Debunking Economics: An Interview with Steve Keen – Part II

Steve Keen is an Associate Professor in economics and finance at the University of Western Sydney. The second expanded edition of his popular book Debunking Economics is available now.

Interview conducted by Philip Pilkington, a journalist and writer based in Dublin, Ireland

Part I of the interview can be found here.

PP: Let’s move on to another interesting point about neoclassical economic theory. It’s my understanding that the whole system is assumed to be, at its very essence, one of ‘truck and barter’. In that I mean that they tend to ignore the fact that capitalist economies are, in reality, monetary economies and have nothing to do with barter-based economies. Yet, am I correct in saying that the neoclassicals abstract away from this in order to get away from all sorts of things that make their type of analysis more difficult? I’m thinking in particular of where profits come from and the role of credit in the capitalist system of production. Could you talk about this a little?

SK: That’s actually a strange point of the theory. There was no need to assume the non-existence of money in building a model of capitalism – fundamentally, it makes as much sense as assuming the non-existence of wings when building a model of flight. But this was an established aspect of pre-neoclassical economics long before Walras came on the scene.

David Graeber notes that right from Smith, economists have had a ‘creation myth’ that exchange began with barter and money developed subsequently. This also turns up in Jean Baptiste Say, who, rather than Smith, is the direct ancestor of neoclassical economics:

Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product; for we do not consume money, and it is not sought after in ordinary cases to conceal it: thus, when a producer desires to exchange his product for money, he may be considered as already asking for the merchandise which he proposes to buy with this money. It is thus that the producers, though they have all of them the air of demanding money for their goods, do in reality demand merchandise for their merchandise.

Now there are many elements in that which are clearly nonsense, but the proposition that producers want other goods for their goods, and don’t seek to accumulate money instead, became ingrained in neoclassical thinking.

Ironically, though this was done to abstract from money so that capitalism appeared as a social system aimed at fulfilling the consumption needs of the producers, rather than the class system Marx described it as, it has made what neoclassical economists do – attempt to model capitalism – far harder than it need be.

There is certainly a political side to it – with money abstracted from, so are profits and accumulation – but I really think that this notion that capitalism is a barter system also became ingrained because they thought it would be easier to model capitalism without money than with.

In fact, it’s as easy to model capitalism without money as it is to model birds without wings. But they won’t consider abandoning this impossible assumption and simply modelling the economy in nominal, monetary terms.

PP: One thing that you raise time and again (excuse the pun) in the book is temporality. Economists seem to be enamoured of static models that don’t take the passage of time into account. Perhaps you could comment on this. Is there some historical reason for this or what?

SK: One word: ‘EQUILIBRIUM’. Three main causes: Adam Smith’s ‘invisible hand’ metaphor; ideology; and the great economic historian Philip Mirowski’s point that neoclassical economics adopted the ‘energetics’ approach to physics that pre-dated the development of thermodynamics. Without the ‘arrow of time’ plus the knowledge that no system can be ‘perfect’ that thermodynamics gives, economists continue believing in things that physicists long ago proved were impossible: perfect efficiency in a system, reversibility of processes and independence of a system’s final state from its initial state (though this depends more on complexity theory than the 2nd law).

They’ve spent a couple of centuries trying to prove ‘the invisible hand’, with proving it meaning that the economy reaches an equilibrium in which everyone is as well off as they can be (the ideology bit). Ignorant of the 2nd law of thermodynamics (“You can’t win; you can’t break even; you can’t leave the game”), they hypothesise economic systems that are perfectly efficient. And with a methodology based still on comparative statics (DSGE models are not dynamic, they’re just another version of comparative statics where two time-separated equilibria are compared in the one model) rather than dynamics, they have remained insulated from the techniques mathematicians, engineers and computer programmers have developed in the last century to analyse non-equilibrium systems.

I also blame the development of ‘mathematics for economists’—economists teaching other economists mathematical methods. That’s all most economists do in terms of mathematical training (along with econometrics, which is economists teaching other economists statistical methods). So they don’t learn what is routinely learned by engineers and physicists who are taught mathematics by mathematicians (even though the teaching of mathematics is slanted to the needs of the dominant service group at the time). So, most of them have no knowledge of differential equations; the insolubility of many mathematical problems etc. They have instead developed their own clumsy modelling methods, which presume you can only model in equilibrium, and dynamic processes involve moving from one equilibrium to another where the time path can be ignored.

In fact most dynamic processes of any interest involve movement from one disequilibrium position through many others to a time-path-dependent disequilibrium position. The equilibria of such systems can be attractors or repellers, but they’re neither the starting point nor the ending point.

The trouble is too that this ignorant way of thinking about dynamics dominates not just the neoclassicals, but most of the rival schools of thought as well – including much of Post Keynesian economics (though there are of course exceptions there!). When I first returned to economics as a mature-age student in my mid-30s, my Post Keynesian colleagues (and then instructors) were making much noise about ‘the traverse’. I couldn’t fathom what they were on about – until I realised that they were saying that neoclassical economics was wrong to ignore dynamics since that was ‘the traverse’ from one equilibrium point to another.

I tried to tell them that this was just as much a fallacy as neoclassical methodology itself: if dynamics were simply the ‘traverse’ from one equilibrium situation to another, then the neoclassical argument that one could ignore ‘the traverse’ and focus simply on comparative statics of the beginning and end equilibria was a legitimate argument. But instead, there’s no ‘traverse’, there’s simply continuous disequilibrium. In that case, comparative statics is not merely too simple because it ignores ‘the traverse’, its wrong – because the economy will never be in any equilibrium situation.

The bizarre thing is that all they have to do is accept some of the results from their own research – like the SMD conditions that show that market demand with heterogeneous agents generates a market demand curve that doesn’t satisfy the necessary condition for equilibrium in a market of a downward-sloping demand curve – and instantly they have to do disequilibrium dynamics to be true to their own research findings. But here ideology – and bad pedagogy – intervenes, and they either distort or obscure results that undermine their own methodology, and persist with a barren, equilibrium approach.

Here I can’t resist taking a swipe at Gregory Mankiw, whose textbooks are among the most dominant in economics today, and whose students recently staged a walkout from his class at Harvard.

One of his students sprung to his defence with this reply.

In it he quoted Mankiw’s ten ‘pearls of wisdom’ that he puts across very early in his book as the insights that economics provides. Three of them are:

• Demand curves slope downward and supply curves slope upward (usually).
• Sometimes, things happen that make demand curves and supply curves shift.
• Comparative statics can be a useful way of thinking about how changes in some variables will affect changes in other variables.

The first is wrong theoretically via the SMD conditions and empirically via research into the actual cost structures of real firms (see Fred Lee’s work and also Alan Blinder’s Asking About Prices); the next two support comparative statics and, from a mathematical point of view, are also wrong. The conditions under which they could be true are that there’s only one equilibrium (or there are many but equally desirable – their ‘Pareto optimal’ nonsense), and all equilbria are attractors. Neither of those conditions applies in economics, but they practice a method that assumes they always apply.

