I have long argued on this blog that Steve Keen needs to be taken seriously as an economic theorist and he had made a number of contributions that help solve key theoretical puzzles.
I will posit that one of these contributions is a major modification, indeed correction of Walras’s law. But if he is to be taken seriously then we have to see what economic theory looks like with these changes ‘plugged in’ -does it become more or less coherent? Here I look at his correction of Walras’s law and its implications for general equilibrium theory, a track I wonder if Professor Keen is interested in going down as, rightly, he sees the rigid and dogmatic approach to equilibrium theory in the current lucasian hegemony in economics as a major weakness.Decisions, Decision, Decisions
Keen's Modification of Walras’s Law, Applied to Walras’s Theories
Andrew Lainton
Lainton disagrees with the view that excess reserves don't affect bank lending and has put forward argument for it.
Growth in bank accounts do have an effect on economic activity if it leads to an increase in excess reserves which banks try to offset by increasing lending. Capital plus excess reserves is the banks budget constraint (we have covered this point, and the fallacy that reserves don’t matter in endogenous money theory, on this blog many times, and we are agreement here with all of the banking theory textbooks written from an endogenous money perspective). Of course if banks do not lend we get a seizing up of the monetary circuit.
5 comments:
I'm not sure if Lainton even knows what Walras' Law is. Here is a quote from the third para of that blog:
A brief recap, Walras’s law is that excess demand in all markets equals excess supply, they sum to zero, but if and only if an economy is in equilibrium.
Er, no. Walras Law says that the sum of excess demands across all markets equals zero. This is derived from the budget constraints of the actors involved (by assuming they hold with equality). It holds regardless of whether the economy is in equilibrium or not. It is simply a property of the mathematical consistency of the model--what MMTers would call stock-flow consistency. As a corollary, for n markets, if n-1 are in equilibrium, then the nth market is as well.
All of this is readily available from a Google search, e.g., see Wikipedia: http://en.wikipedia.org/wiki/Walras'_law
Incidentally, Godley and Lavoie (2007) write that Walras' Law is one of the principle features of their work, which they call the "budget constraint and the adding up constraint" (long-ish quote to follow but it provides a good explanation of what Walras' Law signifies):
[This constraint] says that agents must always respect their budget constraint, both in regard to their expectations and when they assess realized results. In the case of expected results this is sometimes referred to as Walras' Law... but we would rather refer to a budget constraint or a system-wide consistency requirement. In a water-tight accounting framework, the transaction flows of the ultimate sector are determined entirely by the transaction flows of the other sectors. Indeed, we shall see that this consistency requirement always implies a redundant equality. [It] means that there cannot be any black-hole. In the words of Godley and Cripps (1983: 18), 'the fact that moneyy stocks and flows must satisfy accounting identities in individual budgets and in an economy as a whole provides a fundamental law of macroeconomics analogous to the principle of conservation of energy in physics.'
The problem I have with Andrew's work is that he's rather fond of name dropping and not very good at explaining things in terms anybody else can actually understand.
Perhaps that's the town planner coming through.
I can never make sense of what he is on about.
The reserve argument is down to the amount the bank has to pay for funding on the liability side. But I see that has little to do with the reserves itself and more to do with the tightness of the central bank discount window.
'the fact that moneyy stocks and flows must satisfy accounting identities in individual budgets and in an economy as a whole provides a fundamental law of macroeconomics analogous to the principle of conservation of energy in physics.' Godley and Cripps (1983: 18) via vimothy
Mere sophistry wrt to banks. The banking system as a whole creates mere virtual liabilities since they are rarely redeemed (except during system wide bank runs, an economic catastrophe in our present system) and the assets of the banks are dependent on continual credit expansion which is impossible because lenders are only content with interest rates in excess of real economic growth and can obtain them during booms.
@ vimothy
Nick Rowe commented over there to that effect
"In the words of Godley and Cripps (1983: 18), 'the fact that moneyy stocks and flows must satisfy accounting identities in individual budgets and in an economy as a whole provides a fundamental law of macroeconomics analogous to the principle of conservation of energy in physics."
Funny, I've been making similar arguments for acouple of years now and getting all kinds of wailing and knashing of teeth in response that the concept doesn't hold in economics.
So, where does (aggregate) profit come from in a closed system?
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