A controversy is rocking economics. Nobel Laureate, not to mention ‘New York Times’ columnist, Paul Krugman and Steve Keen – an economics professor from Down Under, with some new-fangled ideas about traditional economics not being up to the job – have engaged in the academic equivalent of fisticuffs. Does it matter? Well it does, because the row that is raging goes right to the heart of what many people think is wrong with economists. It matters because many economists seem to be out of touch with reality. It matters, because the debate may ultimately shine light on that modern day mystery: what’s really going on in the world?
Steve Keen is a Professor of Economics & Finance at the University of Western Sydney. He also wrote a popular book entitled ‘Debunking Economics’. He seems to see himself as some kind of latter day Galileo, expressing views that are perceived as heretical by the economic world’s establishment.
He reckons traditional economists, the likes of Paul Krugman, are akin to those who used to see the world sitting at the centre of the universe. Galileo, Copernicus and co then came along with theories that were quite different. The establishment used circular argument to try to disprove the dangerous ideas of these thinkers. Galileo was wrong, they argued, because his ideas didn’t fit within their models. And yet the models that the establishment of that era were so keen to hang onto didn’t work. They didn’t, for example, predict the positions of stars.
Paul Krugman has often made arguments which seem to suggest he doesn’t think debt matters, not at the macro level anyway. So, for every debtor there is a creditor, so the economy does not go bust. In times of recession, when markets don’t want to spend money; when they’d rather put it in treasuries – the safest asset possible – then government debt doesn’t matter, because all the government is doing is taking the money lying idle and spending it.
Keen, on the other hand, says Krugman’s model of the economy takes no account of debt, banks or even money. He says that’s daft. To try to explain the workings of the world without taking these factors into account is akin to trying to explain the workings of the universe with the starting point that the Earth sits in the middle.
But there is another point; Keen says that the Krugman model totally failed to predict the financial crisis, whereas his did.
Keen himself does not claim his theories are of startling originality. Rather, he draws upon the theories of Hyman Minsky – the economist who died in 1996 – but created a model that seemed to predict the finance crisis pretty much spot on.
Minsky said that for an economy to grow, planned expenditure must exceed income. And he argued that debt is the key instrument for making this possible. The danger, according to Minksy’s theory, is when growth of debt gets out of hand and we get Ponzi borrowing – a situation in which borrowers can only repay the interest on their debt by borrowing more money. This is then followed by what has now been called a Minsky moment. 2008 is often said to have seen such a moment.
So Professor Keen is a disciple of Minsky.
Krugman, on the other hand, goes for more traditional idea of an economy working in equilibrium.
Here is the snag: Krugman did not predict the finance crisis. And still the world – and particularly readers of the ‘New York Times’ – hang on his every word.
And he used his ‘New York Times’ column to slate Keen’s ideas, but – and this is where things get nasty – he supposedly took Keen out of context. If you want to know the detail, go here: Krugman on (or Maybe off) for Keen’s own account:
The snag is that when Keen responded to Krugman to point out he had been quoted out of context, Krugman appeared to shut him out, saying: “time to move on”. In other words, I don’t want to discuss this any further.
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