Paul Krugman and Steve Keen have been debating endogenous versus exogenous money – as well as some other issues – for the past few days. The debate appears to have drawn to close, so here I offer a summary for those who can’t see the wood for the trees.
2. Keen responds, noting that banks do not require savings before they make a loan, as they can create loans and deposits simultaneously through double entry bookkeeping. The CB has to provide the reserves required for whichever loans they do make in the short term, else the economy will grind to a halt.
3. Nick Rowe weighs in, with a comment thread well worth reading. He sides with Krugman overall but appears to agree with at least some of what endogenous money proponents are claiming, including the the double entry accounting view of money creation.
4. Krugman, however, continues to deny this, claiming that CBs have monetary control, and citing a paper by James Tobin to support his point of view. He fails to note that, not only did nobody ever assert that the CB has no control whatsoever over monetary activity, but Tobin also wrote a paper called ‘Commercial Banks as Creators of ‘Money’‘, in which he agrees with the view that Krugman opposes.
5. Scott Fullwiler schools Krugman on how banking actually works in the real world.
6. Krugman makes a post where, through a sleight of hand, he seems to acknowledge that banks can create money, but goes on to straw man endogenous money proponents by saying that they claim there is no limit to this process. Of course, that’s not true – the only claim is that reserves are not the limit, the actual limitations being capital, risk and interest rates.
7. Krugman, unfortunately, goes on to make another post, one in which he effectively asserts that the Central Bank has complete control of the money supply, something completely contradictory to what he said before and blatantly falsified by the failure of monetarism in the 80s.
8. Krugman and Rowe both parade their ignorance by making it clear they have not read Keen’s latest post properly, and fall straight into his characterisation of DSGE. Keen responds. Krugman says the debate is over.
Looking over the debate, I’d score it to Keen – you might expect that, but I genuinely went through periods where I thought he might be wrong. Sadly, Krugman quite clearly moved the goalposts a couple of times, and Rowe didn’t make it exactly clear where he stands, even after I asked him. Neither of them engaged properly with Keen’s or anyone else’s arguments.
I can’t help but feel that the orthodox economists were deliberately obfuscating the debate – making it unclear exactly what they advocate, but simultaneously clinging to a core theory and asserting that its critics are attacking a straw man, ignorant of what is ‘added’ at a higher level. I’m forced to wonder if their theories are simply immune to falsification.
NB: A couple of others provide some constructive comments on Keen’s slack definitions in his most recent paper, particular with respect to units, that are worth reading in their entirety. Having said that, Keen’s accounting appears to be correct, even if it’s not the clearest.