Tuesday, September 16, 2014

Lars P. Syll — Krugman and Mankiw on loanable funds — so wrong, so wrong


Nice quote from Bill Vickrey's  Fifteen Fatal Fallacies of Financial Fundamentalism. I hope Paul Krugman will read the whole thing. Then we might get some forward motion from him. Greg Mankiew on the other hand?

Lars P. Syll’s Blog
Krugman and Mankiw on loanable funds — so wrong, so wrong
Lars P. Syll | Professor, Malmo University

2 comments:

circuit said...

Liquidity preference vs loanable funds? Which is right?

One theory (liquidity preference) points to the STOCK of money (its quantity demanded and quantity supplied) as the mechanism which determines the interest rate. The interest rate adjusts to equate the quantity supplied of money with the quantity demanded.

The other theory (loanable funds) points to FLOWS as measured through time. The rate of interest adjusts to equate the quantity demanded of these flows with the quantity supplied. The demand for so-called "loanable funds" simply reflects the borrowing plans by net borrowers while the supply of so-called "loanable funds" reflects lending plans by net lenders.

Which is right?

I would say that the economy is essentially a completely interdependent system. In such a system, there is NO way of disassociating one from the other. They are looking at the same thing from a different vantage point.

PS: "Loanable funds" may have been at one time described as equivalent to bank deposits and savings, but this was discarded long ago. Today, economists (including mainstream folks) simply refer to loanable funds theory as the view that focuses on FLOWS between net lenders and net borrowers rather than on the STOCK of money in the economy. Modern loanable funds theory is actually quite useful, especially for those who are interested in sectoral balances analysis.

Tom Hickey said...

Thanks for explaining that, circuit. Evernoted.