Home > Uncategorized > The real winner: economics which takes money and debt serious

The real winner: economics which takes money and debt serious

Tyler Cowen and Paul Krugman are musing about the direction of macro-economics: is Keynes the new Keynes or isn’t he? In reality, macro-economics wich takes debt and money serious is winning – and didn’t the real Keynes take debts and money quite serious? A non-exhaustive list of examples:

Here, Dirk Bezemer with: ‘Debt: the good, the bad and the ugly’, good debts boosting demand and production and bad debts boosting asset prices and wealth illusion.

Here, Richard Werner with a very recent article about good and bad debts good debts boosting demand and production and bad debts boosting asset prices and wealth illusion.

Here, an article by Òscar Jordà, Moritz Schularick and Alan M. Taylor which states, based on carefull historical research, “Housing finance has come to play a central role in the modern macroeconomy.” Bezemer and Werner would consider a large part of housing finance related debts to be bad and even ugly debts.

Here, Josh Mason and Arjun Jayadev who state about USA household debts, based upon careful historical research: “If lower private leverage is a condition of acceptable growth,then in the absence of a substantial fall in interest rates relative to growth rates, large-scale debt forgiveness of some form may be unavoidable.”

Here, Steve Keen’s debtwatch website

Here, the Reinhart and Rogoff ‘This time it’s different’ book, about 8 centuries of financial folly and wealth illusion

And since some time, the national accounts contain data on sectoral debt (households, banks, non-financial companies, the government) as a matter of routine.

Which are used in, for instance, the Macro Economic Imbalance Procedure scorecard of the European Union.

Might I state that the real Keynes is winning?

  1. Macrocompassion
    November 28, 2014 at 11:21 am

    Unfortunately the crux to achieving macro-economic progress is not in money but in the right of access to natural resources (and the way that speculators in its value restrict this right). So this money-business treatment is a load of hot air and has very little substance.

  2. November 28, 2014 at 8:54 pm

    Who takes Orthodoxy or Heterodoxy seriously?
    Comment on merijnknibbe’s ‘The real winner: economics which takes money and debt serious’

    True: Money and debt have to be taken seriously. False: Keynes was the first to take money and debt seriously, therefore Keynes will be the new Keynes.

    As a matter of fact, economics started with the debt problem:“Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by political economy a branch of the science of the statesman or legislator, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt trough the conquest of her colonial Empire.” (Halévy, 1960, pp. 104-105)

    From classical Political Economy onwards the debt problem was solved by demanding that government debt should be close to zero. Households should be savers and prudent lenders. Business sector debt that was backed by productive capital has always been regarded as unobjectionable. Since saving and investment are always equal, in a sound economy the financial assets of the household sector are equal to the business sector’s liabilities. Money was handled with the Quantity Theory and considered to be neutral. No systemic problems in this big picture. To be sure, nobody denied that there could be disturbances because of all sorts of human failure and folly. And economists were always well aware that financial and economic crises go hand in hand.

    It is not so much ignorance of the phenomena that is the problem but theoretical misconceptions. And in this respect Keynes was not much better than the classicals.

    The key point is that economists are not aware of the relationship between debt and profit. Only if the household sector’s consumption expenditures are greater than wage income, i.e. financed by credit, the business sector as a whole can make the initial monetary profit in the pure consumption economy (the complete formula is here https://commons.wikimedia.org/wiki/File:AXEC29.png). The relationship between growing debt and profit becomes a bit more complex when investment, government and foreign trade are included but this does not alter the elementary relationship. For the wider implications see (2013b; 2014b).

    True: Neither the classicals, nor the neoclassicals, nor their actual reincarnations got the relationship between debt and profit right. However, this does not make Heterodoxy the winner by default. The profit theories of Marx, Schumpeter, Keynes, Kalecki, Davidson, Minsky, Keen, all on the list of the 20 top heterodox economists (see below), are also demonstrably false (2014d; 2011a; 2011c; 2011b; 2013a).

    Finally: after he wandered a lifetime in the wrong direction (2014a; 2014c) how can anyone take Krugman’s actual musings about the future of economics seriously?

    Egmont Kakarot-Handtke

    References
    Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon
    Press.

    Kakarot-Handtke, E. (2011a). Schumpeter and the Essence of Profit. SSRN Working
    Paper Series, 1845771: 1–26. URL http://ssrn.com/abstract=1845771.

    Kakarot-Handtke, E. (2011b). What is Wrong With Heterodox Economics?
    Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803:
    1–9. URL http://ssrn.com/abstract=1845803.

    Kakarot-Handtke, E. (2011c). Why Post Keynesianism is Not Yet a Science. SSRN
    Working Paper Series, 1966438: 1–15. URL http://ssrn.com/abstract=1966438.

    Kakarot-Handtke, E. (2013a). Debunking Squared. SSRN Working Paper Series,
    2357902: 1–5. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2357902.

    Kakarot-Handtke, E. (2013b). Redemption and Depression. SSRN Working Paper
    Series, 2343561: 1–28. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2343561.

    Kakarot-Handtke, E. (2014a). Loanable Funds vs. Endogenous Money: Krugman
    is Wrong, Keen is Right. SSRN Working Paper Series, 2389341: 1–17. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2389341.

    Kakarot-Handtke, E. (2014b). Mathematical Proof of the Breakdown of Capitalism.
    SSRN Working Paper Series, 2375578: 1–21. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2375578.

    Kakarot-Handtke, E. (2014c). Mr. Keynes, Prof. Krugman, IS-LM, and the End of
    Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856.

