Keen / Krugman Dialogue on Minsky

Steve Keen has posted a good response to a couple of posts by Paul Krugman entitled “Minsky and Methodology (Wonkish)” and “Banking Mysticism”, which were themselves in response to an earlier post by Keen.

Update: Free links to subsequent contributions to the discussion are provided in the remainder of this post.

Further Contributions:

Latest installment from Krugman: “Banking Mysticism, Continued”.

Keen responds in a new post.

Scott Fullwiler enters the discussion. (H/t to Mitch Green.)

More from Krugman in “Tobin Brainard 1963″ (includes a link to a post by Nick Rowe).

More at Keen’s blog.

Just noticed a short piece by Scott Rochfort on the exchange at the Sydney Morning Herald website.

Krugman again (“Things I Should Not Be Wasting Time On”), this time in response to Fullwiler.

Randall Wray responds to Krugman.

Krugman on Keen (“Oh My, Steve Keen Edition”) .

Update to Fullwiler’s post.

Keen responds to Krugman.

Update to Krugman’s “Oh My, Steve Keen Edition” post.

Keen responds to Krugman (and also Mark Thoma).

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16 thoughts on “Keen / Krugman Dialogue on Minsky

  1. I’ll be honest: in general, I like Paul Krugman. I’d go further: among the mainstream economists, he and Joe Stiglitz are among the most valuable ones.

    I’ve followed Krugman quite consistently and I bear witness he’s come a long way in understanding things, from being a technocrat in the 1980s to being now a sort of “progressive” (I use this term between quotation marks as a slightly ironic thing).

    But there’s one thing time hasn’t changed and I doubt ever will: Krugman’s arrogance. That’s his undoing.

    Take this from his first piece:

    “In particular, he [Steve Keen] asserts that putting banks in the story is essential. Now, I’m all for including the banking sector in stories where it’s relevant; but why is it so crucial to a story about debt and leverage?”

    A story about debt and leverage without banks is like a love story without lovers.

    Krugman is no fool. It’s only his incapacity to see himself in a critical light that allows him to make such an obviously silly statement.

  2. “In particular, he [Steve Keen] asserts that putting banks in the story is essential. Now, I’m all for including the banking sector in stories where it’s relevant; but why is it so crucial to a story about debt and leverage?”

    Non sequitur, It’s eliminating the cause from the explanation. Krugman is no fool? How does that follow?

    To use an aphorism Bill Gates was famous for, “That’s the stupidest thing I’ve ever heard.”

    I’m with Keen on this. That kind of behavior is a head-shaker plus eye-roller. What do you do with it?

  3. This haunts me. Krugman likes to regularly repeat his ‘Sam and Janet’ story. Where Sam borrows 10k, but that’s ok in terms of AD because Janet now has 10k less to spend. (Paraphrasing here). Which would be the case if banks weren’t involved. But they are.

    Loans create deposits. No one debits Janet’s deposit account and credits Sam’s with those same funds when he borrows. No reserves are involved either. And it’s still unclear to me if THAT is what Krugman thinks happens. Operationally, it’s very easy to prove otherwise. (POINTS at the bank accounting entries!) Just can’t get my head around it so I prefer to think Krugman has some David Lynch understanding of banking ops that somehow transcends reality.

  4. The problem is the guy never actually attends reality.

    There cannot be any constraint in the economy until you can point to a mechanism by one entity can stop the other doing something.

    If I have land and you don’t, I can stop you building on it.
    If I have a patent and you don’t. I can stop you making something.

    But to suggest that the Central Bank controls the economy by limiting the amount of cash in the ATMs is completely bonkers. If they tried to do that you’d cause general panic in the economy.

    Krugman can’t face the reality that the private banks are in charge, and the central bank has very limited powers to constrain them.

  5. Have you ever seen written anywhere a good analogy to the human body Neil? It’s just that Nature everywhere (if you look through the appropriate lense) improvises on a theme of ONE aspect dividing as duality thus forming a triplicity with seven attributes. So, making an attempt: –

    The blood cells (economic nourishment) are produced in the bone marrow by the body itself, on demand.
    The heart (CB) stores enough to maintain circulation and stability through fluid pressure.
    The sympathetic brain (Govt) coordinates the electrical pulses and diameters of the conduits.

    The attributes of the whole are harmony and beauty, cellular intelligence – collectively organs, aspiration of the body to live and reproduce, and utter magic of organisation of the various organs into a whole.

    Purpose is to provide a vehicle for a being who is once again an imperfect triplicity (Will, Love, Intelligence).