PP: Your point about ‘the traverse’ is interesting and I think a good way to lead into a discussion of your own ‘positive’ work, rather than your ‘negative’ critique.

My first encounter with the bones of economic theory was Philip Mirowski’s historical work in his book More Heat than Light (which, not coincidentally given the broad point you’re making, you just cited now). I was instantly struck by the way neoclassical economics saw things in terms of stasis, lack of movement and, above all, equilibrium. I had read some of Norbert Weiner’s work before – particularly The Human Use of Human Beings – and was pretty well-versed in the philosophical arguments of Nietzsche, Hegel and the so-called post-structuralists. I knew that this equilibrium stuff was a complete fantasy. All systems, large and small, are always moving toward a state of entropic decay and dissolution (just as, in the same manner, we’re all moving toward death – depressing as that sometimes may be). They’re not moving toward some fantasised harmony of some sort.

Without getting too deep and philosophical: life, as Freud says somewhere, is one great struggle against death. We’re just marking time. Ditto when we do scientific analysis of any sort. We’re always just catching at the coattails of something always slipping away. ‘Equilibrium’ is just a fantasy we cook up, a harmonised ideal that we project into reality. Physicists and engineers know this. Cosmologists know this. Only theologians deny it. For them there is a heaven somewhere.

Now, for me that always meant that what economic analysis could ever achieve would always and necessarily be very, very approximate and limited. This is because we’re dealing with highly complex systems – and given that we only have a few variables to work with, we’re dealing with these highly complex systems largely in the dark. Yet you’ve spent a great deal of your career trying to model some of these systems without recourse to the priest’s heaven of ‘equilibrium’. Perhaps you could say something about this work – and its nature.

SK: It’s actually profoundly simple once you stop using the “simplifying assumptions” so beloved of neoclassical economists – simplifying assumptions like assuming that the economy is always in equilibrium, that money doesn’t matter, that you can ignore time… In fact, they’re about as “simplifying” as making it “easier” to explain how birds fly by assuming that they don’t have wings.

If you look at the history of economic thought, you’ll regularly find the leading neoclassicals saying that they should for example consider time, but that that would make analysis so much more difficult, so let’s make the “simplifying assumption” that … and on they go from there – into an impasse.

Here are some of my favorite examples of that:

If we wished to have a complete solution … we should have to treat it as a problem of dynamics. But it would surely be absurd to attempt the more difficult question when the more easy one is yet so imperfectly within our power.(Jevons 1871)

…dynamics includes statics… But the statical solution… is simpler…; it may afford useful preparation and training for the more difficult dynamical solution; and it may be the first step towards a provisional and partial solution in problems so complex that a complete dynamical solution is beyond our attainment. (Marshall, 1907)

The idea of erratic shocks represents one very essential aspect of the impulse problem in economic cycle analysis, but probably it does not contain the whole explanation … In mathematical language one could perhaps say that one introduces here the idea of an auto-maintained oscillation… It would be possible to put the functioning of this whole instrument into equations under more or less simplified assumptions about the construction and functioning of the valve, etc. I even think this will be a useful task for a further analysis of economic oscillations, but I do not intend to take up this mathematical formulation here.(Frisch 1933, pp. 33-35).

So what they did was throw the dynamic approach into the “too hard” basket, hoping that their successors would take it out of there and do it later. But neoclassicals never did this.

Now of course the tools exist to model complex dynamic systems, from the idea of systems of differential equations and systems engineering software at one end of the spectrum to cellular automata and multi-agent modelling at the other. I’ve stuck with the former “tops down” approach, and started from the perspective that we have to treat capitalism as a strictly monetary, inherently cyclical dynamic system.

The irony is that this decision not to use equilibrium and barter as “simplifying assumptions” has made my work easier, not harder. Centuries ago, mathematicians developed a method for modelling dynamic systems called “differential equations”, and with them you necessarily begin with a system that is not in equilibrium: if you start from equilibrium, then nothing happens! In the last 50 years, engineers have developed a methodology for building such systems graphically using flowcharts, and in the last 20 years, computer programmers have turned that engineering method into live “graphical user interface” programs that simulate these flowcharts on screen.

I’ve simply ported these advances into economics, while the vast majority (though certainly not all) economists don’t even know they exist. The minority who are aware of these methods and programs generally call themselves complexity theorists or something like that – people like Carl Chiarella, Thomas Lux, Peter Flaschel, Willy Semmler – and they’ve done some brilliant work. Technically, I don’t see my work as better than theirs – I don’t think I can hold a candle to Carl Chiarella for example, whose knowledge of mathematics is far stronger than mine. My advantage has come from having a richer knowledge of the history of economic thought, and therefore applying this method to turn the insights of the truly great thinkers – Marx, Schumpeter, Keynes, Fisher, Sraffa and Minsky – into dynamic mathematical models.

My first forays into this built on Richard Goodwin’s “growth cycle” model to introduce debt-financed investment into Goodwin’s simple “predator-prey” model of a class struggle between workers and capitalists (in which, to confuse both Marxists and right-wingers, technically speaking the workers are the predators and the capitalists are the prey!). With this I could model the fact that investment is debt-financed, and the model captured Minsky’s basic idea that capitalists borrow to invest during booms, but have to repay debt during a slump, with the result that debt can “ratchet up” over time, leading to a final crisis in which the debt taken on simply overwhelms the economy and it falls into a Depression.

That model generated an apparent “Great Moderation” followed by a “Great Depression”, which led me to finish my first paper on it with what I then regarded as a rhetorical flourish:

From the perspective of economic theory and policy, this vision of a capitalist economy with finance requires us to go beyond that habit of mind which Keynes described so well, the excessive reliance on the (stable) recent past as a guide to the future. The chaotic dynamics explored in this paper should warn us against accepting a period of relative tranquility in a capitalist economy as anything other than a lull before the storm. (Keen, 1995, p. 634; emphasis added)

Some flourish: in fact that’s what then happened: a period of apparent calm occurred from the 1990s till 2007, and then all hell broke loose. Neoclassicals were lulled into complacency by the apparent tranquillity, and then bang.

But I was dissatisfied with my own model because it wasn’t explicitly monetary. I finally worked out how to model money creation dynamically after becoming aware of Graziani’s work on “the monetary theory of production”, which made the point that in a monetary economy, all exchanges involve one commodity and three agents: a buyer, a seller, and a bank that effects the sale by transferring funds from the buyer’s account to the sellers. That ultimately led to the breakthrough that I could model money creation directly from double-entry bookkeeping, and now I can develop models of monetary dynamics of any desired level of complexity that way.

I’ve now developed a method of building models of financial dynamics and physical production that is embodied in simulation software. A prototype called QED (which stands for “Quesnay Economic Dynamics” in honor of the person whom I believe should be seen as the father of economics) is already available on my blog, and with the help of an INET grant I’m developing a far more comprehensive modelling tool called “Minsky”.

