Home > debt, The Economics Profession > Why Steve Keen is even more right than he thinks

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?

  1. Mike Meeropol
    October 28, 2011 at 2:00 pm

    Of course the problem with academic economists is that they see “an asset” in terms of a “promise to repay” as having some “intrinsic” value as measured by its current market value. They “believe” this because they still believe the story of supply and demand which answers all questions in economics (“Teach a parrot to say supply and demand and it will be an economist!”).

    In the real world, the asset of someone’s promise to repay is only as good as the someone’s ability to repay. Rising indebtedness as a percentage of income increases the likelihood of an interruption in the ability to repay.

    Q.E.D. (except for economists!)

    • October 28, 2011 at 2:14 pm

      I’d back all my promises to repay with credit default swaps I’d purchase from my shadow-self, but I just can’t afford them….

  2. October 28, 2011 at 3:53 pm

    I have to take issue with the statement that national income accounting is double-entry bookkeeping. It is double-entry bookkeeping PLUS economics. So it is puzzling and just plain weird to see economists insist that it is ONLY D.E.B.! “Assume there are no economists…” The folks who developed modern national income accounting were principally economists. They had accountants working with them, too.

    There’s also a metaphysical problem in the statement, “one person’s debt is another person’s asset.” How is the ownership of private property established here? Is it subjective? “I think she owes me money.” Is it a private agreement? “We both agree he owes me money.” Or does it involve some kind of legal registration of claims? “A title search shows that my bank has a mortgage registered on the land in district lot 49 owned by them.”

    • merijnknibbe
      October 28, 2011 at 7:00 pm

      I completely agree that it’s accounting plus economics – just think of the sectoral divisions (local government/central government/households/non-financial companies/financial companies) and the like. Economic arguments are used to draw the lines between these institutional sectors are. Another one: increases in asset prices (stocks, houses) are not seen as an increase in income.

  3. October 28, 2011 at 5:24 pm

    In our world economists occupy a similar space to the one we assign to our politicians: The Prime Target Area. That allows the real culprits to go on doing their dirty work out of the public spotlight.

  4. Dunning-Kruger
    October 29, 2011 at 2:14 pm

    I think the argument against is as follows: Accounting statements does not display time relations but are only snapshots at a certain point in time of your fortune.

    When a bank gives you a loan, it puts your loan on accounts receivable. You have added liquidity, but no liquidity is taken away from the bank.The bank issued money of zero maturity to you, and got a right with long term maturity in exchange. You can use your loan immidiately, but you will suffer some small liquidity drawbacks only in future periods.

    What actually happens is a time travel of your demand from future to now, which of course has an real world economic effect.

  5. October 29, 2011 at 7:00 pm

    …and why O why aren’t they made to study/critique the work of the best of the Nobel prize winning economists (like Dr. Amartya Sen) logically? Are the schools run by and for ego demons or what?

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