Keen, Krugman and National Accounting
from Merijn Knibbe
A little bit about the Keen-Krugman debate. According to Steve Keen,
“The Walras-Schumpeter-Minsky proposition [is] that aggregate demand is income plus the change in debt, and that this is expended on both goods and services and purchases of financial claims on existing assets.”
Steve should have called this the Walras-Schumpeter-Minsky-National Accounting proposition. As can be seen from the next graph, these accounts use the same idea (the accounts use gross income and not net income, but this doesn’t matter for the argument, at the moment):
So, Steve is right, at least in a technical sense. His concept is entirely consistent with National Accounting which means that Paul Krugmans endeavour to debunk it by using phrases like mysticism is bonkers. But does this mean that Krugman is wrong with his approach? Not necessarily. In the National Accounts, investments are, by definition, equal to everything owned by companies and the governments lasting more than one year (well, with some exceptions, of course). And, by definition, these investments are supposed to be ‘real’ saving. This means that when consumer durables are redefined as ‘capital goods’ (they are not supposed to be capital at the moment, except for (new) houses), the rate of saving increases! Investment by wise definition and accounting necessity drives savings, in the National Accounts – you should not save to guarantee your future, we have to invest to guarantee our future! And this is financed, in a passive way, by net lending or increases in equity. ‘Investments’ in financial assets are in the National Accounts by definition considered as just a way to change the color of money and not as ‘real’ investments which add to the productive capacity of a society. And money set aside to invest in these financial assets is not seen as ‘real’savings. This however does not mean that flows of money are not important. People and companies might still lend a part of the money they need to finance these investments (including consumer durables), which gives rise to a kind of ‘net’ debt. Eggertson and Krugman should have been much more precise about this, but this is consistent with National Accounting, too (but their use of indifference curves is, of course, ‘mysticism’, as these are, contrary to the other concepts mentioned here, not rooted in consistent concepts, well designed definition or embedded in elaborate systems of measurement). Borio and Disyatat have written a nice article outlining the differences between the concept of saving and investment on one side and ‘financing’ on the other side. Its telling that when it comes to money and lending practical economists from the Bank of International Settlements/Central Bank of Thailand use the same concepts as Post-Keynesians and, to an extent, Austrians – but not the same concepts as neo classical economists.