My vision for Minsky is that it will make it possible for undergraduates to build meaningful models of monetary macroeconomics within minutes, and also scale to the level of enabling researchers to build large scale monetary models incorporating both government and private sector money creation, multiple sectors, multiple countries, and trade and financial flows. I hope it will be the “Yellow Brick Road” to lead new students away from neoclassical economics, because one of the great weaknesses of the heterodox approach is that it hasn’t been able to match the apparent sophistication of the neoclassical paradigm and model: in place of systems of equations describing “general equilibrium”, heterodox economists have only been able to wave objections to ignoring uncertainty, etc. – they haven’t been able to offer a compelling alternative methodology (Wynne Godley’s “Social Accounting Matrix” approach was a step in the right direction, but not enough). This will I believe be a compelling alternative that will expose neoclassical methodology for what it really is – passe.

PP: And what do you make of the critique that economic models can only really give us a small insight into the actual working economy – i.e. that they are just ‘toy models’ that ‘train the brain’? The heterodox highlighting of fundamental uncertainty you highlighted above would be a good example of such a critique. Another, more recent example, would be what Yanis Varoufakis et al have called the ‘Inherent Error’ in all economic models in their new book Modern Political Economy – that’s a critique showing that the lack of any possible coherent theory of value that corresponds with any theory of growth means that models will never reflect the real world. Do you buy these critiques and if so where does it leave those, like yourself, that seek to build models of the economy?

SK: Generally I agree that economic models have to be toy models. We can build a model of the weather that lets us predict it with moderate accuracy for a week or so – a significant achievement given how chaotic fluid dynamics are. But predicting the future course of the economy over its relevant time frequency – which is years rather than weeks – is probably a forlorn ambition.

However, building a mathematical model which incorporates the factors that are qualitatively important in capitalism is not a forlorn ambition. For example, neoclassicals build models in which private debt has no important macroeconomic effect. I build models in which it does. As to which model is qualitatively more accurate, I rest my case.

There’s also a role for mathematical modelling in accurately expressing verbal logic. For example, Graziani and Circuit theorists developed a brilliant verbal model of money, but reached the bizarre conclusion that capitalists couldn’t borrow money, make a profit and repay the debt. They’d actually made a simple stock-flow error, which I was able to correct with a simple dynamic model of banking. Without that maths, Circuit Theorists had spent 20 years floundering on that issue.

I think it’s also possible to provide a quantitative context with a model, when something as extreme as our current debt bubble is considered. Given the astronomical scale of private debt today, I’m quite confident in making an empirical prediction that growth in the Western OECD will be below long term trends for some time, until debt levels are radically reduced.

On the theory of value aspects of the argument Yanis and Joe make, I differ because of my own very different analysis of Marx’s theory of value – which is detailed in my 1993 papers on Marx.

So I think they overstate their case.

PP: Do you believe a coherent theory of value exists? If so, can you lay out the basics?

SK: Boy, you are going into detail here Philip! Do you really have space for this in a Naked Capitalism interview?

Nonetheless, yes I do. It takes a lot longer than an interview to set it out, but the précis is that Marx’s basic theory of value is NOT the labour theory of value, but a dialectic between use-value and exchange value – both of which he defined in objective rather than subjective terms. Whereas neoclassicals argue that there is a relationship between (subjective) utility and (objective) cost of production [the relative price of two commodities being set when the ratio of their marginal utilities equals the ratio of their marginal costs), Marx argued that the two were incommensurable: in a primitive stage of society the utility of a product that one tribe could produce and the other could not might play a role in the price paid for it, but as exchange becomes routine he argued that the relative cost of production becomes the sole determinant of exchange value.

In consumption this simply meant that use-value played no role in setting price. But in production it meant that there could be a gap between quantitative use-value and quantitative exchange-value: the quantitative use-value of an input was its capacity to help produce a surplus, the quantitative exchange-value was its cost of production. The two were different, with the former (normally) exceeding the latter, and this was how Marx explained the source of profit.

He thought he could prove this property was limited to labour alone – so that it was consistent with the labour theory of value – but that was wrong.

I use this as the starting point of my theory of profits, but then use the dialectical method to expand it to consider the setting of wages–where the fact that labour is both a commodity and a non-commodity means that the wage will normally exceed the value of labour-power–and the pricing of capital assets–where subjective expectations of profit set price.

I set this all out in my Masters thesis and an unpublished paper “A Marx for Post Keynesians”, which are both available on my blog.

PP: Finally, what advice would you give to a student thinking of doing economics that has a nagging feeling that the neoclassical strain is complete nonsense, yet at the same time sees that it is the fundamental language in which modern policy is cast?

SK: I’d advise him/her to do an undergraduate degree in systems engineering with a minor in economics. That way you learn the language of economics while simultaneously learning how to think systemically—rather than being lobotimised in the name of education.

Other essential courses to include would be basic maths—calculus, algebra and differential equations—with basic computing, and a course in modern history (since economic history courses have been almost totally abolished). Plus do something to keep the right brain functions alive too —music, poetry, party a lot, maybe lead a student revolt…

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  1. Marley

    Thanks so much for this, PP. As someone with an engineering Bachelors about to embark on a Masters in Econ (if I could just finish that application… aaaany day now!), there was so much in the two part interview that resonated with me. I am still only learning about the ‘players’ past and present, and will definitely be following up with Steve’s book and his writings. Much Obliged.

  2. Jose

    Great interview – the only thing missing was Keen’s take on MMT.

    A topic for a later conversation with Keen, I hope.

    1. Fraud Guy

      You know, I recall my college days, when I did Econ 101 after Calc II, and wondered about Econ–is that it? Math that I learned in grade school? Surely that can’t be it?

      Apparently, it was.

      Thank you for actually doing the math, as opposed to math-lite.

  3. jake chase

    Economics survives because it provides convenient justification for corporate power grabs. Economists see no difference between the corner grocery (when those existed) and Microsoft or Alcoa or General Electric. Big business is justified by efficiency, although most of what it “produces” is now worthless junk some of which falls apart before you can drag it home from retail stores the size of Yankee Stadium where they employ twelve people. A few months ago I caused a dust up at Lowes, when I stood at the end of an isle yelling help, help! Two operatives came running up to ask what was wrong. I need some help, I told them.

    When one learns enough economics to obtain a degree (as I did) you know for certain it is all crap. Those who go on to work in the field must choose between poorly paid demolition work on the outer fringes, or toadying to the corporate masters. Steve Keen is to be commended for his choice, but effective criticism doesn’t have to be this complicated. It should be enough to observe that wealth gets increasingly concentrated, debt grows inexorably, worker lives become increasingly desperate, and assholes like Larry Kudlow keep going to the bank. What else does one need to know?

    For those seeking a sensible explanation I recommend Veblen’s Theory of Business Enterprise (1904). Just understanding that one book might make you rich.

  4. craazyman

    This is way too much for 6 in the morning guys. Hope youze guys had a few beers to get you thru.

    I’ve developed three laws of economics while riding the bus: 1) one man’s cost is another man’s revenue; 2) one man’s surplus is another man’s pile of junk; and 3) money = property like wave = particle.

