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The return of black box economics - a critique of Keen on effective demand and changes in debt

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  • Severin Reissl

Abstract

In a paper for the Review of Keynesian Economics, Steve Keen recently provided a restatement of his claim that "effective demand equals income plus the change in debt". The aim of the present article is to provide a detailed critique of Keen's argument using an analytical framework pioneered by Wolfgang Stützel which has recently been developed further.Using this framework, it is shown that there is no strictly necessary relationship whatsoever between effective demand and changes in the level of gross debt. Keen's proposed relation is shown not to hold under all circumstances, and it is demonstrated that where it does hold this is due to variations in the `velocity of debt'-variable he introduces. This variable, however, lacks theoretical underpinning. The article also comments on Keen's proposal that trade in financial assets should be included in effective demand, arguing that this undermines the concept of effective demand itself. It is also shown that many weaknesses in Keen's argument stem from a lack of terminological clarity which originates in his interpretation of the works of Hyman Minsky.

Suggested Citation

  • Severin Reissl, 2015. "The return of black box economics - a critique of Keen on effective demand and changes in debt," IMK Working Paper 149-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:wpaper:149-2015
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    File URL: http://www.boeckler.de/pdf/p_imk_wp_149_2015.pdf
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    References listed on IDEAS

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    1. Fabian Lindner, 2012. "Saving does not finance Investment: Accounting as an indispensableguide to economic theory," IMK Working Paper 100-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. M.G. Hayes, 2013. "Effective Demand: Securing the Foundations," Review of Political Economy, Taylor & Francis Journals, vol. 25(4), pages 661-671, October.
    3. Albert, Hans & Arnold, Darrell & Maier-Rigaud, Frank, 2012. "Model Platonism: Neoclassical economic thought in critical light," Journal of Institutional Economics, Cambridge University Press, vol. 8(3), pages 295-323, September.
    4. Engelbert Stockhammer & Rafael Wildauer, 2016. "Debt-driven growth? Wealth, distribution and demand in OECD countries," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 40(6), pages 1609-1634.
    5. Olivier Allain, 2013. "Effective Demand: Securing the Foundations," Review of Political Economy, Taylor & Francis Journals, vol. 25(4), pages 653-660, October.
    6. Jakob Kapeller & Bernhard Schütz, 2014. "Debt, boom, bust: a theory of Minsky-Veblen cycles," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 36(4), pages 781-814.
    7. Olivier Allain, 2013. "Effective Demand: Securing the Foundations," Review of Political Economy, Taylor & Francis Journals, vol. 25(4), pages 653-660, October.
    8. repec:pke:wpaper:pkwp1211 is not listed on IDEAS
    9. Fabian Lindner, 2015. "Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory," World Economic Review, World Economics Association, vol. 2015(4), pages 1-1, February.
    10. E. Stockhammere & J. Michell, 2017. "Pseudo-Goodwin cycles in a Minsky model," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 41(1), pages 105-125.
    11. repec:pke:wpaper:pkwp1210 is not listed on IDEAS
    12. Jochen Hartwig, 2013. "Effective Demand: Securing the Foundations," Review of Political Economy, Taylor & Francis Journals, vol. 25(4), pages 672-678, October.
    13. Marc Lavoie, 1992. "Foundations of Post-Keynesian Economic Analysis," Books, Edward Elgar Publishing, number 275.
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    Cited by:

    1. Jacob Assa, 2017. "Leveraged Growth: Endogenous Money and Speculative Credit in a Stock-flow Consistent Measure of Output," Working Papers 1727, New School for Social Research, Department of Economics.
    2. Alan Karaev K. & Vadim Ponkratov V. & А. Караев К. & В. Понкратов В., 2018. "Основы балансовой механики Вольфганга Штютцела // Basics of the Wolfgang Stützel’s Balance Mechanics," Мир новой экономики // The world of new economy, Финансовый университет при Правительстве Российской Федерации // Financial University under The Governtment оf The Russian Federation, vol. 12(1), pages 104-113.

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    More about this item

    Keywords

    Effective Demand; endogenous money; debt;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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