empirical evidence from history which demolishes your belief.
(3) A FRB system would clearly be an endogenous money system (which would exist to a significant degree in the business community anyway because of promissory notes and bills of exchange), and subject to the random shocks of commodity money production as well, and would also be quite capable of generating excessive credit and inflation as well.
LOL * 2Delete
"However, the great difference between today’s machinery of theft and free market FRB is that in the free market, there are remedies for fraud"
Greespan famously didn't think he should investigate fraud because the market will sort it out. Look what happend. But of course actually existing capitalism is not a 'free market' is it Bob!
The contention of Rothbard at least, is that fractional reserve banking permitted in a freemarket with free competition in currencies would be unable to prevent lots of mini- austrian business cycles. But due to the nonexistence of a central bank or government to interfere, the effects would be short lived as the malinvestment would be free to liquidate quickly.Delete
Also, it would affect far less people rather than creating a massive ripple effect throughout the rest of the economy.
That's at least what I've had hammered into my head and have been insisting on for the past year and a half.
I'm not sticking to the Rothbarian/Misesian view, just explaining what it is and why Bob (as unintelligent as he seems) is not in any way inconsistent for his live and let live attitude to FR.
"The contention of Rothbard at least, is that fractional reserve banking permitted in a freemarket with free competition in currencies would be unable to prevent lots of mini- austrian business cycles. But due to the nonexistence of a central bank or government to interfere, the effects would be short lived as the malinvestment would be free to liquidate quickly."Delete
(1) the evidence of history does not support Rothbard.
(2) Australia in the 19th century had an approximation of free banking. It was a disaster:
(3) In the absence of a lender of last resort, the idea that banking crises and resulting real output collapse
would be "short lived as the malinvestment would be free to liquidate quickly" is absurd. If the financial system collapses the result will be not be "short lived" or quick liquidation of alleged malinvestments.
Not even Hayek believed this. He came to argue that there was a devastating thing called "secondary deflation" - unnecessary and disastrous:
Even Roger Garrison thinks that "Deflation caused by a severe monetary contraction is another matter. Strong downward pressures on prices in general put undue burdens on market mechanisms. Unless, implausibly, all prices and wages adjust instantaneously to the lower money supply, output levels will fall. Monetary contraction could be the root cause of a downturn - as, for instance, it seems to have been in the 1936–7 episode in the USA.".
See the addendum here:
Think about Rothbard's idealized world for a second: No CB and no government intervention in the banking system.Delete
What does this mean? This means no lender of last resort, no FDIC insurance and a very decentralized banking system consisting of many small banks. Banks who could even issue their own currency.
In this system, he contends, there is no reason to curb FRB because FRB would fail without the government backstop.
If banks were to over extend through lending or inflate the currency they issued, their customers would become concerned and bank runs would occur. Yes some banks would fail (GASP!) but the impact would be very small in the context of the entire economy.
Rothbard's basic assertion (which he applies over and over)is that it is impossible for any business in any industry (including banking) to gain enough power to harm the system without government assistance.
Therefore, it is logically consistent for him to defend free markets, even if FRB would be a result.
@ Bob RoddisDelete
"... in the free market, there are remedies for fraud."
Markets depend on trust in order function and nothing is more damaging to markets than the loss of trust.
A market participant who is permitted to sell an inferior good claiming that it is a high quality good, gains a large cost advantage over its honest competitors.
And, furthermore, if driven either to bankruptcy or into the adoption of fraudulent practices, honest sellers and the high quality goods they produce, will be forced, by competition, out of the market.
The 2008 Chinese infant formula scandal is an example of this process whereby honest manufacturers were driven out of the market, six infants were killed, and over 300,000 were hospitalized.
If fraud isn't punished cheaters prosper.
The main problem I see is that it is high cost, inefficient and at times impossible for each buyer to have check to ensure each purchase is indeed that which they paid for.
Doing so would create huge overhead.
Imagine a gold coin having to be tested for purity with every transaction. Even if the test didn't destroy a portion of the gold being checked (which, after a finite number transactions, would eventually consume the entire coin) it would be a huge waste of time.
I don't know Austrian views very well so I'd be interested to hear if there are any Austrian's who favour state monopoly on violence, i.e. standard social contract theory. Without that, it seems there is no free market because violence is privatised. In order to protect themselves people have to create defensive social structures and society just reverts to pre-capitalist feudal bondage. On top of that the scalability of state violence implies the risk of invasion by a foreign state.Delete
It really should be just that simple, shouldn't it? Unfortunately, it can become difficult to convince people who have built their careers or identities around a mistaken idea to part with it; as you are no doubt aware, it starts to take on a nigh-religious significance.
Please give me as much hell as I deserve for this. I'm interested in Keen's point of view and want to understand post-keynesianism more.ReplyDelete
But is Keens reason for why the equilibrium model fails, anything like the old Austrian notion that equilibrium is a fiction that can never be reached because market actors are never stationary, and are always acting on their needs at all times? In other words, a market can never "reach" equilibrium but is always tending towards it. I don't have his book yet so I can't tell.
No. He says that the Austrian notion of markets tending towards or always being close to equilibrium is wrong.
His view of markets is more pessimistic than that.
Keen rightly says that macroeconomy is a complex nonlinear system. As with most chaotic systems, equilibrium tells you very little. For example, the equilibrium could be unstable.ReplyDelete
The problem is that 99% of neoclassical economists know nothing about chaotic systems and chaos theory. Keen is the only one I've seen that actually treats the economy like a chaotic, nonlinear system and the behavior that he gets out of his models is that of a chaotic system.
Economics needs to use more chaos theory if they're going to model economics. This idea that the economy is a linear system is a total joke. Nassim Taleb has the same critiques on neoclassical economics.