    Clearly getting money is preferable to getting property in a transaction because money allows the Imagination-Wave to determine where to localize the private Money-wave into the observation of property. So you have the money because you don’t know whether you want to buy more production inputs or whether you want to go to the beach for some Tequilla shots. YOu can’t carry your inputs to the beach and exchange them in a barter transaction for a few Tequila shots and lunch. This is intuitively obvious and doesn’t require equaations.

    I wish I could model these things with Shroedinger’s equations but right now that’s impossible for me. Modeling the Imagination-wave is the hardest part. I think it needs a poly-dimensional framework with very nearly random input variables, probably based on the modulating suppression and explosion of instinct, which then needs a model. There’s a lot of models needed, which should keep us entertained until we reach final equilibrium and ascend.

  5. Rodger Malcolm Mitchell

    Two important equations:

    Gross Domestic Product = Federal Spending + Private Investment + Private Consumption + Net exports

    Federal Deficits – Net Imports = Net Private Savings

    So, based on those equations, here is a simple question you should be able to answer:

    How do federal tax increases and/or spending cuts (aka deficit reduction) reduce unemployment or grow the economy? If you can’t answer, then there clearly is something wrong with the whole super committee concept.

    Those who do not understand Monetary Sovereignty ( do not understand economics.

    Rodger Malcolm Mitchell

    1. BruceMcF

      I can answer and yet it remains the case that the Super Committee is a completely counter-productive exercise. And it could not be otherwise: the example of the economies in Europe pursuing austerity, whether by choice (UK) or forced upon them (Greece) is that austerity kills growth and causes unemployment to explode under current conditions.

      How does a government spending cut grow the economy? It depends on whether the economy is at or close to full employment and what spending is cut. If the economy is at or near full employment AND if the spending that is cut is government consumption rather than government investment, the spending cut releases real resources from consumption some of which are likely to find their way into private real investment in productive capacity.

      Since the Super Committee will be proposing spending cuts that include investment in and maintenance of necessary physical and social infrastructure, and since the economy has ample idle labor and equipment, neither condition is fulfilled. Instead, under depressed economic conditions, what is required is more demand in order to mobilize currently idle real resources. So under current conditions, the spending cuts will reduce employment and undermine growth.

      How does a tax increase grow the economy? It depends on whether the economy is at or close to full employment and the nature of the tax that is being increases. If the economy is at or close to full employment, then a tax that depresses consumption will, again, release real resources, some of which will surely ~ under full employment conditions ~ make their way into real investment in additional productive capacity.

      Under depressed economic conditions, those are exactly the kinds of tax cuts that you wish to AVOID, since the problem is not a lack of sufficient real resources to meet demand, but rather a lack of sufficient demand to fully employ available resources.

      Under the theory that the mainstream economic faith works under, the economy is always tending to full employment “in the long run”, and so the long run policies are ALWAYS, by assumption of the model, spending and tax policies that depress the economy. Now, in the real world, those are ONLY the policies to pursue in general if the economy in general is overheating, and in particular if some particular resource must be considered scarce ~ such as we in the US must consider petroleum, given that we import roughly 2/3 of our petroleum supply.

    2. craazyman

      That one’s easy. If somebody has $1 million in savings in their mattress or in a checking account, and government spending cuts convince them to invest part of it (say on personal security services or weapons), then their money wave localizes on property in the form of Investment. And the money goes from potential property to real property.

      I guess that’s the so-called Confidence Fairy, which is probably a cousin of the Photon Fairy that makes the decision where to localize each individual photon on the airy disk.

      If the tax increase siphons money that would have been saved or put in a mattress or put in checking account or speculated away on some absurd piece of art — and spends it on prudent Investment. Then the same result, but without the confidence fairy.

      Both cases would appear to involve a mechanism that translates the money wave into real property, resulting in a measurable observation of so-called “economic activity.”

      Potential economic activity is always present in proportion to nature, capital, labor and imagination — but it actualizes in response to the intersection of the various wave functions and so can gyrate all around, depending on the independent variables, which each have their own wave functions.

      It gets to be quite a mess, but follows rough laws of proportions most of the time, unless something weird happens like unrestrained fraud or lunacy or social collapse.

    3. Dan Duncan

      They’re not equations. They are FUNCTIONS.

      When are you redundant MMT-Morons going to figure this out? It changes your entire stupid argument.

      It’s not that hard. Think about it….

      Equations state a condition on a SINGLE quantity. Functions, on the other hand, express a relationship between two quantities.

      They aren’t the same thing. The stupid MMT/Monetary-Sovereign artifice is built on “equations”, which aren’t equations.

      Ain’t that right, Pilky?

      1. alex

        “Equations state a condition on a SINGLE quantity.”

        Really? When did they stop permitting equations with N variables?

        “Functions, on the other hand, express a relationship between two quantities”

        Of course functions are usually expressed as equations. There are a number of other aspects to them, but to say that something is a function is not to say that it isn’t an equation.

      2. BruceMcF

        An equation involves two mathematical expressions that are known or declare to be equal, aka “equating” the expressions.

        A function is a one to one or many to one relationship between members of a domain set and members of a range set ~ the one to one functions are invertible.

        One of the habits of the neoclassical faith is a commitment to modeling using functional equations, even for relationships that in reality are non-functional ~ many to many or one to many relationships.

    4. redleg

      you missed some variables that Keen just talked about:
      1) debt, specifically delta debt, and 2) delta time.

  6. MacCruiskeen

    “Ignorant of the 2nd law of thermodynamics (“You can’t win; you can’t break even; you can’t leave the game”),”

    I would just like to quibble that that is not the description of the 2nd law of thermodynamics, but the three laws. When I was in geek school, there was a joke going around to the effect that each of the major social organizing systems (capitalism, communism, and religion) was in opposition to one of the laws (capitalism=you can win, communism=you can break even, religion=you can get out of the game).

    1. BruceMcF

      And further, the country song lyric that summarizes the three laws is “you can’t win, you can’t break even, and you can’t get out of the game”.

  7. SattvaGuna

    “Without getting too deep and philosophical: life, as Freud says somewhere, is one great struggle against death. We’re just marking time. Ditto when we do scientific analysis of any sort. We’re always just catching at the coattails of something always slipping away. ‘Equilibrium’ is just a fantasy we cook up, a harmonised ideal that we project into reality. Physicists and engineers know this. Cosmologists know this. Only theologians deny it. For them there is a heaven somewhere.”

    I agree with your suspicions regarding comparative static models in economics. But regardless of how well-versed you think you are in the “philosophical arguments of Nietzsche, Hegel and the so-called post-structuralists,” you are not very well versed in theology. Please avoid such sweeping statements when ignorant of the topic you criticize; otherwise, you need never worry about seeming “too deep and philosophical.”

    1. Philip Pilkington

      I’m well versed enough in theology to know that most theologians assume a ‘perfect’ afterlife which resembles the economists’ equilibrium.

