Here. He's got a really bothersome video posted that's worth watching just to get a sense of what Keen's position is. I have to say, my opinion of this guy has dropped like a rock ever since this Krugman/Keen thing started. I always gave him the benefit of the doubt because so many people spoke so highly of him. The blog back-and-forth made me leery, but I figured maybe they were just talking past each other. But this video is chock full of cases where Keen is either completely ignorant or completely disingenuous when it comes to mainstream economics.
One thing's for sure though - I'm really looking forward to my Macro Political Economy class in the fall now. It's basically a post-Keynesian political economy class.
I still have a lot of respect for most of the post-Keynesianism I've run across. But this Keen guy is really starting to rub me the wrong way.
Thursday, April 5, 2012
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"The blog back-and-forth made me leery, but I figured maybe they were just talking past each other."
ReplyDeleteSurely, yes - Krugman more than Keen.
Ummm... not quite.
DeleteOn a related issue. Krugman came to an appreciation of Hyman Minsky's theories quite late in his career
ReplyDeleteIt's only in early 2009 that Krugman made this comment on his blog after actually 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."
http://krugman.blogs.nytimes.com/2009/05/19/actually-existing-minsky/
I think that you're being just fine with regard to Keen. New Keynesian economist Roger Farmer does study coordination failures and multiple equilibria. (I suspect even Keen would concede that Samuelson and Krugman are better than Friedman and Lucas.) To me, it's obvious that the money supply is partially endogenous and partially exogenous - why make anthills into mountains over this? But Keen is right about debt-deflation, for it is a neglected part in economics research.
ReplyDeleteOut of curiousity Daniel Kuehn, will you ask your Macro Political Economy professor, Robert Blecker, about Kaldorian growth models? From what I've gathered from the Internet, your professor seems more Kaleckian than Kaldorian.
Forget Keen.
ReplyDeleteActually, I will say this for the "debate"--I respect Krugman's contribution to the discipline, but he is constantly trolling macroeconomists. It's been (almost kind of) amusing to see the shoe on the other foot.
ReplyDeleteDaniel, here's your problem. Invoke the principle of charity when choosing the tone you read this in:
ReplyDeleteNeoclassical economists are impossible to pin down. They think paying lip service to a concept, or adding it on to an existing model as a friction, is sufficient to deal with it. Unfortunately the core models STILL treat finance as an intermediary linking savers to borrowers. They do - I'm taught this stuff NOW, and they do. Krugman even said something similar in his initial posts.
The difference between their models and Keen is that credit, banking and money is CENTRAL to Keen's models, whilst neoclassical only add their 'fixes' AFTER it has become apparent a certain phenomenon matters. The core model, however, is always preserved, ready to go back to once the crisis is over. This is why neoclassical models didn't see the crisis coming and Keen did.
As for DSGE, the point is not how fast is gets to equilibrium, or whether it actually gets there. The point is whether economies have destabilising tendencies, whether equilibrium itself breeds disequilibrium. DSGE simply does not contain endogenous disequilibrating tendencies, only random shocks and 'frictions' that 'get in the way' of the 'underlying mechanics' of the economy.
Maybe Keen overstates his case. But face facts: he is on the right (wrong?) side of a crisis that he saw coming and you didn't. The evidence is on his side.
Out of curiosity, how can you tell the difference between incorporating X in the model as you'd like and incorporating X in the model as one of Keen's epicycle. As far as I can tell, if the concept is in the model its in the model. The deciding factor for whether its "tacked on" or whether its essential seems to me to be whether Keen likes the economist on the other side of the table or not.
DeleteYou write "central" in all caps, but as far as I can tell a model is just a collection of relationships (usually equations, but not necessarily). There's no "center" to a collection of relations, unlearningecon. Or if there is one I don't know how to determine where it would be.
If you want to say that finding steady states is less useful than thinking about the implied dynamics, I agree with you... but you kind of need the former to understand the latter, so this complaint always seems like much ado about nothing.
re: "Maybe Keen overstates his case. But face facts: he is on the right (wrong?) side of a crisis that he saw coming and you didn't. The evidence is on his side."
