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Thursday, October 4, 2012

Keen Connects to MMT

Continues to interest me:


or for a more encompassing version of lesser quality (sound):

Keen has a unique definition of Aggregate expenditure (closed economy):
=C + I + NetAssets + (G-T)

....he didn't explain that enough for me to fully understand what he's saying here.  But here is my take (updated since I previously mentioned I too was confused) since many bloggers are just outright calling Keen's work nonsense.  This is partly Keen's fault for not clearly defining things.

He goes on to say that:
Income + Change in Debt = Output + Net Asset Turnover

...which suggests to me he thinks that changes in assets (prices bubbles)are a result of changes in debt (a la Minsky, which makes sense).

From what I understand, what Keen means by Net asset turnover is speculative and ponzi financing.  That is, financing of financial instruments that do NOT have a backing of a physical good or service and therefore are not expected to fully repay the principal and interest of the financing absent bubble formation.

In this way, Keen income and debt partially financing real goods and services, but also partially financing speculative and ponzi investments (the value of which is not based in real output).

In this view, neoclassical economics ignores this new class in the usual Y = C + I + G formation.  The real question to me is then, why does he include G-T instead of just G in his above formula.  That is still unclear to me.

UPDATE: had a brief back and forth with Prof. Keen about why he nets out taxes in his effective demand function.  Not very insightful.   He just said it's "cash flow."....hope he describes his re-formulation of the usual demand function in a more user-friendly way in the future.... Maybe he's too in-the-weeds.

53 comments:

Nathan Tankus said...

Spending is the ultimate source of demand. Government spending is the only source of government demand. Taxation drains income from the private sector, which means they can't spend out of that income. A tax policy may induce private sector spending in some way, but the ultimate source of demand isn't the taxation.

As he says, I suggested he use effective demand, which means his equation defines future spending plans which may or may not be realized.

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