      1. Marat

        Phillip- I assume you know about the reswitching debate better than I do, but it would have been nice for you and SK to go into this and why several assumptions made around GE theory have been proven (and admitted by certain economists to be) logically invalid.

      2. JTFaraday

        So, we won’t be resurrecting the dead, I take it?

        Or endlessly reincarnating in the flesh or reincarnating the whole world in endless cycles of creation and destruction or anything like that?

        Which reminds me, what kind of “time” are we talking about here?

      1. liberal

        I assume you’re familiar with that really neat Isaac Asimov short story about entropic decay that ends with the line, “Let there be light!”?

    2. another

      Like most people, I am ignorant of the intricate details of astrology, yet without compunction hold that it is nonsense.

      1. Dave of Maryland

        Hello Another –

        Re: Astrology. I refer you to pg. 197 of the 2011 Farmer’s Almanac (that’s last year’s, not this year’s).

        For October 2011, for the Atlantic corridor, the last entry for the month reads, “26-31 Heavy rain, then sunny, cool.”

        This was put in print ONE FULL YEAR before the book was published, which was a year ago. It was exactly true, to the day. I thought of this when Steve mentioned that weather forecasts are only good for a week in advance.

        I once phoned the Old Farmers to congratulate them on their outstanding use of Astrometeorology, but was told in no uncertain terms that NO ASTROLOGY WAS USED. They sounded frightened that anyone would bring it up.

        I thanked them for their time, hung up, and had a good laugh. I have since determined that astrology is not the language of the stars, but the raw energy of the earth itself, expressed in planetary language as we lack any other. Since astrology radiates from the very earth itself (a sphere 8000 miles in diameter of enormous complexity), of course it predicts the weather. The weather, your life, my life, and that of everyone and everything. Including the economy which, echoing Steve, will be in the dumps into the 2020’s. Astrology has always done this, and always will.

        The ignorant are such easy targets. Please forgive me.

        1. spooz

          Sounds like Gaia theory, something the spiritual side of me used to embrace. My rural friends tell me it will be a mild winter because the squirrels coats are thick (the opposite of what you would expect). The folks in this poor county have been eating squirrel and noticing their coats and making correlations to weather for years and years.

          I say “used to embrace” because the spiritual side of me has retired into the corners, replaced by a relentless search for truth in a corrupt world. I’ve turned outside after years of nurturing the inside. If anything, the years of introspection gave me a well developed bullshit meter, and I am disgusted by the propaganda I see around me.

          2020? Guess it will be a long, long search.

  8. Ed Beaugard

    Sorry to pile on here, but you really should be more specific about the post-Keynesians. Who exactly are you talking about when you criticize them? My guess is it’s probably not Joan Robinson, since she developed a critique of neo-classical economics that’s similar to what you’re talking about here(probably before you were born).
    Also, I would be careful about “physics envy”, the whole discussion about mechanics, dynamics and rubbish like complexity theory being applied to economics is extremely misguided, as any post-Keynesian will tell you.

    1. Ed Beaugard

      “I’d advise him/her to do an undergraduate degree in systems engineering with a minor in economics.”

      No philosophy, or philosophy of science?
      You can apply systems engineering to astrology, but that doesn’t make astrology into a natural science, it merely creates another pseudo-science.
      You CANNOT WIN against neo-classical economics if you accept the ergodic axiom(as they do), and try to make economics into something resembling physics or engineering.
      Economics is a moral and not a natural science, always has been, always will be.

    2. UnlearningEcon

      I think you are in danger of not only throwing the baby out with the bathwater, but dispensing of the bathtub and redecorating your entire house, or something…

      Anyway, just because certain types of maths are bad, doesn’t mean all maths is bad. Keen’s models are *not* ergodic and they do a good job of modelling the economy. David Orrell also explores a lot of promising ground in ‘Economyths’ using complexity models.

      1. spooz

        economics is indeed a science because economists use ultr-advanced math techniques that rival if not eclipse the math used by physicists and chemists

        Why so you leftists hate economics so much? because,unlike sociology,anthropology and all other joke subjective “sciences”,the economics departments are not full of far-leftists,Marxists,socialists and all scum putting ideology over science.”

        Provocative statement there…ultra-advanced math techniques indeed.

        I’m interested in the models, as such, but am concerned that they can be utilized by gamers to enrich themselves. Having faith in models while ignoring systemic risk could serve to enable those who would choose to profit at the expense of a sustainable economy. Also, when the whole system relies on consumer confidence, which has been seriously shaken by ongoing “shocks”, I find it hard to believe a model can be created to capture it.

      2. Ed Beaugard

        “Anyway, just because certain types of maths are bad, doesn’t mean all maths is bad.”

        IT IS NOT MATH THAT IS BAD, IT IS HOW MATH IS USED THAT IS BAD(this is a very important distinction).

        Of course, systems engineering is a legitimate science in every sense, it is the APPLICATION of systems engineering to economics that is a blunder of the highest order.
        When discussing economics, one is discussing political and social phenomena, NOT the physical processes of nature.
        (I wonder sometimes why it’s so difficult to communicate this distinction).
        You might want to read Skidelsky’s biography of Keynes, or Joan Robinson, or Keynes himself on the uselessness of econometrics).

        “Keen’s models are *not* ergodic and they do a good job of modelling the economy. David Orrell also explores a lot of promising ground in ‘Economyths’ using complexity models.”

        I can’t speak to this, I can only respond to what Keen said in the interview. There’s nothing there to dissuade me that Keen’s not engaged in (roughly) the same project as Samuelson, Cochrane, Fama, Solow and others that lead to the present disaster.

        I happen to think that both complexity theory and chaos theory are rubbish, that is, they are question-begging(not question-prompting) of the highest order and are similar to the vacuous idea of “emergent properties” in biology, for example.

        P.S. If Mr. Keen is building models that computationally predict economic outcomes, he’s using the ergodic axiom. Period.
        There’s a paper by Paul Davidson on the INET site that talks about the problems of the ergodic axiom very eloquently.

        1. UnlearningEcon

          Ergodicity is about tending to equilibrium. Keen’s model does not tend to equilibrium.

          His model is one of monetary flows and as such it is not necessary to include emotion/psychology. It doesn’t claim to tell us everything about the economy but it can show us a few things, which is exactly the way models should be used.

          1. Ed Beaugard

            @Unlearning Econ:

            I don’t know where you got that about ergodicity and equilibrium, but it’s not my understanding of what is meant by the word.
            Essentially, ergodicity means that as a system moves from one state to another, the “numbers” that characterize one “phase-state” can be used to predict the properties of the next “phase-state”. This has nothing to do with “equilibrium”, one is merely isolating a system at a particular points in time.
            Also, I’m not sure about the emotion/psychology thing you’re referring to, as far as I know, that doesn’t really have anything to do with ergodicity.
            Anyway, you would find Paul Davidson’s paper on INET very useful. He’s much better at explaining ergodicity than I am, that is how I’m using it to criticize some aspects of Keen’s economics.