Notice I've never said Keen totally botches anything when it comes to the analysis. He might emphasize different things than I would... maybe. I still don't know him well enough to say. My point is that he really doesn't seem to know what he's talking about when he's criticizing the mainstream - and that's resulting in him being a lot less constructive than he could be. To be honest, it's the mirror image of a lot of the Austrians that actually have interesting ideas but waste their time making idiot complaints about a mainstream they are clearly strawmanning.
Daniel
ReplyDeleteSomeone wrote above:
Keen is right about debt-deflation, for it is a neglected part in economics research.
As the chief seer, Krugman cannot admit he missed the most important point
Selfpreservation leads to talking past and lots of other sins
Debt deflation is another way of saying that the marginal propensity to spend on output varies between groups.
ReplyDeleteIf we have debt deflation and the real cost of debt maintenance increases then the means money which is worth more is passed between debtors and creditors. If both groups were alike in their spending habits and their money holding habits then output wouldn't change. If they are unalike then it may, For example, if creditors tend to hold money for longer before spending it on output then an increase in the real value of debt will reduce output. Or, if creditors are more likely to buy existing capital goods.
Essentially debtors and creditors have different V in MV=PY.
I assume this is why Keen is interested in getting rid of representative agent models. Because if you take all agents to be the same then this can't happen.
Any economic theory with endogenous V incorporates this idea roughly.
Current
ReplyDeleteWhat silly stuff are you writing about? In debt/deflation, neither debtors or creditors have money to spend.
What don't you understand about being land rich, cash poor?
By definition, in debt deflation, debtors have no money. If they had money, they would pay off their debts. Creditors also have no money. Their source of money (debtors) has dried up. What creditors have are old assets repossed from debtors, which are falling in value and cannot be sold. So, with neither side having money, you have no propensity to spend by anyone.
And, in once into deflation, money is, in a practical sense, not worth more, for as soon as you buy some, you have a loss because the asset drops in value.
Let's not go overboard here - they don't have "no money". Most debtors simply have less money (or to put it more accurately - less purchasing power), but they still have money to pay their debts, and their creditors then have more purchasing power than they would otherwise. The point of debt deflation cycles is the change in purchasing power, not that someone has "no money".
DeleteTo the extent that creditors are not yet paid off by debtors, and simply hold claims, those claims are still worth more because of the shifts in the purchasing power of the money they will eventually be paid in.
Now - certainly some classes of assets are considered so toxic and uncertain that they probably don't do creditors any good to hold them, but on the whole Current is right (and its actually a point I never thought of before - a very interesting point).
Daniel,
ReplyDeleteYou comments are where the rubber meets the road. You are talking about a model. I am talking a about the real world where in debt/deflation debtors really have no money (or they have so little money they act like they have no money, for if they have money they will not spend it).
And, creditors have no money, for their money comes from debtors (which is why banks have been failing since 2007).
The claims of creditors also valueless. What do you think my bank clients have been doing the last 5 years. They have been declaring assets valueless and writing off incredible amounts of loan losses. Their claims are not "worth more," for gold, copper, oil, everything but real estate have gone up in price and real estate is what was providing the cash on which the economy was running. Look at Keen]s charts and graphs.
I understand what you are trying to say. Let's assume that there is a widget factory in Blackacre with a 100 million dollar mortgage. You have debt deflation, so the owners are unable to repay all or any part of the 100 million. They go bust, starve until depression over takes them, drive to Charleston SC and jump off the bridge, ending their lives. No money from debtors.
The creditors now have a factory which you think is an asset, but is not. Your thinking that someone will buy the factory at a lower price and reopen, but that is not the reality.
The factory has been transmogrified from an asset into a liability. No cash is coming in, but there are still taxes and insurance. No one will buy the factory because China can make widgets for less. The town around the factory goes to hell in a hand basket. Workers leave. Weeds sprout in the school yards and other public areas. Public transportation is abandoned. Think Detroit. Detroit = Debt/Deflation or as you would write it, D = D.
