Why Steve Keen is even more right than he thinks
From Merijn Knibbe
According to Steve Keen quite a few academic economists do not agree with him that (changes in) debt matter, for changes in demand:
“even after showing empirical evidence on the impact that rising and then falling private debt had on the economy both now and during the Great Depression, I couldn’t convince several of the academics in the audience of the importance of private debt: they kept coming back to “one person’s debt is another person’s asset, therefore the level of debt doesn’t matter”.
The fact that these economists do not understand the simple, common sense statement of Keen shows their utter ignorance of modern, scientific economics, as Keen states nothing special. In, for instance,
* The National Accounts
* The Monthly Bulletin of the European Central Bank (ECB)
The same method is used. These publications explain household demand (including demand for financial assets) by adding net change of debt to disposable income, just like Steve Keen does. And just like any accountant would do. There is nothing special about the statement of Keen. To the contrary. It’s part and parcel of empirical, scientific economics. It’s in fact plain, old-fashioned accounting…
In the National Accounts for the Netherlands (including an english legend) , “total resources of households” are equal to [total income plus net lending (called: change in liabilities)]. These resources are used for [expenditures plus net change in financial assets] (pp. 436-443, here).
The Monthly Bulletin of the ECB does the same thing (page S32, here): the change in consumption plus the change in financial and other assets (houses) is basically explained by: [income plus net lending], which results in a balance sheet for households showing consumption, changes in liabilities, assets and net worth. And this is of course double entry accounting on the state level, as pioneered by Simon Stevin in 1581: the balance sheet, the income and expenses sheet, the liquidity statement.
Why, oh why, are these academic economists so utterly ignorant , why don’t they read the National Accounts, why don’t they read the Monthly Bulletins, why haven’t they mastered double entry accounting, why don’t they even know about Simon Stevin? Is it because they got a state of the art economic education, based upon representative consumers and hyperrationality and perfect foresight and Ricardian equivalence but not based upon learning how to measure and estimate economic reality?