Philip Pilkington: Krugman Makes Accusations of Fundamentalism to Defend His Own Dogma

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.

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  1. YankeeFrank

    Krugman must defend his loanable funds model because he has trumpeted it so vociferously in the past. He is physiologically incapable of admitting past errors and so must shout down any attempts that may show him to be in error. This can be seen in the clearly determined way he misrepresents MMT (on those rare occasions he deigns to mention it at all), and his ham-handed attempts to deny the reality of commodity futures speculation and its effect on current prices.

    In terms of vanity, I can understand why he must disavow and distort MMT. It reminds me of a software engineer friend who once complained that his job was becoming increasingly kafkaesque due to the poor design decisions of the “architects” of his project — its one thing to point out errors on the margin: if this piece or that is not well designed well okay. But when the whole thing is flawed what can you say that will allow them to acknowledge their errors without admitting total incompetence?

    With Krugman MMT is the design that shows almost his life’s work is largely a fraud. He can’t admit that because he would lose all face and self respect. A man who knows this and has a modicum of integrity would, at least, slowly recede and allow new ideas their day. But Krugman continuously steps in it. This loanable funds garbage is just more of the same. Its really too bad because he is a worthwhile proponent of the 99% on many issues. I try to tease apart the garbage and leave the good stuff when I read his columns. But its hard knowing what a stuffed shirt he is to go on respecting him.

    One funeral at a time. Unfortunately, I don’t think we have enough time to wait. With friends like Krugman and with the right becoming more unhinged and rabid every day, this nation is heading for much worse ahead. The boomers, and my vain and enervated Gen X, will do us all in I’m afraid.

    1. Max424

      Excellent post. I could not be in fuller, word for word agreement.

      Krugman battles the far right wing, almost on a daily basis. This would be admirable if the Professor didn’t embrace most of the fascist right wing principals espoused by our current President.

      The Professor undoubtedly believes we only have two choices, we can either accept the Full Bore Fascism of the Republicans, or we can gratefully settle for the genteel, Fascism-Lite of the Democrats.

      Wrong. Those are not choices. The choices are; Republican Full Bore Fascism with Psychotically Incoherent Metaphysical Elements, or, Obama’s -No Bullshit Added- Full Bore Fascism.

      By throwing his considerable weight behind the President as we enter this election season, Krugman is making it clear; he likes his Fascism without the additives.

      1. sgt_doom

        “Krugman battles the far right wing, almost on a daily basis. This would be admirable if the Professor didn’t embrace most of the fascist right wing principals espoused by our current President.”

        This comment is truly and perfectly stated. While I appreciate Krugman’s and Stieglitz’s stentiments at times, they are both complete idiots who do abjectly sloppy work — I guess that’s why they received the Swedish Central Bank’s Prize for Economic Sciences in memory of Alfred Nobel (always misnamed the Nobel Prize, ‘natch, and about the only person who did good work and received it was that lady sociologist awhile back).

        Recall that Krugman, back in 2008, was the same idiot calling the surge in oil prices (when the paper price was 13.8 times greater than the physical market price) simply “supply and demand forces at work.”

        Completely ignoring the actions of Goldman Sachs, Morgan Stanley and others, both in speculating the price upwards on ICE Futures, as well as speculating oil refinery-related chemicals upwards, as well as speculating freight forward futures prices upwards (to pump up the costs of super tanker rentals and bulk carrier rates).

  2. Marko

    Krugman labels the post : (Wonkish ). That’s supposed to be a signal that no matter how contrary his assertions are to our everyday experience , and our common sense , we should trust him because the issues are just too complex for we mere mortals to grasp.

    He seems baffled that Keen suggests that the malignant growth of lending during the housing boom could have contributed to aggregate demand and gdp growth . I’m baffled that Krugman would dispute Keen’s suggestion on the website of the Times. He will rue the day he stuck this particular foot in his mouth. He’s now firmly associated himself with all the other discredited hacks who’ve been peddling make-believe , and self-serving , economic propaganda for decades.

    If Krugman’s models don’t show it , it simply doesn’t exist , no matter how obvious are the impacts out in the real world.

    That debt has fueled growth unsustainably worldwide is now accepted by almost everyone , with the notable exception of professional economists , on the left as well as the right.

    They’re the flat-earthers of the 21st century.

    Economists like Krugman and DeLong are preferable to those to their right like Obama is preferable to Bush or Romney , i.e. barely , minutely preferable.

    We’d be better off without the lot of them – economists and politicians alike. We need a clean slate , because a future constructed by the likes of Obama and Krugman will be indistinguishable from one constructed by their Republican counterparts.

    1. dSquib

      “Krugman labels the post : (Wonkish ). That’s supposed to be a signal that no matter how contrary his assertions are to our everyday experience , and our common sense , we should trust him because the issues are just too complex for we mere mortals to grasp.”

      That seems like a perfect description for the way the peculiar word “wonk” is used in liberal political discourse. It’s always interested me how and when the word is applied, where a liberal establishment policy guy is known as a “wonk” whereas someone relatively outside that establishment with as good or greater knowledge of a given subject, is not. It’s a status thing and speaks to a certain political class who feel especially entitled to greater influence. The rubes just get to vote every two years.

    2. ArkansasAngie

      Obama is barely less evil? Nope … vote against the incumbent. Politicians are unafraid of voters because the incumbent nearly always wins.

      Personally I’d prefer a one-eyed drunked sailor to either Obomber or Prince Romney.

      1. dSquib

        Slight thought experiment here but I’m tempted to say I’d prefer Newt. Everything I’ve heard about the guy says he’s even more unlikeable and toxic than his media personality suggests. The Republican leadership in the Senate and the House loathe him. The one endearing thing about Tom Coburn is he is openly contemptuous of Newt, and you even sense there’s another level of contempt he could go to on camera but doesn’t. The house and the senate would serve him a shit sandwich every session. He’d be fantastically ineffective at legislative level. Granted that still leaves the executive, where he may be worse than Obama or Romney. I’d just like to see everyone write off the Presidency for 4 years, and get more involved in local, state politics, and direct action.

        1. Philip Pilkington

          Haha! I like it. The only problem is that the gremlin would get to realise his dream and become president. This is the guy that — in a parody of trying to play at being Eric Cartman — reportedly left his wife because she got cancer.

          Gingrich strikes me as one of those rare individuals who I have no problem saying that he probably doesn’t deserve the privilege of living.

          1. F. Beard

            This is the guy that — in a parody of trying to play at being Eric Cartman — reportedly left his wife because she got cancer. Philip P

            At least Cartman is loyal to his cat – unless it wants some of his potpie.

        2. fresno dan

          that’s so insane…I LIKE it. And could he do any worse than what we got. And maybe, just maybe maybe people would pay attention to what is actually in the laws proposed…

      2. jonboinAR

        Unfortunately we have to vote for Obama to make sure more Scalia’s don’t get appointed to the SCOTUS. All these times I’ve advocated voting for whomever you would like to see as president, I’ve failed to take that into account.

