Steve Keen - De-Bunking Economics

Notes from a talk given by Steve Keen in November 2012

The State of Economics

What is the state of economics 75 years on? Economics is more akin to a crawl rather than a walk. Economists model the economy as if it is near equilibrium all of the time. But the reality is that complex systems have far from equilibrium behaviour. Complex behaviour cannot be predicted beyond a very short window - something that is well understood by weather forecasts but not by most mainstream economists.

The Butterfly Effect - 3 equilibria - all of which are unstable

Steve Keen now building a model of the Phillips Curve into his presentation ..... an unusual approach ..... to show that basic economic models do not reach equilibrium ...... indeed a slight change in the parameter of the model is that an equilibrium is never reached.

Try telling this to an AS micro or AS macro student that the equilibrium can never be achieved! Younger economists have the challenge of understanding dynamics and modelling.

Now moving onto Schumpeter

Entrepreneurs- people with good ideas but no money

Banks give them spending by creating money out of money - newly created bank debt

Conventional economists ignore banks, debt and money in their models - the Bank of England model does not include the banking sector in their models. Most A2 macro courses no longer cover anything of substance on banking too.

Back to the in-house macro modelling ..... difficult to read from 40 yards away!

Debt dynamics and the crisis

Demand in the economy is the sum of income + the change in debt

There has been a dramatic change in the behaviour of private sector debt

Huge de-leveraging has taken place, in complete opposite to the rise in government debt (private debt being squeezed / public sector debt on the rise). The steep fall in private sector debt has hit goods and service markets together with asset markets such as equities and property.

Imposed fiscal austerity linked to the fiscal cliff will take $500bn out of the economy but the danger is that this will also encourage a futher bout of private sector de-leveraging.

The change in debt has a direct bearing on the level of employment. Deceleration of debt is even greater than during the Great Depression.

Bubbles in financial markets are nothing more than Ponzi schemes; stock market investors think they are brilliant but when share prices are rising, all they are doing is changing the acceleration of debt.

75 years on from Keynes, we now understand complex systems and dynamics ...monetary economics must be at the heart of the study of economics at different levels.