  9. Lafayette


    • Demand curves slope downward and supply curves slope upward (usually).
    • Sometimes, things happen that make demand curves and supply curves shift.
    • Comparative statics can be a useful way of thinking about how changes in some variables will affect changes in other variables.

    Interesting, but purely academic. I defy any economist to show me the Supply/Demand curves for, say, any commodity. Yes, they can be shown in terms of pricing versus quantity for either the Demand or Supply side, but it remains an empirical observation. And like all observations, they can change depending upon the circumstance.

    Economics is not physics, there are no laboratory tests and base data is highly empirical.

    And I fear that putting too much emphasis on just mathematical notions of Supply/Demand and regressive modeling is just “playing with the numbers”.

    In order for economics to show us “pertinence” it must open itself up to other soft-sciences, namely psychology, sociology and even anthropology.

    For instance, the “propensity to Consume” cited early in any Ec101 textbook is not only crucial to explaining Consumer Demand but it is a highly socio-psychological factor. Different strata of society show different patterns of demand. Consumer Demand can be a highly emotional economic parameter as asset bubbles have shown us time and time again.

    Who cares about the aggregate? And that is just the point: Economics today is anchored in macroeconomic theory, having left on the wayside the more interesting microeconomic happenings. That is, how is Supply and Demand manifested on the individual’s level of propensity to spend.


    Which is why the adoption of a concept called the Feel-Good-Factor finds credibility. After all, why is demand stagnant in both Europe and the US. Because, with all the media concentration on EuroZone failure, it is having an obvious effect upon propensity to spend. Which is the only cure to the generalized economic malaise, since it will spark growth, which generates jobs, which makes everybody Feel Good. So aggregate Demand expands even further, by what is called the Virtuous Cycle.

    [Until, of course, the “Finance Engineering” Dorks will find yet another way to Maximize Profits by creating dangerous Fail-Sure (instead of Fail-Safe) Investment Instruments.]

    NOTA BENE – And finally

    And finally, the economists took a battering when they, supposedly, failed to either predict the sub-prime mess or its consequences.

    The blame was far too easy. Economists did say that an asset bubble was occurring in housing. The Fed did nothing to curtail it and the Bush Administration nothing as well.

    What could they have done? The Fed is responsible for financial markets and it behooved its management to audit market practices that would have uncovered the lack of credit worthiness verifications as well as predatory pricing. (Let us hope the new Consumer Protection Administration will pick up that ball.) The administration could have increased the capital gains tax from housing that was bought and sold in a period of less than three or six-months to avoid the “flip-a-condo” mentality – that fueled the bubble.

    But in America we don’t want to regulate “business” or fiddle with taxation because that costs us jobs. Reckless Ronnie was elected to do away with “all that nonsense”.

    So when Sh*t Happens, finally, that costs us even more jobs.

  10. Joe Rebholz

    There is a more fundamental problem with economics. That is the very idea that there is an objective system — called the economy or the political economy — that exists and can be studied with or without mathematics is wrong. As Keen very well points out whatever it is, it is dynamic not static. And we humans are constantly changing “it”. So what we think “it” is changes our behavior towards it. What we need instead of the idea of some objective system that we can analyze is to DESIGN and BUILD a system which distributes its produce fairly to all humans — in particular starting with distributing the human necessities which include food, water, shelter, clothing, health care, education, non-violence, individual (not corporate) freedom to every individual human consistent with the world’s limited resources. This should be the PURPOSE of the system, instead of the present system’s purpose of maximizing individuals’ money.

    1. Lafayette


      What we need instead of the idea of some objective system that we can analyze is to DESIGN and BUILD a system which distributes its produce fairly to all humans

      Been there, done that … Great Failure. Of course, I am referring to any Centrally Planned economy, which may not be what you had in mind.

      Nonetheless, given the fact that the only alternative is the one we have – that is, a market economy – then we cannot escape the fact that it is “capitalism” per se that best suits the manner in which it functions.

      The Supply/Demand model was meant to achieve two purposes:
      • To provide consumers with goods/services that they desired, and
      • As a return for the provision of goods/services, suppliers would obtain profits.

      However one may consider a market-economy, ineluctably one is led back to its above two principle attributes.


      If, on the other hand, one thinks that the policies of Political Economy should have a larger scope than just the above three ends (goods/services/profits)) then we must define the “other attributes” that a market economy derives.

      What attributes of our present societal structure today do we want to ameliorate? Knowing our ends often indicates the means that must be employed. What some feel most absent from America’s version of a market economy is the lack of egalitarian attributes – the first and foremost of which is the paramount importance of Personal Dignity.

      Which means that if we all must work to obtain the means with which to raise a family, then we should all share in the economic profits derived from our efforts – that is, not equally but equitably. Which means that “fairness” is the key attribute of an egalitarian society.


      So the economic destiny or purpose of our society is not to create a class of individuals who need not work and live uniquely off their asset or financial rents. Our purpose is to assure that all citizens live with dignity – that is they are not abjectly poor, that they can care for their families and that they can lead useful, fulfilling lives.

      Or, in summation, that they have the means to obtain decent employment at decent wages that assures the household’s well-being.

      (household = a residence and its occupants regarded as a unit)

      1. spooz

        “Nonetheless, given the fact that the only alternative is the one we have – that is, a market economy – then we cannot escape the fact that it is “capitalism” per se that best suits the manner in which it functions.”

        I am reexamining the value of a market economy that incentivises the best and the brightest to work on new ways to game the system at the expense of a sustainable system.

        1. Lafayette

          Good luck. Gaming means, in a zero-sum “game”, that what I lose you gain and vice-versa.

          Hardly equitable, that.

    2. alex

      In engineering school one of the first thing you learn is that you have to learn to analyze before you can learn to synthesize.

      Before you design a new system, it’s a very instructive exercise to study existing systems. Not only will you learn about the pros and cons of various approaches that have been tried before, but you can sharpen your analytical tools.

  11. Susan the other

    If we started at the beginning, the dawn of money, couldn’t you say that money itself is a bank? Something that only attempts to hold value. Value is the thing that is dynamic, waxing and waning. The concept of interest is then the same as the concept of insurance, betting for and against changes in time. So interest/insurance are the monetary equivalent of religion, hope and gambling and almost by definition inflationary. Without interest and insurance we would have only relative appreciation and depreciation to establish value. It wouldn’t be steady-state because nobody can control change but it would force economies to be need based and not money based. (Since money without a need to satisfy has no use.) So isn’t this more sustainable? A world without monetary profit. I really do not understand why this is such a vilified way of looking at things. Because some horrible concensus is going to tell you what your needs are?

    1. F. Beard

      A world without monetary profit. Susan the other

      You are on to something here. The Bible commends profit making but condemns profit taking. It also forbids collecting interest from one’s fellow countrymen.

      So what kind of money form requires no usury, requires no profit taking yet allows for profit making? Ans: Common stock, a money form that shares wealth rather than reaps it.

      1. Susan the other

        Hi F. I really think all things simplified are better. I’m really not a communist. It’s just that I’m so sick of irrational rationalization that I want someone to clean up the rules.