  3. Middle Seaman

    I am not an economist, but I am not a stranger to complex arguments and sophisticated models. P (Pilkington) says that K (Krugman) is rude and doesn’t listen fully to KE (Keen). Furthermore, K is not only rude; he is doesn’t get it and doesn’t understand M (Minsky).

    Surprisingly, that almost the whole argument except some minor issues. How am I supposed to understand what is going on? I read Keen before, I read Krugman frequently, I read Dean infrequently. Usually, they all explain themselves quite clearly.

    This sounds like a high school student complaining to the teacher. I try not to read P.

    1. YankeeFrank

      Umm. There is an actual point here that you are ignoring: the loanable funds model is hogwash despite Krugman’s protestations to the contrary.

      1. Anonymous Jones

        Ummm, I don’t think he ignored the point. It’s one thing to say something is hogwash. “The fact that the earth orbits around the sun is HOGWASH.” See what I did there?

        It’s kinda, you know, important to show *why* you think something is wrong. This little toss off post most certainly did not do that. It just played to what you already believe about that world. Because loans can be created and reserves found later, that proves it in your mind? It seems you have a low standard of proof for your preconceived notions and an impossibly high standard of proof for those things you have been prejudiced against.

        That said (!!), I am skeptical of PK here. I think PP rightly points out that PK is doing *exactly* what PP usually does (and that is, not realizing all he is doing is explaining his own biases while simultaneously deluding himself that he is the wise victor who is, you know, actually examining and resolving the issue).

        I was hoping there would be a full and satisfying response to this easily dismissed blog post from PK; sadly, this wasn’t it (though it was certainly not close to terrible, especially by PP standards).

          1. mikeVa

            See what? 99% of economics is bullshit. Theory after theory. This whole worship one economist over another is stupid. Krugman in his first paragraph says he is open to discussion.

      2. Eric L

        I came across Keen’s debt deflation blog a while back and watched a lot of the lectures, and I like his approach and 95% of what he says makes a lot of sense to me, but there are some things about his stance here that I don’t get. The argument he’s making now seems to be one he’s posted repeatedly starting here.

        1. He makes a lot of the fact that banks will lend and then find deposits — so what? The fact that they look for depositors means they have to consider their ability to find them and the interest rates they will have to offer to get them, and that will constrain the so the depositors are still a part of the equation.

        2. Where do interest rates come from? I notice in his lectures he dismisses the idea of a supply and demand for money, insists the supply and demand curves are the same and the fed sets the rate. But the fed doesn’t simply decree a rate and the banks obey; they affect the rate by acting as participants in the market Keen claims doesn’t exist — they print dollars to trade for financial assets, increasing the supply of money while taking on some of the demand for it, or they do the reverse. So, if there is no supply/demand of money, where does the interest rate come from?

        3. Is he living in a world where no one was buying mortgage backed securities, Greek bonds, or otherwise putting money into the financial sector? Does the fact that the wealthiest have accumulated lots of money and put it in hedge funds have anything to do with financial instability? Do endogenous money proponents believe that the giant pool of money has nothing to do with our giant pile of debt?

        4. He identifies endogenous money as central to mainstream macro’s misunderstandings of the economy, but I don’t see why anything else that he argues depends on throwing out the idea of patient agents loaning to impatient agents. For example, he dismisses the idea of a money multiplier because banks might lend before coming up with the cash to meet their reserve ratio. As long as banks have to meet this reserve ratio that’s irrelevant. I argue the money multiplier doesn’t control the money supply because these days banks securitize their loans, and the securities require no reserve. (And I do think financial assets are a form of money, in that asset holders view them as a form of savings — a store of value. My 401k statements claim I have a certain number of dollars in my retirement savings, for example, and none of that is reflected in the M0 or M1 money supply.) He criticizes Bernanke for thinking that repayment of debts results in money being redistributed from debtors to savers. I would argue that Bernanke is wrong to think such a redistribution would have no macroeconomic implications — marginal spending propensities are certain to be quite different between the two groups; that’s why one group became the savers and the other the debtors. And I also think that, because the savers view financial assets as savings, they will view repayments on principal as changing one sort of savings into another, not as an increase in their wealth. So in that sense I’m close to the endogenous money position, but I don’t see how you get rid of the role of savers in creating debt.

        I like his approach to modeling the economy and think he gets the basic dynamics of the business cycle and financial instability right. But he says he demonstrated an all-credit economy, yet the banks in this economy start with a fixed amount of money in their vaults, which they can’t create, only re-lend? He says models need banks, patient agents lending money won’t do, but ultimately to make his model work the banks have to spend just like workers do (though at a lower velocity — sounds like they’re more patient?); banks morph into bankers. I don’t see why you couldn’t build essentially the same model, but have that initial money in the bank vault be the initial fiat money supply and replace banks with wealthier citizens who spend more slowly and lend money to firms and workers. Aggregate debt levels would still matter.

        So am I missing something? Does Keen think savers are irrelevant or am I misunderstanding the role he believes they play in the economy?

        1. SKO

          Sure, I’ll take this up.

          1. Why is it important that bank find deposits ex post?

          Because they’re not finding them ex post, they’re getting them ex nihilo. Deposits and loans are only very tangentially related at this point. In my home country of Canada banks have 0% reserve requirements, all that matters is the value of the “capital” they have on their books. While America still has reserve requirements these are met by borrowing in the inter-bank loan markets which doesn’t really change matters. These capital requirements are basically irrelevant under the current system, with banks making their capital requirements ex-post in the over-night repo market. The take home point here is that banks can create a credit out of nothing and do so all the time; which leads to the next crucial point.

          One of the key, if not the key, insights of post-Keynesian economics is that for every debit there is a corresponding credit. For every newly created loan there is a equal and corresponding deposit brought into existence . This makes sense if out think about; if my employer takes out a loan to pay my wages, he will be debited the amount of the loan while I will be credited it. While obligations may grow in line with the new money, the money supply still rises.

          Now we can see why the money supply is endogenous; if a credit creates a deposit then one bank will have more reserves than necessary, while another will have less which means they can square up with each other after the fact with some simple inter-bank lending. See the work of Basil Moore or Marc Lavoie for better explanations of whats going on here.

          2. Then where do interest rates come from?

          I think Keen subscribes to the “radical endogeneity,” school, in which the interest rate is determined through a combination of bank competition and the actions of the central bank. There is no independent supply curve. Instead, the money supply is determined solely by the demand for credit in private markets. Basically hes not saying that the money markets are irrelevant for the interest rate, they’re just irrelevant for the money supply.

          3. Do endogenous money proponents believe that the giant pool of money has nothing to do with our giant pile of debt?

          Not entirely sure what you mean here, the link you posted is broken. If you’re referring to large amounts of deposits then sure, as in point 1 they are a necessary side effect. If you’re referring to the ‘savings glut” hypothesis then post-Keynesians like Keen will disagree with you completely. Since deposits are not required for lending they are irrelevant for determining the interest rate. This might sound strange to a neoclassical but its actually backed up quite well by the evidence.

