Paul Krugman and Steve Keen see the world a bit differently.Back in April, the two economists engaged in a lengthy online debate over the nature of credit creation – essentially, Keen argues that banks are really in control of the money supply whereas Paul Krugman sees the Fed as the ultimate arbiter of credit conditions.
Emanuel Campiglio and Giovanni Bernardo, researchers at the New Economics Foundation, take a novel approach to parsing the debate. Using system dynamics, a common tool in complex systems analysis, they explain that the differences between the two economists’ views really come down to a nuanced definition of aggregate demand.
Campiglio and Bernardo even go so far as to say that “both Keen and Krugman are right in their own logic.” However, the researchers say that “Keen’s definition of aggregate demand is more appropriate” for describing and understanding modern economics.
They conclude that the change in the amount of credit extended by banks is “the crucial variable affecting the dynamics of the economy.”