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"I’m forced to wonder if their theories are simply immune to falsification."

Ouch! A fine summary of the Krugman/Keen debate. I take this to be the central proposition in Keen's paper:

Banks play a crucial role in Minsky’s analysis because they can endogenously expand the money supply in response to entrepreneurial or Ponzi Finance demands for funds. This emphasis upon the crucial role of banks can be traced back to Minsky’s PhD advisor Schumpeter, who argued that investment is not financed by savings, but by the endogenous expansion of the money supply by banks.

In other words, banks don't need deposits in order to lend.

Scott Fullwiler has a fine step-by-step explanation of how the trick is worked.

Winners don't have to do strawmanning would be my takeaway here; Krugman did an awful lot of it. Also, I like operational explanations of how banks really work, rather than diagrams.

NOTE Somebody smarter than me is going to have to put this in the MMT context.

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shargash's picture
Submitted by shargash on

Their theories are immune to falsification. As far as I'm concerned the global financial crisis falsified their theories, but the Krugmans of the world just created new, backward-looking narratives that explain why they weren't really wrong. After a crisis that was clearly caused by an unsustainable expansion in private debt, Krugman went out and wrote a paper explaining why private debt doesn't really matter, "coincidentally" validating Krugman's pre-crisis beliefs.

This is important stuff. I think Keen is at least heading in the right direction, whereas mainstream economists from Friedman to Bernanke and Krugman just don't get it. And so we get serial bubbles, abetted (if not caused) by central bankers who think they don't (and can't) have any influence on bubble making.