          4. Are savers irrelevant?

          No, savings have important effects on prices, as you point out financial assets act like money (Read Paul Davidson, you’ll get a lot out of it!) and in this regard act similarly to “hoarding” in Keynes’ writings. Are savings irrelevant for growing the money supply? Absolutely. Otherwise, how could such low savings correspond to any investment at all (as in the run up to the crisis)? This here gets a little more confusing and I need to go but if you need a better explanation then go to the sources! I’d recommend: Paul Davidson, Michael Kalecki, Basil Moore, Warren Mosler, Hyman Minsky, and Steve Keen himself.

          1. Eric L

            Thanks, I will look up those people.

            So to clarify, yes I was talking about a savings glut, and linking to the This American Life episode of the same name, not sure how I dropped the colon after http. And by savers I mean people buying financial assets or depositing in banks, not people hoarding cash. Or did you just mean that putting money in banks or buying financial assets has the same effect as hoarding cash? I noticed liquidity preference came up elsewhere in this thread, why would savers’ preference for more liquid assets matter if they have no effect on the availability of credit?

            So Keen believes interest rates are complicated and Pilkington apparently believes the fed sets them and the banks obey. I’ll have to do more reading here. For now, I remain convinced that, while the ability of the banking system to create money is unlimited, over the short run the money they actually create will be affected, not necessarily strictly by the amount of available deposits but at least by their expectation of their ability to find deposits, or by their expectations of the interest rates they will have to offer to get those deposits, which will be affected by their availability.* Yes, creating money makes money available for deposits, but there is a stock vs. flow distinction there. I also expect that the economy would look roughly like the loanable funds model when interest rates are high enough to deter some from borrowing, whereas when rates are low the demand for debt will be the primary constraint and the economy will look roughly like the endogenous money model.

            * It occurs to me that there is something else that endogenous money proponents might mean here. Since the inter-bank loan interest rate is the one the fed targets, if you view them as setting it, then banks are going to loan based on what they can make a profit on given the rate that they have to borrow at. This ignores the fact that the fed changes this rate by expanding and contracting the money supply, though you could handwave that away by noting 1) that their ability to print money gives them near-infinite ability to affect the rate (except when it’s near zero), and 2) that most of the expansion of the money supply comes from the banks. You could go a step further by saying that when the fed trades cash for treasury bonds or vise versa, what they’re doing is no different in effect from fixing the interest rate at which the two can be traded, and allowing the banks/bondholders to choose to expand or contract the money supply (after all, the trades aren’t compulsory). An effective change in one interest rate is going to affect other interest rates in the same direction, so you could argue in that sense that they set the interest rate and the banks expand the money supply according to what they can profitably loan given prevailing rates. If that is what endogenous money proponents mean then I consider that a valid conceptual model. But savers still matter because the availability of their deposits (or, in the what I assume is the MMT conceptual model, their unwillingness to spend) affects the inflation-versus-interest rate tradeoff that the fed is facing and thus will affect the rate the fed chooses.

            This gets me back to my nagging suspicion that there is a MMT/Krugman-ite neoclassical duality, where the fight is all about concepts but the two sets of concepts can be used to describe the same economy and get the same predictions. But the gulf seems so wide because if you start from one framework and replace a little bit of it with concepts from the other framework, you get nonsense. For example I remember reading a Krugman post where he explained that the problem with MMT is that if the government just prints money to fund everything they could cause hyperinflation. I’ve read a little more about MMT since then and noticed that the MMT theorists understand that just fine.

  4. reason

    This is Krugman’s first paragraph
    “Steve Keen has a new post up (with a link to a new paper) about Minksyan (Minskyite?) economics, and how people like me get it wrong. Good for him; debates like this are always productive, and I wish domestic responsibilities weren’t keeping me from going to the Berlin conference.”

    Keep on him, but don’t rubbish him. PK is on the right side (the side of the common man). We need him as an ally.

    1. reason

      Reading a further post on PK’s blog and the comments – I think PK will eventually get the point about endogenous money – and it’s importance. I think Steve Keen is wrong about some important points (and Steve also doesn’t get MMT) but I hope he is the catalyst for some important discussions. If SK can influenc PK’s thinking that is something important.

      I want a new synthesis – I don’t think any school of thought has it fully right.

    2. pebird

      Agree with Reason and Beard.

      As much as I would love an MMT economist at the NYT, Krugman is probably the best we are going to get. And he does get a lot right.

      1. Masonboro

        Agree with Reason, Beard and pebird.

        The enemy of my enemies is my friend and PK has a wide audience to which he calls out the Right’s lies and distortions daily. Progressives are being out-spent and out-organized and need all the resources available to slow the rightward march. MMT vs IS-LM is a small quibble in the overall scheme of things. Economic debate is a contact sport and PK and SK are both grown men (grown women also included).


    3. alex

      reason: Keep on him, but don’t rubbish him.

      OMG, that’s being reasonable or even *gasp* civil. You’ll be branded an apostate for taking that attaitude towards Krugman. Left or right, Krugman is like a lightning rod. Never fails to amaze me.

      1. Walter Wit Man

        He’s the lightening rod because he is being foisted upon us as the left most position in economics.

        This is a role that Krugman is eagerly playing. And its a role. Krugman is a left-wing gatekeeper.

        Lefties get upset because we are being screwed with. Just like Obama pretends to be liberal to sucker people into the party so that he can enact right-wing policy, Krugman serves a similar purpose but for those people that are a step to the left of Obama’s base. He suckers these people into thinking they will have a seat at the table, via PK. Therefore we are suppossed to get behind PK because he represents the left’s best hope.

        But this is unfair to those of us on the left because PK ends up justifying neoliberalism. So of course he is a lightening rod. It’s intentional. He has volunteered for the role. He’s being paid handsomely, I’m sure. His ego is stroked.

        And his job is to make sure the left always loses and is trapped in the Democratic party.

        1. alex

          “he is being foisted upon us as the left most position in economics”

          Foisted by whom? The “liberal” NYT? Who is the left most economic writer for the Weekly Standard?

          1. Walter Wit Man

            But there is agreement among a wide spectrum of people that Krugman represents the left. I’m sure the Weekly Standard “economists” would agree with that claim. Just like most “progressives.” The right thinks this is a bad thing, while the progressives think it’s a good thing and that other people should listen to PK.

            “Foisted” may be a bit strong. But to those of us to the left of PK it’s frustrating because this mainstream dynamic of using PK as a lightening rod focuses all the attention on him.

          2. alex

            “there is agreement among a wide spectrum of people that Krugman represents the left”

            These days many people think that anything left of the John Birch Society makes you Mao’s cousin.