A big part of this picture is what Delong call the demand for safe assets. If anyone has money, they will not buy the factory, for such is not a safe asset. Are you now starting to get the picture.
Your error, and I think it is one of the fundamental errors of macro, is that you never consider the costs of putting a debt deflated asset back into use or to consider that much of the time it cannot be done at all. This was Minsky's entire point about instability. If you could put Humpty Dumpty back together again, the Minsky would be wrong on instability.
No Anonymous, I'm talking about the real world. Deflation doesn't make people have "no money". That's not what happens in the real world that we live in.
Deletere: "I understand what you are trying to say. Let's assume that there is a widget factory in Blackacre with a 100 million dollar mortgage. You have debt deflation, so the owners are unable to repay all or any part of the 100 million."
No, you apparently don't understand what I'm saying. It's not saying that the creditors now have a factory. The point is that the owners of the widget factory CAN repay part of the mortgage. Debt-deflation changes the value of money. It doesn't make people's money evaporate.
Daniel:
ReplyDeleteYou need to ask the schools you attended to repay your tuition, so that you can pay off your student loans.
Let's just assume an economy in which all prices (of goods, services, plant, equipment, land, commodities) and that there is no means or method to stop prices from falling. However you define money, in such a world, money is contracting (which includes hoarding cash, etc.). It must, for prices to continue to decline. This is Keynes zero bound world, where prices will continue to fall, indefinitely.
As regards debt, no rational bank will make a loan secured by an asset because the falling value of the asset will leave the loan unsecured (I hope you agree with Keen that private commercial bank lending creates money). In such a world, one hoards cash for necessities. No bank would make a loan for there would be no chance of it being repaid. No one would repair what is broken for deflation would make the repair meaningless. I could go on but you seem able to reason about what happens when all prices deflate.
Now we have actually performed this stupid experiment on ourselves, twice. First, in the 1920s the world went back on the gold standard, in effect creating a world wide economy in which all prices were falling, of which the result was the Great Depression.
In the 1990s, Clinton's balanced budgets shrank the supply of safe assets. No one at the time asked (or even thanks to lazy people like Lucas) had done serious thinking about what was happening and no models existed to test what was being done by the contraction in the supply of safe assets. Greenspan let private debt expand to cover and hide these issues and when private debt underwent debt deflation in 2007, we have the Lesser Depression.
Now, were we seem to differ in on what is money. You seem to equate money with "cash," legal tender. But you know that money is more than cash. In fact, in a perfect economy, isn't everything that can be exchanged money or its equivalent.
In my view of money, Debt/Deflation means that money contracts. What one used to be able to exchange one can no longer exchange, for its value is only going down.
Yes, money contracts - but people have money still. I can't keep going over this. You're making me sympathize with Krugman even more now.
DeleteDaniel,
DeleteLast try.
Current made this statement:
"Debt deflation is another way of saying that the marginal propensity to spend on output varies between groups."
My disagreement is with the use of the word "varies."
The statement is not true in debt deflation when all prices are falling for then there is no "variance" between groups. When all prices are falling the marginal propensity to spend is the same for everyone.
The marginal propensity to spend should vary only when prices are falling for some and staying steady or going up for others. IOW, the description of debt deflation (all prices falling) excludes variance.
The underlying reason is that, when all prices are falling, the incentive is for no one to spend, which incentive applies equally to everyone.
If what you were saying were true, you would have no theory that accounts for the Lesser Depression.
This is fundamental. Keen's point (and mine) is that that we had a Minsky moment, with trillions in speculative loans that defaulted, setting off debt deflation. Nothing much has changed, because we still have the overhang on the economy of the excessive private debt (and no public or private policy that can effectively reduce that debt, save inflation).
[As an aside, if you want an Nobel prize, you should study whether it was the inflation under Carter that gave use the Great Moderation. That inflation, it could be argued, reduced the ratio of gov't and private debt and permitted all the public and private borrowing that was the foundation of the Great Moderation.]
What is your theory of the cause of the Lesser Depression, if not debt deflation?
Debt deflation is critical to the Lesser Depression/Great Recession. What makes you think I don't think that?