    Kakarot-Handtke, E. (2014d). Profit for Marxists. SSRN Working Paper Series,
    2414301: 1–25. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301.

    Link to top 20:
    http://larspsyll.wordpress.com/2014/02/28/top-20-heterodox-economics-books/

  3. November 28, 2014 at 9:23 pm

    Who takes Orthodoxy or Heterodoxy seriously?
    Comment on merijnknibbe’s ‘The real winner: economics which takes money and debt serious’

    True: Money and debt have to be taken seriously. False: Keynes was the first to take money and debt seriously, therefore Keynes will be the new Keynes.

    As a matter of fact, economics started with the debt problem:“Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by political economy a branch of the science of the statesman or legislator, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt trough the conquest of her colonial Empire.” (Halévy, 1960, pp. 104-105)

    From classical Political Economy onwards the debt problem was solved by demanding that government debt should be close to zero. Households should be savers and prudent lenders. Business sector debt that was backed by productive capital has always been regarded as unobjectionable. Since saving and investment are always equal, in a sound economy the financial assets of the household sector are equal to the business sector’s liabilities. Money was handled with the Quantity Theory and considered to be neutral. No systemic problems in this big picture. To be sure, nobody denied that there could be disturbances because of all sorts of human failure and folly. And economists were always well aware that financial and economic crises go hand in hand.

    It is not so much ignorance of the phenomena that is the problem but theoretical misconceptions. And in this respect Keynes was not much better than the classicals.

    The key point is that economists are not aware of the relationship between debt and profit. Only if the household sector’s consumption expenditures are greater than wage income, i.e. financed by credit, the business sector as a whole can make the initial monetary profit in the pure consumption economy (the complete formula is here https://commons.wikimedia.org/wiki/File:AXEC29.png). The relationship between growing debt and profit becomes a bit more complex when investment, government and foreign trade are included but this does not alter the elementary relationship. For the wider implications see (2013b; 2014b).

    True: Neither the classicals, nor the neoclassicals, nor their actual reincarnations got the relationship between debt and profit right. However, this does not make Heterodoxy the winner by default. The profit theories of Marx, Schumpeter, Keynes, Kalecki, Davidson, Minsky, Keen, all on the list of the 20 top heterodox economists (see below), are also demonstrably false (2014d; 2011a; 2011c; 2011b; 2013a).

    Finally: after he wandered a lifetime in the wrong direction (2014a; 2014c) how can anyone take Krugman’s actual musings about the future of economics seriously?

    Egmont Kakarot-Handtke

    References
    Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon
    Press.

    Kakarot-Handtke, E. (2011a). Schumpeter and the Essence of Profit. SSRN Working
    Paper Series, 1845771: 1–26. URL http://ssrn.com/abstract=1845771.

    Kakarot-Handtke, E. (2011b). What is Wrong With Heterodox Economics?
    Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803:
    1–9. URL http://ssrn.com/abstract=1845803.

    Kakarot-Handtke, E. (2011c). Why Post Keynesianism is Not Yet a Science. SSRN
    Working Paper Series, 1966438: 1–15. URL
    http://ssrn.com/abstract=1966438.

    Kakarot-Handtke, E. (2013a). Debunking Squared. SSRN Working Paper Series,
    2357902: 1–5. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2357902.

    Kakarot-Handtke, E. (2013b). Redemption and Depression. SSRN Working Paper
    Series, 2343561: 1–28. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2343561.

    Kakarot-Handtke, E. (2014a). Loanable Funds vs. Endogenous Money: Krugman
    is Wrong, Keen is Right. SSRN Working Paper Series, 2389341: 1–17. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2389341.

    Kakarot-Handtke, E. (2014b). Mathematical Proof of the Breakdown of Capitalism.
    SSRN Working Paper Series, 2375578: 1–21. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2375578.

    Kakarot-Handtke, E. (2014c). Mr. Keynes, Prof. Krugman, IS-LM, and the End of
    Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856.

    Kakarot-Handtke, E. (2014d). Profit for Marxists. SSRN Working Paper Series,
    2414301: 1–25. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301.

    Link to top 20:
    http://larspsyll.wordpress.com/2014/02/28/top-20-heterodox-economics-books/

  4. November 29, 2014 at 7:01 am

    The link to the Richard Werner Article is dead

    • merijnknibbe
      November 30, 2014 at 10:41 am

      Fixed.

  5. November 30, 2014 at 3:38 am

    Werner’s most recent comments on European Debt management:
    http://www.sciencedirect.com/science/article/pii/S0261560614001132

  6. November 30, 2014 at 6:12 am

    I strongly agree with the idea that progress in macroeconomics REQUIRES deep consideration of the role of money and debt. Money is “neutralized” by quantity theory models to be a veil, whereas in fact it plays a crucial role in the economy. Similarly, debt receives no attention in DSGE models (or other types of aggregated macro models) since how can one agent owe anything to himself?
    What I would like to ask someone who knows more about this is: HOW does the real Keynes differ from the Samuelson Hicks representation currently well known and taught in textbooks as Keynesian economics. What are the key points of difference. I have been meaning to read Keynes to try to figure this out, but it is a daunting prospect. I was hoping that someone has already done this exercise of understanding what Keynes really said as against what is widely believed about this.

    • davetaylor1
      December 1, 2014 at 9:53 am

      Asad, I’ve commented briefly on this in the Mainstream economics distorts …” thread. It may help you that Keynes himself summarises his argument in Chapter 18 of the General Theory, and explains his reason for changing his mind in Ch. 17 Section VI.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.