            Tellingly Krugman used to think of himself, and call himself, slightly left of center. That was in the late 90’s. In his own description he now calls himself a “liberal” not because his opinions have changed, but because so many other have moved the goalposts. Barry Goldwater and Ronald Reagan are also starting to look a little pink around the gills.

    4. pedex

      Krugman on the side of the common man?

      you must be joking

      sorry but saving the banks and inflating the debt away destroys the common man and this is what Krugman has been advocating for years

      methnks he ewants to keep the ponzo alive as long as possible that way it doesn’t blow up in hs face while he’s still around to feel the fallout

    5. Walter Wit Man

      PK pretends to be on the side of the common man. Like Obama pretends.

      But in the end PK supports the Democratic party and Obama–so he supports the fascist elite and not the common man.

      So the left wing policy PK pretends to support will never be an actuality–his role is to give the left hope. It’s false hope–the hope is meant to disable you and confuse you. You will fore go standing up for your rights because you foolishly hope that PK, or the Democrats, or Elizabeth Warren, or some other hero, will save the day.

      1. different clue

        Krugman supported NAFTA and still emits apologetics for it, so far as I know. Krugman supports Free Trade. So . . . whose social class side is Krugman on?

  5. Carlito Quesare

    I have to agree with Middle Seaman on the presentation of this post.

    That being said, I’d swim to Australia if Prof. Keen would be my faculty supervisor, and I live no more than 45 minutes from Krugman’s Princeton offices, and would only consider maybe two of the Princeton Econ professors as advisors. SO I am biased.

    Krugman long ago made his choice in his public life, his path is sealed, he is a character in several classic Greek tragedies. He is our Rasputin on bad days, he is unable in his advanced age to reinvent himself without taking a sabbatical and wondering his mind for quite some time to break free from his constructs.

    That’s nothing especially unique, not every academic is going to be sharp as a tack as they enter their 60s.

    1. alex

      “That’s nothing especially unique, not every academic is going to be sharp as a tack as they enter their 60s.”

      Give it a rest. You make it sound like his brain has turned to Swiss cheese at his “advanced age”. BTW, Keen is all of one month younger than Krugman. Is this an intellectual battle of the geezers?

      A more cogent criticism is that most academics who’ve created a successful career based on certain theories, they’ll defend those theories no matter what. The real advantage of youth is that you aren’t constrained by having to defend a career you haven’t had yet. Keen explains this well by quoting Max Planck (who was very frustrated by the established order’s refusal to accept his quantum theory): “science proceeds one funeral at a time”.

      1. jonboinAR

        That was my thesis theme when I wrote on Henry IV, Part One, about 25 years ago. Hal has freedom because he hasn’t yet been boxed in by his life choices.

  6. jake chase

    Don’t blame Krugman for failing to understand how banks create debt out of thin air. Andrew Jackson said that if people understood how banks operated there would be a revolution tomorrow morning. I seem to recall that even Keynes got stuck on IS-LM and he was a very successful speculator. One of the main reasons economics gets everything wrong is a pervasive failure to understand debt. The so called real economy is just fallout from the expansion and contraction of bank debt. If you understand that sentence you know more about economics than Krugman, but he will probably get the Nobel prize if he doesn’t have it already. Life isn’t fair.

    1. sgt_doom

      Or, as Louis Bacon of Moore Capital once explained:

      “There are those who know that they are in the game; there are those who don’t know they are in the game; and there are those who don’t know they are in the game and have become the game.”

      1. different clue

        You’re either one of the players, or you’re one of the chips. Unless you decide to get terminally mad and kick the table over.

  7. Conscience of a Conservative

    Keen comes of as understanding the world as it really is. Minsky adds tremendous insight into investment decisions and the instability of our market and changing risk premiums. I would agree CAPM has issues that limit its application with regard to changing risk premiums and how it can work in a ZIRP environment.

    Krugman unfortunatley provides a model as the bais for policy that is devoid of how the real world works and this can only be dangerous, and on a personal level having read his posts have come to understand Krugman as an easily insulted arrogant opiner. Just don’t mention to him how Mankiw’s books outsell his.

    1. Conscience of a Conservative

      One last note, while I find Keen’s discussion of our problems insightful, I find his prescriptions for remedy less such. Making stock ownership temporary makes no sense to me. Who would own the company after the jubilee? The State? First person to claim? Perhaps I missed something but it seems unworkable.

      I think there’s a simpler answer. The Fed has the tools to adjust margin. They can raise margin requirements, but have not had the will to do so for quite some time. Perhaps if they had done so the tech bubble would have been avoided. Like wise the Fed could mandate home minimum home owner leverage such as requiring a minimum 20% down. Down payments are not popular with home builders, real estate brokers and politicians but they make goood sense and those that are against don’t like to admit that buying without taking an equity stake is akin to rent.

      1. F. Beard

        Like wise the Fed could mandate home minimum home owner leverage such as requiring a minimum 20% down. CoC

        Credit creation is a form of counterfeiting in which the more “credit-worthy” are allowed to steal purchasing power from the less “credit-worthy”.

      2. F. Beard

        Keen has also proposed a universal bailout, including non-debtors, with leverage restrictions to prevent the problem form reoccurring.

      3. digi_owl

        I understand it so that if you buy your shares directly from the company, you can keep it for life. Trade it however and it will return to the company after some time. This is to put focus back on what shares was supposed to be about, long term investments into a company.

        This meant that you handed over cash to the company for paper giving you a voting right regarding how the company is run and a cut of any future profits. But these days most of the shares are traded not between company and investors, but between “investors”. The company that issued the shares see no profits from this churn.

        Also, this would counteract some of the short terming issue of stock options. This because it would make buying stock option shares when the CEO or similar cashes in. This because the buyer would do so on the secondary market, and they would have limited “shelf life”. This means that for a CEO, stock options are only really good if the company is long term viable. This then counteracts the prevalent pump and dump that we see going on these days, where a big name CEO goes in, makes heavy handed cuts and restructuring to appeal to the secondary share market, and leaves once he feels he can get a big enough return on his options. That the company may well collapse seconds after he is out the door is of no concern to him at that point.

      4. jonboinAR

        I bought with no down. Rent is exactly how I thought of it. What was there to lose? My mortgage was just a little higher than what renting would have been, but not much. Fortunately for me, it’s worked out well so far.

        1. LifelongLib

          Me too (well, a 5% down FHA loan, with help from a generous relative). A history of paying rent on time is a much better guide to whether you can carry a mortgage than a big down payment is. I could save that living in my parents’ basement for free. It wouldn’t tell anything about how well I can manage costs similar to those of home ownership.

  8. paule

    According to Krugman:”My point is that there seems to be a lot of implicit theorizing going on here — and at least at first glance, the implicit theorizing doesn’t make a lot of sense. I could be wrong, but that’s the whole point of simple models: to lay bare what you’re assuming, and make it clear what, specifically, is driving your conclusions.”

