## Tuesday, May 13, 2014

### Some folks just imagine conflicts that do not exist

It may make great theater, but terrible science.

In the latest issue (#67) of the real-world economics review, Egmont Kakarot-Handtke presumes to moderate a debate (PDF) between Paul Krugman and Steve Keen (PDF). Sadly, Kakarot-Handtke’s paper lies at that unfortunate intersection of incomprehension and irrelevance. The paper is irrelevant, in that Kakarot-Handtke imagines a debate between loanable-funds and endogenous-money approaches to macroeconomics that to my eye does not exist (at least in this context.) The paper demonstrates incomprehension in that Kakarot-Handtke attributes to the loanable-funds model a non-existent property.

To the latter, we hardly need look beyond the final words Kakarot-Handtke offers:
The structural axiomatic analysis leads to the prediction that Krugman’s loanable funds model will be clearly refuted. It simply does not happen in the actual monetary economy that saving and dissaving of the households is exactly equal.
Here, Kakarot-Handtke appears to tear down a straw man. The textbook loanable funds model is one in which households lend to businesses– directly or indirectly– for investment purposes. If the loanable funds model predicted that households neither saved nor dissaved on net, then there would also be no investment. What Kakarot-Handtke actually argues is that even in a purely consumption-based economy, that households can save or dissave on net if businesses dissave or save, respectively. Surely nothing Krugman has written can make one wonder if he disputes this point.

Nevertheless, Kakarot-Handtke manages to get there. Specifically, Kakarot-Handtke quotes Krugman (twice!) as saying
If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand.
So it is disconcerting to see Kakarot-Handtke then go on to comment
From the quote above it is clear that for Krugman savers and dissavers are not independent. For someone who saves there is someone else who takes the money, courtesy of the intermediation of the banking system, and spends it. Hence there is no effect on the rest of the economy.
He then produces the equation $$Y\!\left(t\right)+\frac{d}{dt}D\!\left(t\right)=G\!D\!P\!\left(t\right)+N\!AT\!\left(t\right)$$ Yet this construction is catastrophically non-specific. Consider Keen‘s Figure 3, titled “Aggregate demand as income plus change in debt.” The figure shows, however, nominal GDP plus change in debt. Is $Y$ then equal to nominal GDP? In that case, we are left with $$\frac{d}{dt}D\!\left(t\right)=N\!AT\!\left(t\right)$$ and find that the “change in debt” is spent entirely on existing assets, and does not add to aggregate demand in the usual sense at all. Clear as mud, that.