In a very belated and intemperate piece Noah Smith accuses Steve Keen of a Communist Type ‘purge’ for criticising Brad De Long for his rather clumsy attempt to rewrite intellectual history in claiming inspiration from Hymen Minsky years before he admitted to reading him.
I am on board with the anti-neoclassical revolution…but I am not going to take Steve Keen seriously if he is mainly interested in purging the ranks of his own comrades. First you win the revolution, then you jockey for position.
A not very well hidden attempt to purge by accusing someone else of being a splitter – Robespierre would have been proud.
Of course De Long then had the gall to call Keen a ‘splitter’ Monti-Python style even though it was De Long who was attempting to apply the tipex to his draft of the Soviet Economic Encyclopaedia. My gentle teasing of De Long on this point led to a prolonged response by him on my blog. The real monti-python event was De Long attempt to revive the Norwegian Blue of Neoclassical Economics and IS/LM.
There are some rather intemperate characters in this debate though a number of them also have the redeeming feature of intellectual curiosity and flexibility. What many on the ‘heterodox’ side would really like to see is an engagement on the theoretical rather than political issues and a reading of the texts in question. Going for the ball and not the man. In that regard the willingness of some renowned economic bloggers, such as David Glasner, Marc Thoma and Simon Wren Lewis, to begin debating and understanding the ideas in question is heartening.
So lets put these personality issues aside and attempt top mark out some key issues where post-Keynesian and the ‘radical faction’ of New Keynesians should be discussing.
1. Ok We all agree now that bank money is endogenous
There can be no clearer outcome of the Keen/Krugman debate (which ive covered here as I was dragged in in evidence) than this. Krugman’s final position was ‘so what’ in terms of central bank policy, but it matters much, as many of the explanations in undergraduate textbooks are clearly wrong, both historically in terms of the origin and development of money and practically in terms of how banks operate and how central banks influence that operation. This needs a wholesale rewrite. This is not to take an extreme position that money can be created without limit ‘out of thin air’ to use Schumpeter’s much abused phrase. Indeed arguably Keen’s key breakthrough in the last two years has been to include a double entry model of the scope and extent of what I term (borrowing a term from early 20C banking theorists referring to the same idea) ‘lending power’ is formed and constrained. This approach has been extended to cover most aspects of contemporary banking including in my own work a model of the transmission of ‘excess reserves’ between banks – the money multiplier with reversed causation. The broader economic community needs to engage with this. It gives us the opportunity to put financial institutions at the heart of our models in a stock flow consistent manner and bridge the false gap between finance and economics. Is that not a good thing?
2. Yes We agree now that debt matters because collateral matters
The traditional view was that debt doesn’t matter because debts and credits cancel out. You find this for example in Bernanke’s Macro textbook. But debts are credits are not the same thing – for the creditor the debt is an asset a flow, for the creditor it is a stock plus a future flow of principal and interest payments. This matters because liquidity can then vary over time and if liquidity can vary so can prices. There is nothing new about this position, it was the position of many in classical economics that were criticalof Ricardo’s similar debt neutrality position. It was certainly the position of Hawtry and several other economists who formulated theories of the ‘credit cycle’ in the late 19th and early 20th centuries. Keen has reinvigorated this stream with his challenge to Says law on the basis that demand is also affected by asset prices and the change in debt.
NK macro has been slowly clawing to the same position, with a variety of papers suggesting that if you include collateral prices in a GE model then this generates cycles – see for example most recently Carvalho et al.
The mechanism is simple: savers are willing to purchase overvalued stock and/or give easy credit to entrepreneurs today if they expect that stock prices will be overvalued and/or entrepreneurs will find easy credit tomorrow. That is, a bubble is possible today just because it is expected to continue tomorrow. The financial market is therefore not using future production as collateral, but instead it is using the bubble itself. Through this mechanism, the bubble raises investment and fosters growth.
But this approach only explains why bubble grow, not how they arise and why they blow up. It is still a comparative static model, and not the kind of dynamic model that Keen and others have been developing. Note that in the GE models of Carvalho and others the non-speculative ‘fundamentals’ of the economy are asymptotic – impossible. The GE models are missing something important. There is scope for much discussion and learning between the camps on this point.
3. We agree we are in a balance sheet recession – so lets model balance sheets
Many on the NK side now accept we are in a balance sheet recession (including Beckworth and Krugman), and that in accepting that debt and collateral matters seem willing to explore the ideas of fisherian debt-deflation and minskyian financial instability. Ok so why not go a step further and model balance sheets at the firm, household and bank levels and their interactions. Why not embrace the Wyne Godley revolution?
4. We agree banks matter, so lets put banks back in the Textbooks
Until the 1940s every economic textbook had a chapter or section on banking theory. Samuelson changed that because it was never his focus and then Freidman and Schwatrz expunged it in favour of an exogenous theory of money for reasons that have been shown to be historically and empirically false. Ok so lets rewind, admit the mistake and reinsert to our core beliefs an understanding of modern banking and money and expunge any associated crud that has built up in its absence.