I posted the following text to reddit more than a week ago, where it has not gotten any significant attention since then. I thought that the readers of this list could also find it interesting, and perhaps start a discussion about the topic.
In the last months I've been watching lectures and reading some of the work by Steve Keen, one of the few economists that managed to predict the financial crisis a few years ago and the author of the book Debunking Economics. Keen belongs to a number of non-mainstream economists that have been challenging the economic establishment for being unscientific and unwilling to admit the problems with their models. An introduction to Keen's work and the problems with mainstream macroeconomy can be found in this lecture.
Keen affirms, against orthodox economists like Krugman, that money is endogenous. Banks do not act as mere intermediaries between savers and borrowers. Almost all money in circulation is, in fact, bank credit, created by the private banks.
One consequence of this is that credit (measured as the increase of debt over time) can be considered as one of the contributing factors to aggregate demand. When the debt grows slower, its contribution to aggregate demand decreases, and when the debt decreases its rate of increase becomes negative and it actually subtracts from the aggregate demand. In other words, what the economy spends in goods and services is what it earns plus what it borrows.
If the level of debt is low compared with the GDP then the economy can handle the increase the level of debt without much problem, and this increase in debt becomes in turn a very important addition to aggregate demand. When the debt becomes unmanageable and stops growing then we have a drop in aggregate demand and therefore a recession.
Keen's proposal to get us out of this situation is what he calls a Debt Jubilee, financed by QE4P (Quantitative Easing For People) or Helicopter Money. That is, the central bank will create money and transfer it directly into the accounts of every citizen, on the condition that if the citizen has any pending debt, the money has to be used to cancel it. The idea is to reduce the level of private debt until it is manageable and it can start growing again.
Now, one of the things that I find more interesting in Keen's work is how similar it looks in many aspects to C.H Douglas' Social Credit. I don't know if Keen is familiar with Douglas' work, but when reading his work it often feels like Keen is reinventing the wheel, so to say, although he is following a much more rigorous, academic approach.
Douglas was an engineer, not an economist, and developed his theories based on his experience both as an engineer and as a cost accountant. He and Keen, each one with their own approach, seem to share a view of the economy as a dynamic system that has to be analyzed in terms of flows, and both have reached similar conclusions about the nature of money as credit and the problem of high debt.
Douglas considered two essential flows (dollars per unit of time) in the economy: the flow of prices, and the flow of purchasing power distributed as wages, salaries and dividends. He affirmed that the capitalist system is inherently flawed because the flow of purchasing power can never fully cancel the flow of prices. This imbalance can only be compensated by net exports, which of course cannot be done by all the countries at the same time, or by an ever-increasing flow of bank credit that is impossible to sustain in the long term. This diagnostic of the problem is consistent with Keen's observations about the high levels of debt, and also with his identification of credit as a source of aggregate demand.
According to Douglas, one of the obstacles to fix this problem is that the creation of credit is a monopoly held by the private banks. Once this monopoly of credit is broken it would be possible to complement the flow of wages, salaries and dividends with an additional flow of consumer credit distributed to all the citizens, without any debt attached. This was called National Dividend, and it is essentially QE4P or Helicopter money with the purpose to enable the purchase of all the consumer goods that can be produced and are demanded.
Both Keen and Douglas' solutions are based on the direct distribution of newly created, debt-free money to the citizens. The difference between Keen and Douglas is that Keen's solution is a one-off measure to kick-start the system once it has saturated. For Douglas the solution is to apply periodic injections of debt-free consumer credit to stabilize the system and avoid saturation in the first place. Using a control theory analogy: the economy behaves like an amplifier of debt. Keen's solution is to reset the amplifier if it saturates, and Douglas' solution is to add a negative feedback loop that stabilizes the system and prevents saturation.
Douglas was a controversial figure. He became surprisingly popular (considering that he is totally unknown today) in the 1930s when the Great Depression finally confirmed the predictions he made just after the first world war, but his theory was never fully understood and was dismissed as crankery by the mainstream economists. Keynes mentioned him in his General Theory as one of the few that got the diagnostic right, but he never accepted his theory either.
Douglas became very critical of bankers, who he blamed for the lack of success of Social Credit, and was accused of anti-semitism, which contributed to ostracise him even more. I wonder if now that economists are finally questioning economic theories that were accepted for decades we could end up realizing that Douglas was right all along.