Steve Keen visits Solvent Land (2)

OK,  I cheated.  I did the easy bit in my post last week.  There is an issue around the ability for governments to run deficits, and this comes in two flavours –

  1. running a deficit to boost an ailing economy (something which is less likely to happen if we make finance simpler by stopping commercial debt) and
  2. running a permanent deficit because it is always good to boost the economy (which is true according to Steve Keen).

I deliberately ducked the much harder questions around what money is and whether we need banks and governments running deficits simply to exist.

In his Vienna lecture SteveMoney is Keen talked about how important banks are to the whole money cycle with this slide; comparing the “neoclassical vision” of banks (which is that they can safely be ignored) with the “real world” where they are vitally important.

From this analysis (for the real world) we can go on to produce the desired result  – businesses making profits and households having more than enough (shown on the left hand side) which can be boiled down to the following equation:

Business surplus + household surplus = net bank lending + government deficit

Hyman Minsky produced something similar in his various papers on financial instability although, as his focus was on the happy effect of having a big public sector, the equations I have so far seen ignore net bank lending, even though Minsky recognised the importance of the financial markets.

So the big question is

  • does Steve Keen’s analysis sum up economics for all time; so that
  • we must have banks which lend money for us to have a desirable economy?

And the answer may be YES.  The basis of his analysis is that borrowing is required for growth, which means that an economy without borrowing will at best be a low growth economy.  My theory is that his analysis ignores at least one factor – increasing our capital goods (such as housing) – which means that there is still scope for growth without borrowing.  However this factor may be small in the way economies work at the present and there is no reason for it to be included in a theory designed to work out the importance of borrowing in the global economy.

On the other hand, one of the reasons for looking at eliminating borrowing is because of the effect it has on our economies – exaggerating both the booms and the busts by providing extra cash when things look good and removing cash from the economy when they look poor.

Put another way, we can choose what we have or choose a different approach which appears to have all the benefits previously listed – an economic system which:

  • does not automatically lead us into recession;
  • safeguards the poorest in society from the most expensive lending;
  • avoids governments borrowing so much that they lose the ability to pay for basic services such as education and health

1 thought on “Steve Keen visits Solvent Land (2)

  1. Pingback: A new way of looking at economics? | Borrowing Ideas

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