Steve Keen has replied to Thomas Palley’s critique of him with an article How not to win an economic argument.
All models are incomplete because they ignore many complications in order to highlight a few key concepts. In other times, a simple model is a starting point with the aim that the modeler adds more complications to make it more realistic. So it is sometimes not a good critique to point out what the models misses. But Steve Keen is making it look as if Palley’s critique is of what his models do not have.
This is diverting attention. For about two years or more, Keen has given all sorts of definitions of aggregate demand. The reason Palley’s critique is so solid is that it again points out that Keen’s definitions are wrong. Keen has repeated statements on aggregate demand and “change in debt” many times, making it sound like a universal law. Palley has shown via very straightforward arguments as quoted in my previous post Thomas Palley’s Nice Critique Of Steve Keen’s Models that the definition is incorrect. Moreover, Keen has changed his definitions as highlighted by a nice blog article by JKH. In my opinion Keen himself is confused on which definition is right and uses all of them together many times without realizing that they are different. His earlier definitions were simply incorrect on basic flow of funds accounting.
In short, there is no simple expression for changes in aggregate demand with changes in debt, a point mentioned by Nick Edmonds on his blog. Even if not, one could argue that it is useful but that is not the case because even at the theoretical level, there are conceptual issues, a lot because Keen doesn’t do his accounting right. Such things are not mere technicalities but the concepts of flow of funds is highly important to make some progress in analytic modeling.
My approach was to take the other side’s model, and show that if their assumptions were correct, they were right: banks could be ignored in macroeconomics, and changes in private debt had only a miniscule effect on demand.
Then I made one realistic small change, and hey presto — banks were essential to macroeconomics, and changes in private debt were the main game (but not the only one) in changing aggregate demand.
True neoclassical economists do not incorporate money and debt in their analysis but Keen has all this while given hints that Post-Keynesians themselves have not if you see his videos. Even the above quotes suggests as if nobody has done this before Keen. That coupled with the fact that Keen considers anyone having issues his models to be sinful of the loanable funds model. There is an irony here because Keen himself makes errors of the loanable funds approach when distinguishing bank debt and non-bank debt.
In my opinion Keen should completely get rid of this aggregate demand/change in debt slogan. Rejection of this does not mean debt is unimportant and all that. There are nice and realistic models such as that of Wynne Godley and Marc Lavoie (G&L) in which money and credit are central to the analysis and with no need at all for Keen’s fondness of aggregate demand/change in debt. These models have a very important role for aggregate demand and credit and feedback effects and so on but there is no need for inventing new definitions.
Neither is there any need for Lebesgue integrals. If one repeats Keen’s analysis where an economic unit pays for a good with a debit card or cash instead of a credit card, then it violates his own aggregate demand/change in debt definitions.