    That’s the problem, simple models as used by Krugman and other economists rarely ‘lay bare’ the assumptions they are making. They usually have to be teased out of the models by critics, a process that may take many decades. For how many years did we assume that the LM/IS framework constituted an accurate summary of Keynes’s work.?

  9. Conscience of a Conservative

    Krugman is a prisoner of dogma. He doesn’t get MMT, Minsky or Hayek and resorts to bullying to get his point across.

  10. dSquib

    Krugman is conscious of is status in liberal politics and he likes it. He won’t attack lefty critics as strongly as he does conservatives or libertarians*. He does just enough to appear slightly to the left of Democratic orthodoxy, though not too much. So he prefers to ignore lefty critics for the most part. Don’t let him.

    * not in the Bush/Obama era at least. I’ve seen some pointed stuff he wrote in the 90s about lefties in the US and Europe who were not down with Clinton’s various military adventures, for example.

    1. ScottS

      Honestly, I think you’re right that PK is an opportunist. But I think that’s not strong enough — he’s more mendacious than that. I’m sure he understands MMT by now, but he has his “Nobel” prize invested in ISLM. Now he’s gone on the offensive to secure his legacy. If he were merely content being the voice of the “slightly left of center” he would jump on the MMT bandwagon.

  11. craazyman

    It doesn’t seem to me that money has a velocity, a term inherited from Newtonian physics. If something has velocity it is a singular entity and it speeds up and slows down.

    Money is a word that describes a process through which individuals cooperate. But money doesn’t exist like hot potatoes passing from person to person at varying rates of speed.

    Instead, it’s more like a wave that radiates like an old television signal from broadcasting stations called banks. Electromagnetic waves all have the same velocity, but different frequencies.

    I would say money is a emanation with a varying frequency associated with its wave form, which can be observed as property when the wave form collapses upon observation (this occurs when the money wave is converted to property through a transaction).

    The composition of the wave forms creates social cooperation structures that take the mindshape of businesses and transactions. So money, property and cooperation structures are all manifestations of the same underlying energy. Bees build hives without money, while money/property is a human beehive. It’s an expression of group imagination channeled to express and magnify the life instinct. How do bees know how to build a hive? Nobody ever told them. But they pick up the signal with their molecules like radios.

    There are circulons that underlie all of this. The dude with the big smoke rings is on to something, even if Mr. Dyson is skeptical. Nothing really makes any sense at all if you think about it long enough. And if you simplify it to where it does make sense, then you’re already wrong about nearly everything you’re trying to explain. But you can look at your model and feel you at least accomplished something with your time.

    1. Paul Tioxon

      Whatever form money has taken in the past, today, it is intangible and from another point of view, functions like language. Language and money are social and historical products. They are so similar in function, that it is shocking how they exist in bifurcated categories of analysis for the social sciences. The Rosetta Stone was the bill of change to bridge the communication gap, just as banking allows for trade across cultural and national barriers. Language, like money, is completely alien from one culture to the next. And the bankers with their exchange services are little more than translators, except they have mystified money, charge a percentage for its use in society, as if it was a proprietary service. Imagine words and phrases owned and communication doled out in an economically and politically stratified hierarchy. Money should be like public education. Of course, public education in Norway.

    2. Bee MMTer

      “Bees build hives without money”

      That’s because worker bees get loans from bee bankers, whom don’t have reserves, but get reserves later.

      Since none of this is real the hive gets built anyway.

        1. Bee MMTer

          No, not really. The hive is pure communism. We share. There is no oblgation to transfer honey-money for work between individuals or groups of individuals. This is what makes our circulons turn.

          We sting bears. Bears steal!

          1. Bee MMTer

            No. You are still confused about bee economics. In our model, a bear is an outside invader. A bear has not contibuted anything to bee society and only can ruin it.

            A bee creditor is a bee banker. Bee banking is largly a cerimonial function, similar to bee dancing. It doesn’t get the bee out of working and he has the same shot at the queen that the rest of us do.

            The bee banker just signals to the workers that there is ample stock of honey-money to eat so that we will not starve while building the next hive. Otherwise he may signal that pollen collection for the old hive is a priority.

            Simple job. Even a dumb bee can do it.

          2. alex

            “You are still confused about bee economics.”

            What can I say. In human economics these days it’s hard to tell the difference between a creditor and any other thief.

          3. Bee MMTer

            Yes, well, you are welcome to figure out your own problems. After all, you are supposed to be the intelligent ones.

    3. digi_owl

      Water, being a mass of molecules, have a velocity when pumped thru a pipe. Money is in essence the water of the economy. And each time there is a loan issued, more water is pumped into the system at high pressure. And this add velocity to the total now in the system.

  12. F. Beard

    They make loans first – ex nihilo, if you will – and raise the reserves later. Philip P

    Ellen Brown makes the point (if I understand properly) that through inter-bank lending, the banks agree to share the interest on their ex nihilo loans and thus do not need reserves as much to settle the net balances amongst themselves.

    So that raises the question what do banks need reserves for?

    1. Eliot Clarke

      Thats exactly what happened in the UK, banks like Northern Rock were borrowing short term on the interbank market to lend long term on mortgages. So in this case they were taking the system to the next logic step. Lending out without having the deposits to cover, looking for deposits, not finding them so borrowing from other banks overnight.

      Robert Peston said the overnight market that froze over in the credit crunch was around 700 billion so to my mind thats 700 billion in excees liquidity that never should have existed and never lent out. Just in the UK. How economists like Krugman don’t see this as relevant to economic models leaves me utterly incredulous.

      1. F. Beard

        Lending out without having the deposits to cover, looking for deposits, not finding them so borrowing from other banks overnight. Eliot Clarke

        Thanks for that. Now it makes more sense to me: As newly created credit moves around the economy it will be deposited in different banks which is why the interbank loans MUST be very short term (overnight) so as to be able to follow the newly created credit as needed.

    2. digi_owl

      Reserves are there from when banks handled everything in physical terms, and payments were mainly cash, not credit or debit/check.

      Because the same money that got deposited was what the bank handed out as loans (think some bank out in the middle of nowhere, not much more than a safe and a counter), if all of a sudden everyone tries to close their account (a run on the bank) then the bank finds itself unable to cover the claims.

      These days however, a loan is often simply a accounting entry. This is what has changed the money system from one of apparent barter (physical object for physical object) to the kind of system that Keen is trying to create computer models for (and where the stock/flow mixup have caused endless problems like the belief that interest payments sucks money out of the economy).

      In essence, it is yet another case of laws not keeping up with changes in daily life.

  13. Paul

    Krugman says “the reason to read old books is for insight, not authority; if something Keynes or Minsky said helps crystallize an idea in your mind that’s really good, but if where you take the idea is very different from what the great man said somewhere else in his book, so what?”

    Then you proceed to criticize him on the basis of what you argue is his misinterpretation of Minsky.

    The irony of this post is painful.