    Could extend the analogy to problems: when some cells try to be immortal (cancer) or through ignorance interfere with any of the aspects, not realising they are a part of a whole.

    i.e. We are a part of Nature and what we create is down to an original design ….?

  6. “Krugman is no fool. It’s only his incapacity to see himself in a critical light that allows him to make such an obviously silly statement.”

    Just sayin’.

  7. Neil, could you expand on just what does happen in those accounts, for the ignorant among us who do want to understand?

    Thanks.

  8. Post Keynesians have been saying for years that central banks cannot control the level of reserve balances, because doing so causes a crisis in the payments system, which carries over into the wider economy. This is one of the most important insights by post Keynesians, and the literature is quite extensive—it not only covers institutional insights in the modern era, but a detailed look throughout history on money and banking. It’s disgusting and disingenuous how Krugman with a wave of his hand can dismiss this literature (ironically, New Classicals and conservative New Keynesians are doing the same with Krugman’s recent attempts to introduce Old Keynesian macro models).

    If we actually examine what central banks do in the real world, rather than starting from a set of assumptions about money and banking derived a prior, then we come to a picture of central bank behaviour that is consistent with the Post Keynesian theory of endogenous money. For instance, the Reserve Bank of Australia (RBA) is quite explicit in the way they conduct monetary policy. They argue that they target a short-term rate and supply the necessary amount of reserves in order to maintain their target rate:

    “The Reserve Bank has no prescribed target for the level of settlement balances, supply whatever amount is needed to keep the cash rate near the target” (RBA, 2003, p. 4).

    The day-to-day operations of the RBA detail their accommodating nature. Each day the RBA will consult with its government and non-government clients as to the timing and size of their payments and receipts. The RBA classifies payments into two categories, low-value payments, which are settled the next business day, and high value payments, which are settled on a ‘real-time gross settlement’ (RTGS) basis. The impact of the latter on system liquidity is almost immediate, and therefore the RBA stands ready to provide intra-day liquidity, (Baker & Jacobs, 2010, p. 41) in the form of an intra-day repo (RBA, 1998, p. 58). These day-to-day activities have allowed the RBA to identify and accommodate the swings in demand for ES balances, whilst forecasting and offsetting swings in the supply of ES balances, and thus maintain the cash rate at the RBA’s target rate (Baker & Jacobs, 2010, p. 42).

    sources:
    Baker, A. & Jacobs, D. 2010. Domestic Market Operations and Liquidity forecasting. Reserve Bank of Australia. Bulletin Quarter 2010

    Reserve Bank of Australia. 1998. Reserve Bank Domestic Operations under RTGS. Reserve Bank of Australia Bulletin.

    Reserve Bank of Australia. 2003. The Reserve bank’s open market operations. Reserve Bank of Australia Bulletin.

  9. “We are a part of Nature and what we create is down to an original design”

    Note quite original design, more near perfection created by generating millions of variations and watching the bad ones fail in the heat of battle.

    We can’t really do that with economics, (or indeed computer system design) as killing real people with your experiments is not generally acceptable.

    So we have to design with our limited brains taking inspiration from the machines of nature around us. And because it has to be understood by our limited brains, it needs to be as simple as possible – but no simpler.

  10. Hey, MDM

    “(ironically, New Classicals and conservative New Keynesians are doing the same with Krugman’s recent attempts to introduce Old Keynesian macro models)”

    I take it this is a reference to Krugman’s recent posts where he advocates for models without microfoundations.

    If that’s the case, the irony is not that New Classicals and New Keynesians are dismissing Krugman’s attempts to re-introduce them.

    The irony is that Krugman justifies his position… in terms of microfoundations!

    “In other words, we’re firmly back in the domain of ordinary economics, in which decisions get made at the margin and all that”.

    I don’t know, but when I try to get to the margin, the thing that usually happens is that I fall over the edge.

    But that’s me.

  11. “as killing real people with your experiments is not generally acceptable.

    Once upon a time it was the animals who lunched on humans. Now, we bring more death and suffering to our own species than any other species does to their own!

    One analogy I heard: “would you use a baby for a chock to stop a car from rolling down the hill?”. That is what we do with human life. No cause should be greater ….

    I don’t think it has anything to do with the human brain, mind, ego Neil. I think it is our inability to listen to the heart … thoughts eclipse understanding!

    Steve Keen has written a good comeback hey!

  12. Thanks, Trixie. It’s a great post by Scott (not surprising).

    PS: Loved your comment under Scott’s post. :-)

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