        1. F. Beard

          Fascism tends to drive people into Communism and vice-versa. T’would be nice if we could instead settle on a just (and therefore stable) system.

  12. allis

    What a pleasure to listen in on a conversation between two intelligent men. However, I am somewhat puzzled:
    SK: “Now of course the tools exist to model complex dynamic systems, from the idea of systems of DIFFERENTIAL equations and systems engineering software at one end of the spectrum to cellular automata and multi-agent modelling at the other. I’ve stuck with the former “tops down” approach, and started from the perspective that we have to treat capitalism as a strictly monetary, inherently CYCLICAL DYNAMIC system.”
    Paul Ormerod, Why Most Things Fail, 2005. p.18:
    “The analytic techniques and mathematical tools used by nineteenth-century scientists enable us to understand a great deal of the world around us.
    These have been much less successful, however, when applied to human social and economic systems. The fundamental reason for this approach regards equilibrium–static, changeless state of the world–as the natural order of things. The whole panopoly of DIFFERENTIAL calculus, the branch of mathematics that is by far the most widely used in economics, is focused on finding equilibrium solutions, solutions in which the system is at rest, static, in which continuity and lack of changes are its hallmarks.
    This is simply not the case either with society or with the economy.” (caps added for emphasis)
    Keen seems to believe in “inherently cyclical dynamic systems.” Aren’t cycles a kind of equilibrium? Ormerod seems to believe that uncertainty, especially regarding the failure of firms, is a central fact of capitalism and that equilibria are infrequent and at best accidental.
    Who’s right? Keen? Ormerod? Both? Neither?

    1. BruceMcF

      They’re both right ~ Steve Keen is talking about systems of differential equations, not about the differential calculus. Modern computing tools allow us to model the behavior of systems of differential equations without being restricted to analytical solutions of equilibrium states of those systems.

      1. H. Alexander Ivey

        The main issue is what is “equilibrium”. Most main stream economists believe it to mean unchanging or that everything sums up to zero at any point in time. Keen is saying that this equilibrium is not correct, is not possible, and is not useful to model. The systems of equations being discussed, diff calc or diff eq, are the same thing. They model real world actions, they show how feedback works in math terms, and they show why the mainstream economist’s equilibrium idea is totally false. And no equation is to show static or dynamic action, the purpose of an equation is to show a relationship. Diff eq shows how the relationship is very much not directly proportional.

  13. UncleMilty

    To me, economics is the study of the choices people, firms, etc. make.

    economics is indeed a science because economists use ultr-advanced math techniques that rival if not eclipse the math used by physicists and chemists

    Why so you leftists hate economics so much? because,unlike sociology,anthropology and all other joke subjective “sciences”,the economics departments are not full of far-leftists,Marxists,socialists and all scum putting ideology over science

    1. John M

      “economics is indeed a science because economists use ultr-advanced math techniques that rival if not eclipse the math used by physicists and chemists”

      I’m not sure whether this statement is meant seriously or facetiously. Granted, most of the math used by physicists is elementary: algebra, trig, calculus, differential equations, etc. But overall, physicists will walk all over economists in the math they use.

      The problem with neoclassical economists is not that they use math (and the level of math), but rather that they forget a fundamental rule regarding math, computers, logic, etc.: “Garbage in, garbage out.” Alternatively, they forget to confront their theories with reality and modify them as appropriate.

      Mark Thoma linked to an article about the “limits of the scientific method in economics.” ( The author described a session where an economist presented his models and predictions of recovery from 2008’s crash:

      “For me, the striking thing about the evening was that nothing changed about his models after they were shown to be hopelessly wide of the mark. He just loaded up the equations, dumped in the latest numbers and started crunching away. I asked him whether he had altered his models in the wake of his dreadful forecast of 2008; stunningly, he hadn’t thought of the question.”

      The author viewed that as illustrating the limit of the scientific method, when in fact it blatantly violated the scientific method.

      1. BruceMcF

        Yes, Veblen long ago observed on the differences between science and what his neoclassical colleagues engaged in, in “Is Economics an Evolutionary Science” … and the problem has become, if anything, substantially worse in the past thirty years.

        Whether the mathematics in use are sophisticated or crude, a physicist is attempting to provide a cause-and-effect explanation of what is going on. The mainstream faith economists are only attempting to provide a mathematical model that EMULATES the economy. Hence the reaction of “plug in more recent data and run the model again” when a mainstream economist runs into an event that large numbers of heterodox economists predicted and which most mainstream economists had been confidently explaining was impossible a mere year or two before.

  14. kevinearick

    Separation of Power

    In any practical civil marriage, any govt/corp ism, communism, capitalism, or socialism, party A breeds party B to go get revenue for party A, which is never happy and continually increases pressure on party B, instructing party B on how to get the revenue, collapsing the tax base with increasing net tax rates.

    To temporarily sustain itself, this system must be an accounting ponzi, party B must be bred to the trough, generation to generation, and there must be excess Bs competing for a spot at the trough.

    Party C doesn’t interfere with the people raising their children for sacrifice to the Gods of Anxiety, but, eventually, party A always employs party B as majority rule to enforce the system on part C, with Family Law. That’s when things go bad for party A.

    When the system assumes marriage is anachronistic, it blows up, every time, because Omar the Tentmaker can no longer cover its obesity. A relatively tiny minority is responsible for economic growth, which is self-securitizing under the system. Real marriage has survived the test of time, but beat it if you can. You might want to build your own enterprise system technology though.

    The most important separation of power in the Constitution is between State and Church, the latter formerly housing the root marriage. Governments devolve because the form of government becomes a state religion for its self-biased agents, which was the point of freedom of religious expression, to maintain the duality, provide a net neutral government return line, and increase diverse practice in a negative feedback loop of positive feedback loops.

    You can set up any type of charge separation, but the participants must respect separation of power to sustain the necessary reactor. The distribution of marriage provides separation at the root with a stable feedback loop in multiple dimensions, and, at the root, you want adaptive stability above all else.

    But build your own operating system any way you want. Obviously, I’m an ignorant relic from the old school.

    The US Constitution is sinking from the density of inelastic laws written on behalf of the least-common-denominator majority, specifically manufactured to block out the future to preserve the past, regardless of the pr-ism employed. Funny what happens when the denominator hits the wall of 1 (global IC chip) and falls below 1 due to momentum.

    A static constitution is like an assembly line turning out diapers for robots.

      1. craazyman

        yes Kevin you’re nailing it. One has to contemplate what sort of incredible degeneration took place to produce the Hindu caste system, which is equivalent in kind but not entirely in degree, to the European class system. The Root Marriage is nearly always a total and complete fraud from the wedding day. It is the big ponzi. Everyone knows this instinctively, but it is drowned in the anxiety of flesh.

        And to your question: How to you code a movement?

        It is written in the Gospels, dude. Pretty much.

  15. Hugh

    Speaking of trying to describe a bird’s flight without reference to its wings, describing modern economies without reference to criminality and looting is much the same. What we have is kleptocracy: not criminality in the system but the system itself as criminal enterprise. Any economics that doesn’t take this core feature into account can only produce a theory that is as lost as the ones it seeks to replace.