DeleteI simply don't agree with you that people have no money to pay their debts, and I also don't agree with you that there is no incentive to spend when prices are falling.
These are both absurd statements. People have less real purchasing power to pay nominally fixed debts, that is true. People have less of an incentive to spend, that is true.
But neither of the things you've said are true.
Daniel, you seem to have become very frustrated with me, which is not my intent.
DeleteYou say, "People have less real purchasing power to pay nominally fixed debts, that is true. People have less of an incentive to spend, that is true." I agree
You write, "Debt deflation is critical to the Lesser Depression/Great Recession."
Please explain how Debt deflation caused the Lesser Depression if, as asserted by Current, debt deflation is when "the marginal propensity to spend on output varies between groups." Under this assertion one group had to be spending more and one less. Which group was spending more and which less and what caused the changes in spending?
Let's just assume an economy in which all prices (of goods, services, plant, equipment, land, commodities) "are falling"
ReplyDeletecut and paste left out "are falling"
If there is a problem with debt deflation it's caused by the redistribution between creditors and debtors. Foreclosures and such aren't a large enough issue to reduce the supply of safe backing assets or reduce the money stock.
ReplyDeleteEven in Florida, the state where property is in the worst situation the rate of foreclosures is only 14%. It is less than 4% for most states.
There is no hard link between backing assets and money supply. Take the UK for example, look up the Bank of England's "Bankstats" report. It will tell you that often the money supply rises at the same time as the nominal quantity of assets held by commercial banks falls. How can this happen? Simple.... The commercial banks collectively hold assets worth about twice the broad money supply. They have monetized only about half those assets, the rest are held against bonds (which are not money-like).
The issue of bank failures is separate.
"Those who refuse to do arithmetic are doomed to talk nonsense" - John McCarthy.
Please explain how you think a foreclosure, a transfer of title from debtor to creditor would reduce the money stock, ever?
DeleteAnonymous,
DeleteAre you the anonymous posting above?
If so I find your question confusing. I'll put the question back to you, how do you think debt relationships can reduce the money stock? Since from your posts above you obviously do.
If you're a different anonymous...
There is some sense in the idea that bankruptcys can reduce the money stock. Because if there are many of them then the amount of safe assets available to use as backing for fiduciary media (ie. money-like bank balances) may fall below the demand for fiduciary media. It is however, doubtful that this can ever occur in practice since there is a huge buffer of safe assets that back bonds. Given the choice banks will always issue 0% interest current account bank balances rather than bonds. So, in a crisis or recession the amount held in bonds falls and that held as money rises. The silly models held by MMTer and some Rothbardians that assume all bank assets are backing money-like current account balances are just wrong.
If so I find your question confusing. I'll put the question back to you, how do you think debt relationships can reduce the money stock? Since from your posts above you obviously do.
ReplyDeleteI am tired, so the list may not be inclusive.
Second, I don't think you intend to limit money to currency in circulation etc.;I assume you are also talking about velocity and some definition of money broader than currency in circulation, but not as broad as my definition
Third, I doubt you and I agree on the definition of money. I define money broadly, as anything which in good times can be easily swapped for cash. (IOW a boat, a bunsen burner, and fire insurance policy on your boat are a liquid asset or money). Raw land is money in good times, when banks will make 85% LTV loans, based only an a single appraisal.
Thus, in debt deflation, "money" contracts in at least the following ways:
1) debtors hoard their cash and all other assets, as per Dan
2) creditors hoard their cash and all other asserts, as per Dan. cash is used to pay down advances from the federal reserve
3) banks stop lending, stopping the process of money creation made possible by reserve banking
4) if any loans come up for renewal, they are not renewed, or renewed only if debtors make principal repayments, leading to debtors being forced to pay off loans, reducing their cash (and assets), leading to the return of cash to the Fed.
cash is broader than currency, but you and I likely don't agree on a def.
[as an aside, as mortgages on almost all residential and most commercial are not held by banks, I don't understand your foreclosure numbers or arguments at all, as residential foreclosure tell us nothing about commercial bank balance sheets]