By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil
You’re at a party and you’re having a conversation. One person interrupts, giving his view without engaging with what you’re saying. It is a presumptuous act based on the assumption that he – the speaker – already know everything there is to know about the conversation and so can simply steamroll over what everyone else says.
Paul Krugman has just done the intellectual equivalent on a blog ‘contesting’ Steve Keen’s recent piece criticising his model of debt dynamics. Keen has raised these issues before and Krugman has politely ignored them. Not surprising. But while ignoring a critique is one thing, shouting over one is quite another altogether.
Keen, on the other hand, has read Krugman’s paper in depth and raised criticisms that are absolutely fundamental. Krugman, it appears, simply scanned Keen’s post and then wrote up a short post accusing Keen of some sort of Minskyian ‘fundamentalism’.
Keen’s criticism is that Krugman has not understood Minsky’s argument about debt dynamics at all and this has led him to construct an inaccurate debt model. Krugman claims that Keen is attacking him because Keen somehow thinks that Minsky’s analysis is Holy Writ. This is complete nonsense. Keen is attacking Krugman because his frankly lazy reading of Minsky has led him to construct a vastly inferior model to the one that Minsky’ work suggests.
The essence of the problem is that Krugman assumes a ‘loanable funds’ model. He assumes that for every borrower in the economy there is also a saver. This is not true – and Minsky knew it. Banks do not, in fact, need reserves in order to make loans. They make loans first – ex nihilo, if you will – and raise the reserves later. This means that the only real constraint on bank lending is the interest rate as set by the central bank.
This is no minor issue. Recently, through a dialogue with Dean Baker, I tried to show that this leads to the destruction of Krugman’s favourite macro model: the ISLM. Once we get rid of the loanable funds doctrine an awful lot changes in macro modelling. It also leads to whole different view of how the economy really operates in that it lays stress on the fundamentally disequilibriating effect that lending actually has – lending, as Keen says, makes a net addition to aggregate demand.
Krugman has engaged in poor scholarship – both of Minsky and of Keen. The former’s theories have been torn out of context and sterilised to fit Krugman’s inferior and old-fashioned macro models. The latter has been accused of fundamentalism and shouted over in the crassest possible manner. Perhaps the key irony though, is that in accusing his intellectual opponent of dogmatism it is Krugman that seeks to keep the old loanable funds theories intact.
Make no mistake, where Keen is merely paying reverence to a great mind by reading his works properly; it is Krugman that is engaging in a most naked form of intellectual conservatism.