    1. Philip Pilkington

      I don’t think you got the point. Krugman is trying to turn this into a debate over methodology. It’s NOT a debate over methodology. It’s a debate over loanable funds. You fell for Krugman’s strawman. But then, no one suggested that he isn’t a smart guy…

  14. steelhead23

    I sometimes wonder if Dr. Krugman does John Maynard Keynes a disservice. That is, I understand that Keynes understood that unbridled debt could cause a default crisis but had not fully developed that aspect of his theory. I have not read Keynes’ book, so I am going on the review of others. If I am correct, it is Krugman who has abandoned Keynes on this key aspect and since his views are widely seen as ‘Keynesian’, this ignorance is harming Keynes’ reputation. Frankly, the worst thing that can happen to an intellectual is to become too enamored with one’s own thinking. It kills intellectual curiosity, a necessity for intellectual growth.

    I suspect that most on this blog know that the Keynesian view that government spending could be managed to maintain strong demand without excessive inflation is anathema to conservatives who appear to believe that while all government spending is bad, some is necessary (e.g. the war machine). As a proponent of that theory, Krugman is constantly at war with conservatives and is probably a bit miffed/perplexed that those to the left do not genuflect before his simple demand graphs.

    1. digi_owl

      The whole neoclassical school do Keynes as disservice, because none of them have actually read Keynes.

      What they have read are Samuelson and Hicks, if that. And those basically bastardized what Keynes tried to formulate so that it would fit existing doctrine of sloping graphs and such. Hell, ISLM is all Hicks. Created before he read Keynes, who he managed to misunderstand such that he thought Keynes just restated ISLM in different terms. Only after ISLM because a fixture of “Keynesian economics” did Hicks see the error of his ways and stated such. A statement that has gone largely ignored by neoclassical economists…

  15. Steve Roberts

    One of the most disturbing things I’ll read are the comments on the NYTimes below a Krugman post. The uniform praise and attacking of anyone that differs from his statements are scary. It’s fanaticism and I can see why he feels he’s never wrong.

    Oh, and yes I realize the NYTimes deletes posts that question his ideas.

    1. Philip Pilkington

      I don’t think NYT deletes posts. I’ve never experienced it. But yes, I think Krugman has constructed a cult of personality.

      1. digi_owl

        Not sure if he has done so with intent, more that he has managed to catch the eye of people grasping for a explanation of what is going on.

      2. Paul

        Quine (whom I don’t really like), once wrote something that I really like. This is only a paraphrase of what I think was in his autobiography:

        There are two kinds of people in the world – those who want to have been right and those who want to be right.

        I think Krugman belongs in the first camp.

        Another point: Early in his career Krugman used to abuse and dismiss John K. Galbraith as a “media personality” versus a real academic econoimist like Krugman himself. I think he used that description in two books that I’m familiar with. I wonder if he ever thinks about that, for irony’s sake?

    2. alex

      Steve Roberts: The uniform praise …

      You must be reading a different NYT than me. I see loads of critical comments under Krugman’s “Minsky and Methodology (Wonkish)” post.

    3. MosesZD

      That’s a lie. Tons of people disagree with Krugman and the posts stand.

      What doesn’t stand is profanity. Ludicrous, incoherent attacks, etc. But disagree, and not all that politely, and they go through.

  16. michael hudson

    Simply reading Steve Keen’s DebtWatch would clear up a lot of misunderstanding, including much of the above discussion. His analysis of the real estate bubble is a good example. Of course banks have inflated the bubble economy. How else to explain it?
    If BIOLOGY theory were based on equilibrium, there would be no evolution. And probably no growth, no parasitism, no collapse of populations, no demographic explosion …
    Equilibrium models are balanced by assuming, unrealistically, (1) diminishing returns, and (2) diminishing marginal utility. Only with these entropy assumptions to models settle at equilibrium, like a perpetual motion machine running down as a result of friction; or a star burning out. (But what happens when it collapses into a supernova?)
    I intend to make these comments in Berlin, as the point needs to be raised. There is a good reason why Steve got an INET grant to work out the math, after all.
    An “equilibrium” explanation of how debts can be paid by imposing austerity is nutty.

  17. Greg

    Can someone please give a concise summary of what Keen’s core point is?

    From my read, Keen’s core difference is that he assumes that when a bank loans, its ability to make more loans does not decrease. That a big change, and he then goes on to talk about the many implications if you accept that assumption. Is that correct?

    I want to better understand this debate, but I’m no economist, and the post above reads like a screed. Can someone please tell me if I have that basic summary correct and, if not, offer your own?

    1. F. Beard

      Imagine all the banks were consolidated into one huge bank. What would prevent that bank from issuing loans without limit? And interbank lending does serve to unify the banks into one aggregate bank.

    2. Philip Pilkington

      Yes. Basically. Keen says that there is no fixed supply of funds. Banks can loan as much as they want at a given interest rate. And the central bank sets this interest rate as a matter of policy.


      (a) Banks can loan as much as they want at a given rate of interest…

      (b) Central bank has full control over short-term interest rate (and significant control over long-term interest rate).

    3. Yves Smith Post author

      To add to Pilkington’s point:

      1. Keynes disproved the loanable fund theory (basically, if you believe loanable funds, if you make money cheap enough, people will borrow. Keynes said hogwash, it’s about liquidity preferences. If people get nervous enough, whether with justification or not, they want to hold cash and no matter how cheap you make money, you won’t induce them to borrow and invest).

      2. The fact that bank lending precedes reserves (banks lend first and find reserves later; if they can’t get reserves from other banks the central bank creates them) has been proven empirically. That decisively disproves the loanable funds theory.

      Krugman in his post explicitly says you don’t need to consider the banking system to explain debt and leverage. The reason economists are so resistant to thinking about integrating the banking sector is that financial markets have no propensity to equilibrium and mainstream economics posits that pretty much everything does have a propensity to equilibrium (this is a methodological choice because the math needed to model phenomena that are unstable is far more daunting, plus you can’t make any predictions over anything other than the very short term, and economists’ power is based on the idea that they can predict and describe. That’s a VERY crude summary, but see the longer form, more rigorous explanation in Ch. 2 of ECONNED).

      1. F. Beard

        is that financial markets have no propensity to equilibrium Yves Smith

        Because the banks are essentially a counterfeiting cartel? Because even honest (100% reserve) lending requires usury and usury is mathematically unsustainable?

        1. digi_owl

          Charging interest do not have to crash the economy. This as long as banks spend whatever they collect in interest back into economy, as costs of operation (wages, electric bills and so on). This because there is a difference between the stock of money (that total amount in the economy at any one time) and the flow of money (how quickly it moves between various entities inside the economy).

          But either too high a interest, or too little spending will reduce the amount that can circulate.

          The latter is what is causing a crisis in Europe, as the Euro nations are constrained in how much they can spend. And so the circulation slows down.

          1. F. Beard

            This as long as banks spend whatever they collect in interest back into economy, as costs of operation (wages, electric bills and so on). digi_owl

            But they don’t. Instead much interest is relent for additional interest and so forth. See “Money as Debt II” for more info. Besides, why should we all work for the banks?

