Tuesday, 3 April 2012

Keen vs Krugman and why it matters

Wrestling Sideways - ReallyIt seems the first skirmish in the battle for economic minds may be at an end. Krugman has declared the debate at an end.

And thanks to modern technology we've been able to watch and take part in this debate.

A summary has been posted and everybody believes their man won. But you may be wondering why this arcane battle matters at all.

It matters a lot. The Post Keynesian view of endogenous money creation changes the view on the causal relationships within the economy. It brings money and finance centre stage, rather than abstracting it out of existence as the Neo-Keynesians do.

Firstly it allows the build up of excess savings in the non-goverment sector - these 'savings net of investment' - and it allows them to build up first in the causal chain. That means that the non-government sector can be seen as 'pushing' money onto the government sector. This is the view that MMT takes and bases its economic model upon - the non-government sector is the one doing the 'net saving' which the government sector then has to react to.

With a Neo-Keynesian model it cannot - the government has to be 'pulling' money from the non-government sector - the government sector is over spending and the private sector is reacting to that. The current Neo-Keynesian viewpoint is why all governments are talking about cutting spending, trying to avoid 'pulling' money from the private sector because they believe that is what is stopping the private sector spending.

Secondly it allows the build up of an excess of private sector debt. Banks can push debt and are not constrained by having to fund the debt because the debt funds itself by its very creation. This leads to dynamic instability in the system and a collapse due to the funding of ponzi schemes. This is the area where Steve Keen and the Modern Circuit Theorists operate and drives their view that the level of private debt must be controlled to prevent any more 'Minsky Moments' like we saw in the GFC.

In the Neo-Keynesian model the level of private debt is a distributional issue and has limited or no effect on the macroeconomy. Banks cannot lend in excess of savings and will be brought under control 'in the long term'. And this is why government isn't panicking about the 450% private debt levels in the UK, and its economic strategy involves pushing more debt onto the non-government sector in an attempt to kick-start the economy.

Thirdly it allows these excesses to persist 'into the long term' (that favourite cop-out phrase of all economists). The Post Keynesian view doesn't see an automatic return to equilibrium - savings can stay in excess of investment for a very long time indeed. Certainly long enough to affect pension planning and the like. So you get persistent trade deficits and you get persistent government deficits due to the dynamics of the money system. Therefore policy must deal with these conditions. MMT's choice to accommodate those savings defers the issue of dealing with them to the future. You deal with them if and when they become spending in excess of your economy's ability to cope in the future. Chances are they won't and the impact will be smaller in the future because you're building a stronger economy today.

In the Neo-Keynesian view that must all resolve itself 'in the long term'. So you get the line that the central bank 'must' put up its interest rates if government runs a persistent deficit and that the trade deficit 'must' be repaid in the future at some point. In their view you have to get rid of excess government spending/trade deficit now because you will have to deal with the results of that excess in the future and it'll be a bigger problem then. Hence the lines about enslaving our grandchildren, etc.

Make no mistake this debate over the nature of money is the capital debates of our time. The result of this will have a profound effect on all our futures.

Keen vs. Krugman represents the start of the Kambridge Kontroversy.

8 comments:

Игры рынка said...

I do not want to sound cynical but the fate of this debate is more likely to be the same as of capital controversies.

But honestly I do not even know if that is good or bad. It is not enough to discuss and even agree these issues among hobby and some professional players. The society, not the textbooks, needs a big shake up. Otherwise there can be NO structural break of behavioural models. Even if we agree on money origin there are much larger issues than that which we face. Take technological unemployment. It hardly discussed anywhere but it is a very sad reality of today.

Neil Wilson said...

I would suggest staying cynical is entirely appropriate.

But we have to win the money argument before there can be policy space available to deal with the technological unemployment issue.

Andy said...

"That means that the non-government sector can be seen as 'pushing' money onto the government sector. This is the view that MMT takes and bases its economic model upon - the non-government sector is the one doing the 'net saving' which the government sector then has to react to.

With a Neo-Keynesian model it cannot - the government has to be 'pulling' money from the non-government sector - the government sector is over spending and the private sector is reacting to that"

This description distinguishes the 2 approaches nicely and originally (as far as I'm concerned anyway) and STAY CYNICAL

Hedlund said...

"Cambridge Capital Debates 2: Electric Bankaloo"? How depressing. Wouldn't it be better if this time "being correct" actually serves as terra firma for the position to take hold and make an impact on the profession?

We experimented with our art-house impulses in the first one. Hopefully the sequel will go fully commercial, complete with Hollywood ending.

Trixie said...

It's difficult to keep all these economic schools of thought (and their various offshoots) straight. Currently, I'm working on trying to parse the following:

"The new Keynesians helped create a 'new neo-classical synthesis' that currently forms the mainstream of macroeconomic theory. Following the emergence of the new Keynesian school, neo-Keynesians have sometimes been referred to as Old-Keynesians."

Because everyone just SHUT UP.

Letsgetitdone said...

Nice summary of the reasons why the debate is important, Neil. But, even though I agree with this:

"In the Neo-Keynesian view that must all resolve itself 'in the long term'. So you get the line that the central bank 'must' put up its interest rates if government runs a persistent deficit and that the trade deficit 'must' be repaid in the future at some point. In their view you have to get rid of excess government spending/trade deficit now because you will have to deal with the results of that excess in the future and it'll be a bigger problem then. Hence the lines about enslaving our grandchildren, etc."

I think this point of view needs some amplification from the viewpoint of how it relates to the kind of propaganda Mike Norman discusses here: http://mikenormaneconomics.blogspot.com/2012/04/blatant-lies-of-peterson-walker-simpson.html

It strikes me that the neo-keynesians would rather use the kind of fear mongering Mike quotes, rather than explain the difference between their position and the post-keynesian one in the honest way you've expressed it above.

Oliver said...

I'm not sure the line about enslaving grandchildren is fair on Krugman and his fellow New Keynesians. Krugman, at least, is quite emphatically in the 'it's a purely distributional issue' camp. I think on should separate this from the 'long term debt' argument - even if it seems inconsistent to do so from where I stand.

Anders said...

Neil - you say "Banks can push debt", and also that the UK govt is trying to kick-start economic growth by "pushing more debt onto the non-government sector".

I agree with the second part, but surely banks can only improve credit availability - they can't force people to take out loans. (Just as you can lead a horse to water but can't force it to drink.)

This seems to me why the govt's policy is not simply ill-conceived on the grounds that it would be a bad thing if non-banks actually did start running up debt again; it's also unrealistic because non-banks simply aren't clamouring for more debt and so won't increase their borrowing, no matter what happens to monetary policy.