Bank credit, financial intermediation and the distribution of national income all matter to macroeconomics

Abstract

The Great Recession has exposed several failings in the mainstream economics profession, including a generalised neglect of the macro role of debt and of banking. Steve Keen has proposed an alternative approach to macroeconomics which he sometimes labels as the ‘Walras–Schumpeter–Minsky Law’. His key claim seems to be that – as a consequence of endogenous money – the concepts of effective demand and aggregate supply should be redefined to include the ‘change in [private] debt’ as well as financial asset transactions. This paper cautions that doing so may generate more confusion than what the redefinitions seek to clarify. Further, while endogenous money is a fact, it is important to recognise the roles of financial intermediation and adverse trends in income distribution in shaping the macro patterns and financing relations that preceded the Great Recession in the United States.