            There is no need to defend interest; common stock as money allows the necessary consolidation of capital for economies of scale but in an ethical, democratic (in the long run at least) manner that “shares” wealth and power rather than concentrates them.

      2. alex

        Yves Smith: … banks lend first and find reserves later; if they can’t get reserves from other banks the central bank creates them …

        That’s a wonderfully simple and clear explanation. I wish everyone would explain it like that. Describing it as “ex nihilo”, or even referencing double-entry bookkeeping, just mystifies what’s really a very simple idea.

        “has been proven empirically”

        Which trumps all objections, or at least should if one claims to have a scientific bent.

        1. F. Beard

          If there was only one bank (and interbank lending approximates this) and no ability to withdraw cash then NO reserves would be required at all EXCEPT in the case of government surpluses.

          Am I wrong?

          If not, then “ex nihilo loans” are very much the correct way to view bank lending.

          1. alex

            It’s not a question of whether “ex nihilo” is correct, but rather whether such terminology clarifies a simple introductory explanation.

  18. Benedict@Large

    This is not a new thing for Krugman, who apparently requires those he addresses by name to be properly papered in all the right journals. I have noticed on the several occasions that Krugman has engaged with MMT, he will not address the school’s princiopals directly, but instead refers to Jamie Galbraith, who while familiar and comfortable with MMT, has done (to my knowledge) no original work in it.

    1. alex

      Benedict@Large: … Krugman, who apparently requires those he addresses by name to be properly papered in all the right journals …

      If that were true then he wouldn’t address Keen by name, as Keen is definitely _not_ in “all the right journals”.

      And while Krugman may never be persuaded, I give him credit for at least addressing these heterdox ideas. Very few big name orthodox economists deign to do even that. Moreover, Krugman is much more dismissive, and often ridicules, various “fresh water” ideas. He simply disagreed with Keen.

      1. Philip Pilkington

        Actually he portrayed Keen as a fundamentalist engaged in Biblical scholarship. AND he didn’t engage with any of the ideas.

        When these are your friends…

  19. kthomas

    Agreed. Problem is that Dr Krugman is usually not wrong.

    “cloistered academic”? I don’t think so. Let’s just say if he were teaching at Alabama St., that description would not have been used.

    My biggest peeve with Dr PK was during the crude oil spike a few years ago. I found his analysis way off the mark. I noticed he has been much more silent on the recent increases.

    1. Philip Pilkington

      He doesn’t engage properly with those he sees ‘beneath him’ and then comes out with posts which supposedly champion the anti-establishment nature of econ-blogging. As I said: stinker.

      Krugman gets some stuff right because of what he actually takes over from the Keynesians. But while he detects the right symptoms and gives the right solutions, I rarely see that he gets the diagnosis right.

  20. Walter Wit Man

    Good job defining the basic dishonesty of our political elite.

    This stuff drives me crazy.

    You’ve proved Krugman to be an intellectual fraud–he isn’t interested in the truth, instead, he serves his fascist masters for a few gold coins and a pat on the head.

  21. GW

    @crazyman, and Paul T.

    So, what you guys are saying is that money is form information. No? This information acts as an OS for the global economy (i.e. it is a reserve currency).

    Related, price is also information–and is measured in terms of money units–as it sends signals to the market place on how to (efficiently?) allocate resources. I think what we are seeing is that price is increasingly an impractical informational signal on how to efficiently allocate resources…OR said another way, money is increasingly impractical as unit of measure.

    I believe, in some dimension, this is all tied to the endogenous money creation mentioned by Keen. All of this rehypothecation(sp?) and borrowing interbank reserves has rendered the dollar to a state where it is increasingly less a store of value and more an imprecise informational signal on how to allocate resources.

    This is why the velocity of money is so low, despite M2/M3 going through the roof. There should be another parameter estimate for inflation, in that it should tell us how information is actual in a unit of money measure. The less info===>the less it is used==>the less velocity…

    Ok…nuff said.. Just my $.02 worth—wait how much info is that again:-)

    1. GW

      Just to bring it back to Yves says about “when people get nervous they hold cash”; we could also say when money is no longer useful as a store of value (w.r.t. the future) and/or no longer contains information (w.r.t the present), people will hold cash and/or not borrow.

  22. Hugh

    Krugman is an Establishment liberal. This basically means he is mired in gold standard thinking with a few Keynesian tweaks.

    He doesn’t understand or chooses not to understand fiat currency. The loanable funds doctrine is useful to the kleptocracy the Establishment runs because (1) it masks who (the banks) control money creation and (2), at least as important for me, it avoids altogether the issue of wealth inequality.

    You see the loanable funds doctrine of for every lender there is a saver is not simply a fiction of a gold standard world. It sneaks in the neoclassical idea of an essentially homogenous population of rational economic actors. At various points, some of these actors will be lenders and some will be borrowers, but in all other ways the actors are essentially equivalent. So for every borrower, there is a saver.

    What this ignores is interest. Borrowing and lending are equal but opposite sides of the same transaction. Because of interest, they are unequal. There is a net flow of wealth, not to generic savers who can themselves become borrowers but to those who actually performed the transaction (the banks and those who own them). And importantly, in the real world, there are no reverse flows that fully compensate for this (bankruptcies, consumption, taxation, etc.). Wealth inequality results and not just any wealth inequality but an ongoing one as one side racks up more and more assets and the other racks up more and more debt.

    This situation is exacerbated by the fact that those who benefit from this state of affairs also control the fiat power of money creation. So you have one side that can create money to lend while the other side has no such power, or to be more precise and anticipating F. Beard, no equivalent power that can fully balance the fiat power of the banks. And remember with interest, this power must not only be equal to the money creation power of the banks but greater than it.

    A far simpler view of all this is that Krugman is just a liberal apologist for kleptocracy so what really did any of us expect?

  23. lambert strether

    It is true, however, that Krugman’s “The Night They Reread Minsky” is one of the all-time great econoblogger headlines.

  24. F. Beard

    Any dynamic model of a process must start away from its equilibrium, because if you start it in its equilibrium, nothing happens. It’s about time that economists woke up to the need to model the economy dynamically— Steve Keen from

    OMG! They don’t?!

    I am only a poor engineer but I see I might have been a great economist so low is the bar set. :)

    1. amanasleep

      @F. Beard:

      From your posts I always assumed you had read Keen. This must be quite bracing for you. Where did you first come across your Debt Jubilee idea if not from Keen?

      1. F. Beard

        Where did you first come across your Debt Jubilee idea if not from Keen? amanasleep

        One morning, a short time after I realized credit creation was a looting mechanism, I woke up and realized the solution was to run the credit creation process backwards (to reverse the injustice) by giving new fiat to the debtors and by having the banks distribute loan repayments to the entire population on a pro rata basis instead of destroying them as double entry book-keeping requires.