    1. Maximilien

      “What we have is kleptocracy: not criminality in the system but the system itself as criminal enterprise. Any economics that doesn’t take this core feature into account can only produce a theory that is as lost as the ones it seeks to replace.”

      I like this. The system itself as a criminal enterprise. So when people speak of “bailouts”, they’re not really correct because the word denotes a one-time event or a series of events. But that’s not what we have.

      Rather, what we have is a PERPETUAL bailout, a relentless ongoing transfer of wealth from the many, defenseless and undefended, to the few, unassailable, predatory, insatiable. A criminal system which IS the bailout.

      So much for economic discussion that doesn’t face this fact.

      1. zadoofkaflorida

        Max, thats what RICO is for. Or has RICO too fallen by the wayside along with the rule of law? BTW – Where is Corzine?
        In his mansion with the personal assistants, tanning bed and personal chef? Should be in Rikers showering with the Aryan Nation and choosing his tats.

        1. Maximilien

          Ah yes, Corzine. CEO of Goldman 94-99. Made hundreds of millions when he took it public (not enough money for him in a private partnership I guess).

          Assuming the money from MF has been stolen, and that Corzine was involved, it’s gonna be interesting. Will the Goldman cabal circle the wagons around him? If they do, who’s gonna take the fall? What’s the story gonna be? How much lying are they (and the media) prepared to do?

          Or….are they gonna toss him to the wolves? Either way, I think we’re in for a fascinating spectacle.

  16. fp3690

    I’m very much open to any meaningful criticism to neoclassical stuff by dissenting economists. However, Prof Keen has kind of made it into a side job and somewhat loses credibility. Especially for his insistence on the way money is used where he is quite unfair. In normal times, money really has a meaningful only because of frictions – it doesn’t have any inherent value in itself with a fiat system.

    In recessionary times, which occur because private actors decide to raise their cash holding, this frictional element becomes important in itself as money essentially becomes an asset (especially under liquidity trap conditions). And it naturally has to be modelled accordingly and a few people have done so lately – the most prominent example probably being Brunnermeier.

    Criticism is crucial in any discipline, but when it becomes self serving it only serves to undermine itself.

    1. Foppe

      When was it decided that money no longer serves as a store of value? And where did you get the idea that money only becomes valuable during recessions? Both of these claims strike me as exceedingly curious.
      Furthermore, what do you make of the fact that borrowing is fundamental to investment, and to the much-vaunted “growth” thing, and how do you combine that with your assertion that money is only relevant when thinking about “frictions”? Should we take that to imply that investment and growth itself should be taken to be “frictions”?

      Anyway, your reply is far too vaguely formulated to be an actual critique.

      1. F. Beard

        Furthermore, what do you make of the fact that borrowing is fundamental to investment, … Foppe

        Actually, it is not. Common stock is a money form that allows consolidation of capital for economies of scale without borrowing, much less usury.

        Conventional money is a wealth reaping tool. That is legitimate for government debts since the government has the right to tax us but it is not alright that the banks are allowed to reap wealth too via government privileges such as a lender of last resort and government deposit insurance.

        1. digi_owl

          Didn’t the merchants of a Italian city state operate a system similar to common stock? This if one consider the idea that a common stock investor carries the risk of failure. That is, during the preparation of a merchant expedition one or more investors would put up the money to fund the expedition. And in return they would get a cut of any profits along with the return of their initial investment. Thing is tho that if the expedition was a failure, the merchant in charge was not liable for repayment of said investment.

    2. alex

      “his insistence on the way money is used where he is quite unfair. In normal times, money really has a meaningful only because of frictions – it doesn’t have any inherent value in itself with a fiat system.”

      What’s that, there’s no significant debt during non-recessionary periods?

      And what sort of nonsense is “inherent” value? Obviously fiat money only has value because people accept that it does (though gold isn’t much different, having little practical use). So what? It still gets saved and loaned.

      “In recessionary times … this frictional element becomes important in itself as money essentially becomes an asset”

      So even you admit that money is important. Even if you believe that it’s only important during recessionary times, have you considered the transition from non-recessionary to recessionary? It’s not magical and instantaneous. Much of what Keen tries to model is related to the Minsky instability hypothesis, in which debt, and hence money, is a key factor.

    3. Hugh

      Neoclassical economics built on the false foundations of rational actors, perfect information, efficiency, equilibria, and Say’s law is bogus from end to end. Yet it remains the dominant school. I can only think that this is the case because it serves as such a useful smokescreen for the looting of kleptocratic elites.

      1. YankeeFrank

        Yep. I can’t think of another profession within living memory that was so completely and suddenly discredited as mainstream economics. Of course any system of thought that has as its foundations such laughable and patently false assertions as does neoclassical economics should be taken as existing for some reason other than the one advertised. As Bill Black says, its theoclassical economics, as it is faith-based and defies reason. Of course, that gives short shrift to much of religious thought, which, since they are aimed at our spiritual well-being instead of material, are actually much more sophisticated and honest than mainstream econ. These charlatans should be booted but of course will remain as long as the current powers rule. They developed together and will perish together.

      2. liberal

        “I can only think that this is the case because it serves as such a useful smokescreen for the looting of kleptocratic elites.”

        Strangely enough, this shows that economics is at least partly a great success.

        How so? One facet of modern economic theory is that “incentives matter.”

        Now suppose you’re an economist. Clearly, at least in our current socio-economic system, your incentive is to provide comfort and cover to the kleptocratic elites. And hence (with a few noble exceptions) you do so.

        Of course, you’ll almost never see economists asking themselves what incentives they (as a class) face.

  17. Schofield

    Actually what gripes me as a tax-payer is having to pay the salaries of the economic illiterates on the Super Committee taking decisions to implode the economy. I’d rather sign up for life to pay for a crate of bananas to be delivered every day to the chimpanzees at my local zoo.

  18. Fiver

    But it seems evident to me that the presence of lack of theoretical veracity of neoclassicals OR their opposing luminaries (Krugman, say) models pales in relation to the moral and ethical and legal collapse we’ve seen over the past several decades. There’s a great big difference between being in favor, say, of “small government” and being in favor of purchasing the votes to make it happen. Or to hand trillions over to Wall Street. Or any number of sordid actions that have been largely supported by the great bulk of economists from BOTH schools.

    I suggest the “equalibrium” model can be viewed as the Ideal drawn from religion and the new tools of math/science as the GOAL, i.e., a stable, reliable, peaceful, orderly society, etc., and given pursuit of that goal with the utmost sobriety, prudence, integrity, honesty, fairness etc., I daresay it will vastly outperform a “dynamic” competing model wherein the agents all behave as appallingly as so many in our varied elite power positions, and others spread throughout the population now regularly do.

    In other words, the quality of the economics or the arguments is not what is driving these terrible policy decisions. It’s the utterly debauched character of the leadership class, the vast majority of whom have no idea what is even being debated.

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