FT Alphaville " Steve Keen and the Minsky moment There's a polite blogosphere debate going on between Paul Krugman and Steve Keen, an Australian economics professor who has some strong views about the role of debt and the financial sector, and about how conventional economics has overlooked or misunderstood them. Keen, who is a beneficiary of George Soros" Institute for New Economic Thinking, last week published a summary of a paper he's going to present at an INET conference next week, which looks at why Hyman Minsky's ideas are important and how they've been misunderstood/misappropriated. One of Minsky's main theories relates to corporate cash flows, and how they can encourage speculative euphoria during prosperous times if they rise beyond the needs of debt management. Anyway, Paul Mason will be interviewing Keen ahead of his talk at an Inet conference in Berlin next week. So, you'll probably hear more about his ideas, if you haven't already. Here's our take on a couple of his main points: Aggregate demand is made up of income and debt, and that debt is in turn is comprised of both "entrepreneurial debt" (good debt, that invests in new, useful and economic pursuits) and "ponzi debt" (that goes on existing assets). He also sees a small-ish role for debt to be spent on consumption. The special role of the financial sector needs to be considered. Banks effectively generate endogenous money, whereas government create exogenous money. The two are not in some kind of closed world where one takes away from the other, as MMT maintains (to put it very simply). Keen's ideas are not that easy to summarise, and we've probably missed something a lot here. (In fact, he doesn't even really have a widely-used clever acronym yet. He told us that monetary circuit theory/MCT is the best one, and it's one that already has a Wikipedia entry with several Keen-related footnotes.) Anyway, back to the Krugman debate on Minsky. The role of banks is one particular point of disagreement between the two, and Krugman writes: Keen then goes on to assert that lending is, by definition (at least as I understand it), an addition to aggregate demand. I guess I don't get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn't have to represent a net increase in demand. Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I'm not sure what. I think it has something to do with the notion that creating money = creating demand, but again that isn't right in any model I understand. Here's a much-circulated video of Keen on BBC Hardtalk in November, mostly talking about one part of his proffered solution - a debt jubilee - to the mess we're in: Knock yourselves out. Oh, and we are not hating on Keen, but there's a prize* for the commenter who most accurately guesses Izzy's concern with his theories. Related links: Keen's paper for the INET conference (PDF) - Ineteconomics.org How I work - Paul Krugman We are all out of tombstones and plasticine vampire squid. This entry was posted by Kate Mackenzie on Wednesday, March 28th, 2012 at 11:50 and is filed under Capital markets, People. Tagged with debt deflation, Money, Money supply, Paul Krugman, steve keen.