        Later, I decided that an equal distribution of money to the entire population was politically more doable and it now occurs to me – much more just. After all, just because one has no cash savings does that mean he has not been cheated by the banking cartel?

        But yes, Professor Keen and I arrived at approximately the same solution independently. I mention this not to brag but to indicate that two different approaches led to the same proposed solution.

  25. Schofield

    Oh My God! I thought the loanable funds thingy got canned at the same time as Milton’s Friedman’s monetarist experiment? Does this LF thingy continue a half-life in Paul Krugman’s head then? Scary!

  26. BR

    So glad somebody pointed this out. It’s the loanable funds model! It has no basis in reality!

  27. Adam Eran

    Like many commenters, I think Krugman has missed the MMT point here. Nevertheless, I welcome his attention to MMT He’s also referred to Yves previously, and even adopted her antidote du jour practice, so his attention is not just on pseudo-Keynesian navel gazing.

    However, the real question here is not whether Krugman, Keen or Keynes gets stuff wrong. It’s “How do we act when reality contradicts that model of how it’s supposed to be that we’ve so carefully nurtured.”

    The expect-able (all-too-human) response is to dismiss reality as silly, ridiculous, ill-founded, etc. So Krugman doesn’t exactly surprise, here.

    This is nothing new. The Pope put Galileo under house arrest for contradicting the conventional wisdom about the geocentric solar system. I would caution all reading this blog that human nature hasn’t really changed that much since Renaissance times.

    When solving problems, one can 1. re-arrange within the existing model (AKA “rearrange the deck chairs on the Titanic”), or 2. step outside the box (something like calling the helicopter to remove passengers). Stepping outside the various boxes is almost invariably frustrating for *anyone*. Think of those who want clean air, but have difficulty quitting smoking.

    So frustration is the normal response to the outside-the-box problem solving. Extend and pretend are much more comfortable.

    This means *everybody* gets a dose of the outside-the-box unpleasantness, not just those who can’t quite grasp it (yet).

    Q: So if every enemy is a potential ally, how do we state the case for reality?
    A: Gently, because it’s hard enough already.

    I know, that sounds like “turn the other cheek,” and look what it got the guy promoting that particular outside-the-box solution… But then he was thinking long-term, no?

  28. Doug Terpstra

    Great post and comments. MMT is really making sense, despite, or maybe because of, Bernanke’s deliberate opacity and obfuscation.

    Krugman’s scorn seems to indicate some insecurity about his own platform. Although one should never question a Nobel prize winner, one statement in PK’s post struck me as especially curious in context:

    “Now, I’m all for including the banking sector in stories where it’s relevant; but why is it so crucial to a story about debt and leverage?” Huh?

    To earn Krugman’s scorn, Steve Keen must indeed be hitting home.

    “First they ignore you, then they ridicule you, then they fight you, then you win.” — Mahatma Gandhi

  29. Schofield

    It’s an energy conservation issue really. Nature set us up to copy ideas from others. It saves energy. It’s probably about 3% of the population, maybe less, that genuinely innovate. I mean listen to the Neo-Liberal Ronald Reagan “The last words you want to hear are ‘I’m from the government and I’m here to help’.” Contrast that with government phones ringing off the cradle when the Credit Crash hit.

  30. Rodger Malcolm Mitchell

    Mr. Pilkington said, “This means that the only real constraint on bank lending is the interest rate as set by the central bank.”

    Close, but no cigar. While he is correct that reserves do not constrain bank lending, bank capital does.

    Rodger Malcolm Mitchell

  31. emptyfull

    O.k. folks. You can beat up Krugman on economics all you want. But please temper the radical-bites-liberal-viciousnsess of the personal attacks on him, huh? Krugman’s linked to Yves a number of times, and that’s how I found this site in the first place. It seems to me that Krugman is an honest liberal of the instituional state church of the economics-state complex. He’s still tied to “orthodox thinking,” but he clearly knows something is seriously wrong in Denmark and he’s ligitemately worried about it. His position in that culture of establishment thinking may prevent him from screaming out about how corrupted our entire political system has become, but you know he wanted to go down to Occupy Wall St. Whatever foibles he has, he’s still patriotic enough to care about the welfare of the country and the democratic world and not just the well-being of the rich and powerful. His posts on Hungary have been important in shifting some attention to a really dangerous decay of democratic life there — the very real threat that a fascist government might grow again in the heart of Europe. So don’t question his sincerity in these ways at least. He’s worried about the right things.

    1. liberal

      I think the best example of what you’re saying was his opposition to the Iraq War. Yes, other people in establishment positions took the same line, but very few people with the “right” credentials were as black-and-white as PK was.

      He basically called Bush a vicious liar.

  32. indio007

    “They make loans first – ex nihilo, if you will – and raise the reserves later.”

    He has seen the light!

    That’s right folks there is no loan because no valuable consideration was given.

    They simply kited a check till they could rehypothecate the collateral the “borrowers” collateral. Nice trick.

  33. Fiver

    Among other things, we learn that Krugman has constructed a “cult of personality”? Good grief.

    Not that he isn’t at bottom a Fed loyalist Stooge at the NYT, useful for maintaining the myth of real debate in a functioning democracy, Mr. P., but from what you’ve said here at NC over the last few months, apparently all humankind save MMT-ers, or at least you as MMT-er, belong to one or other “cult” – even while your own assertions are consistently delivered with the same sort of “fanatic” zeal and “certitude” and general dismissiveness you continually detect and find insufferable in your targets.

    Krugman is a merely popular elite Op-Head whose popularity does not spring of any necessity from his economics, but rather what he says his economics allows or guides “us” to do. He represents that large swath of mushy, want-to-feel-like-I’m-a-good-guy-but-still-not-exactly-hurtin’-money-wise “liberal” citizens who want a “nicer” world but refuse to ever really contemplate, let alone engage, any of what would be necessary to make it happen – a re-distribution of income and power, including their own, great enough to actually address the enormous problems faced. Which is why, as fervently as the most rank of capitalists, this sort of “liberal” is taught to be terrified at the prospect of some lapse in “growth” no matter how wealthy the society as a whole is in which he/she lives. Heaven forbid any of our material aims ever be ruffled, or that we should ever be asked to sacrifice any portion of a lifestyle. Nope. It’s growth that continues to “raise all boats” now matter how often it fails to actually raise those on bottom, or no deal for these good liberals. Not even worth bothering to think about how to change things without “growth” in a spectacularly wealthy country.

    That “growth” as now manifest (how many new cities did China build this year? how many US car sales in March? how many highways, dams, mines, pipelines, everything on the go this minute?) is itself impossible to maintain for a mere couple more decades more without wrecking this planet and thus humanity’s own very soul is as tragic as it is absolutely unnecessary. That this eludes Krugman et al entirely is astonishing. Truly, how could he NOT see that what he needs to figure out is how NOT to grow, but still prosper.

    And MMT ? Can it spell something other than “growth”?

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