...against fictions and other tall tales

Thursday, 29 March 2012

Steve Keen, terminology and the Walras-Schumpeter-Minsky Law

A quick post. Steve Keen believes that aggregate demand is income plus change in debt, and that this demand is spent not just on goods and services but also on buying financial assets.  For Keen, this view of aggregate demand is at the heart of what he calls the Walras-Schumpeter-Minsky Law.

Now, although I find much insight from Keen's work (especially his belief that the main source of struggle in the economy is between financial and industrial capital), I simply do not understand why he has to re-invent terminology this way.  Also, there are problems with looking at aggregate demand in this fashion.  Economist Marc Lavoie expressed caution with Keen's definition of aggregate demand last year in a commentary on the (always relevant) Relentlessly Progressive Economics Blog.  Lavoie summarized his thoughts on Keen's view that aggregate demand is equal to GDP plus the change in credit as follows:
This does not make much sense to me.  There is also a certain amount of double-counting since investment is often financed by credit.  Furthermore, if I get one million dollars in loans to purchase a house, credit goes up by one million; and if the seller of the house puts the proceeds in a bank account, this will have no effect whatsoever on GDP or economic activity. It may only have an impact on the price of houses.
But, for me, the problem with Keen's definition really remains one of terminology. In economics, practitioners should really strive to use commonly used terminology.  If not, then discussions on important policy issues become impossible since the focus tends to get bogged down on unimportant and time-consuming language concerns rather than on the issues that really matter.


  1. Great blog and good recent posts. Thanks for the nod at Billy Blog.

    Michael Boudreau

  2. Welcome Michael and thanks for your note. It's very encouraging to receive messages from readers who appreciate my work.

    As you probably may have figured out by now, the main reason I do this is to try and convince readers that unemployment is the most important public policy problem facing the economy. Many policymakers know this. Our goal should be to ensure that many more of them do as well. Call me an optimist, but I actually think it's catching on (though it may not seem like it sometimes...) Still, let's keep it up!

    1. I was never a great fan of spending time and exerting energy into defining concepts, especially when discussing macroeconomics, needless to say pervasive keynesian concepts. The important issue is to elaborate policy and abandon the philosphy. Notwithstanding I am a even a lesser fan of trying to hold on to a pan with frying oil. JKH had great intentions in his recent posts, but sometimes stuff happens and one's rhetoric slips out of hand. In his case, it happened and you and JL did the appropriate thing in highlighting ambiguity. JKH acknowledged the case, although with slight of tongue, but his gesture was welcome.

      I do however welcome your return to the one of the most critical political and economic problem of this millenium, apart from health: unemployment. It is crucial that the better critics not forget the disarray in today's economies world-wide and fix their focus on policy in the matter because most related social problems like education and public security are triggered thereby. As regards policy your column is exceptional. Let pamphleteers do pamphleteering, and I hope FRB stays away from it and holds the course.

    2. I hear ya...As always, thanks for your comments and support.

  3. Nice post. Mike is right. Your last few posts were very good.Phil

  4. You sure know how to quote them. I've always been skeptical of Keen's approach. Now I am better informed...thanks for posting.

  5. Nod! Your last paragraph makes the point very well. Keep FRB focused on policy.

  6. in response to:

    "if I get one million dollars in loans to purchase a house, credit goes up by one million; and if the seller of the house puts the proceeds in a bank account, this will have no effect whatsoever on GDP or economic activity. It may only have an impact on the price of houses."

    Do you think having one million more in the system has no effect on spending?

    I believe Keen has graphs that show there is a history of correlation between change in total debt and change in GDP

  7. I'm with Keen 100%. He's only saying a small percentage off GDP but obviously compound that over time... And then you have the opposite effect in a deleveraging cycle. It becomes a drag, seems to pretty accurately describe where we are now even with central banks pushing the liquidity button to the max.

    As for the double counting argument he explicitly excludes investment he's only talking about consumption and he's not including any transactions between existing borrowers he’s talking about people/business taking out new finance that would lead directly/indirectly to consumption. I guess it depends on if you believe in Endogenous money creation which is a whole different debate.

    I sincerely hope most people are not like anonymous and so sceptical of any thought outside mainstream economics just waiting for someone to pat them on the back and reassure them that everything is fine in current economic theory. Well the mainstream utterly failed to predict the financial crisis and many years on still don't have any kind of model that comes even close. Krugman and a few others have been pretty decent since the crisis but as Keen so eloquently put it ‘Right, but for the wrong reasons’ . It does not excuse them missing the crisis and excluding debt from there models which I believe even Krugman is now softening his view on with his work with Eggertsson but he still doesn’t really get it he’s saying it’s the distribution not the expansion and contraction thereof.