Ignoring the role of private debt in an economy is like driving without accounting for your blind-spot

Steve Keen argues that neoclassical economists have a blind-spot when it comes to the role of private debt in macroeconomics. They should be worried by the incredibly high UK levels and be seeking ways to avoid the next crash

Debunking Macroeconomics

The failure of neoclassical models to warn of the economic crisis has led to some rare soul searching in a discipline not known for such introspection. The dominant reaction within the profession has been to admit the failure, but to argue that there is no need for a drastic revision of economic theory. I reject this comfortable conclusion, and argue instead that this crisis illustrates the point made beforehand by Robert Solow, that models in which macroeconomic pathologies are impossible are not adequate models of capitalism. Hicks’s critique of his own IS-LM model also indicates that, though pathologies can be imposed on an IS-LM model, it is also inappropriate for macroeconomic analysis because of its false imposition of equilibrium conditions derived from Walras’ Law. I then focus upon what I see as the key weakness in the neoclassical approach to macroeconomics which applies to both DSGE and IS-LM models: the false assumption that the money supply is exogenous. After outlining the alternative endogenous money perspective, I show that Walras’ Law must be generalized for a credit economy to what I call the “Walras-Schumpeter-Minsky Law”. The empirical data strongly supports this perspective, emphasizing the need for a “root and branch” reform of macroeconomics.

Profit Maximization, Industry Structure, and Competition: A critique of neoclassical theory

Neoclassical economics has two theories of competition between profit-maximizing firms (Marshallian and Cournot-Nash) that start from different premises about the degree of strategic interaction between firms, yet reach the same result, that market price falls as the number of firms in an industry increases. The Marshallian argument is strictly false. We integrate the different premises, and establish that the optimal level of strategic interaction between competing firms is zero. Simulations support our analysis and reveal intriguing emergent behaviors.Comment: Accepted for Physica

ROMANIA IN A POST-CREDIT CRUNCH WORLD? A CAUTIONARY TALE FROM AUSTRALIA AND AMERICA

We present data on debt accumulation in Australia and the United States, and tentative data on Romania, to pose the question of whether Romania might experience a credit crunch as a result of the US subprime financial crisis. We develop a model of a credit crunch in a pure credit economy with endogenous money creation to show how changes in bank lending practices and borrower repayment behaviour can bring about an economic decline.Macroeconomics, Monetary Policy, Debt Deflation, Financial Instability

Romania in a post-credit crunch world? A cautionary tale from Australia and America

We present data on debt accumulation in Australia and the United States, and tentative data on Romania, to pose the question of whether Romania might experience a credit crunch as a result of the US subprime financial crisis. We develop a model of a credit crunch in a pure credit economy with endogenous money creation, to show how changes in bank lending practices and borrower repayment behaviour can bring about an economic decline.Comment: 21 pages, 12 figure

Esta não é inflação dos seus pais

This paper provides a theoretical and historical analysis of inflation in monetary production economies since World War II. It shows that the “Keynesian” interpretations of the Phillips curve trade-off and the monetarist interpretations of “inflationary expectations” and the natural rate of unemployment did not establish the proper causal relationship between credit and unemployment, and between costs and inflation. It was Hyman Minsky, an American economist, who – following Keynes' ideas and the bank endogenous currency approach – showed that it is the increase (or reduction) in credit that explains the reduction (increase) in unemployment. The resurgence of inflation today can be explained by a Kaleckian approach in which the reduction of productivity is the efficient cause of an inflation that can become persistent.Este artículo hace un análisis teorético e histórico de la inflación en las economías monetarias de producción desde la Segunda Guerra mundial. Muestra que las interpretaciones “keynesianas” del trade off de la curva de Phillips y las monetaristas de las “expectativas inflacionarias” y la tasa natural de desempleo no establecieron la relación causal apropiada entre crédito y desempleo, y entre costos e inflación. Fue Hyman Minsky, un economista estadounidense, quien siguiendo las ideas de Keynes y el enfoque de la moneda endógena bancaria– mostró que el aumento (o la reducción) del crédito es lo que explica la reducción (el aumento) del desempleo. El resurgimiento de la inflación en la actualidad se puede explicar con un enfoque kaleckiano en el que la reducción de la productividad es causa eficiente de una inflación que puede llegar a ser persistente.Este artigo fornece uma análise teórica e histórica da inflação nas economias de produção monetária desde a Segunda Guerra Mundial. Ele mostra que as interpretações “keynesianas” da curva de Phillips e as interpretações monetaristas das “expectativas inflacionárias” e da taxa natural de desemprego não estabeleceram a devida relação causal entre crédito e desemprego, e entre custos e inflação. Foi Hyman Minsky, um economista americano, que – seguindo as ideias de Keynes e a abordagem da moeda endógena do banco – mostrou que é o aumento (ou diminuição) do crédito que explica a redução (aumento) do desemprego. O ressurgimento da inflação hoje pode ser explicado por uma abordagem Kaleckian na qual a redução da produtividade é uma causa eficiente da inflação que pode se tornar persistente

A péssima economia neoclássica da mudança climática

Forecasts by economists of the economic damage from climate change have been notably sanguine, compared to warnings by scientists about damage to the biosphere. This is because economists made their own predictions of damages, using three spurious methods: assuming that about 90% of GDP will be unaffected by climate change, because it happens indoors; using the relationship between temperature and GDP today as a proxy for the impact of global warming over time; and using surveys that diluted extreme warnings from scientists with optimistic expectations from economists. Nordhaus has misrepresented the scientific literature to justify the using a smooth function to describe the damage to GDP from climate change. Correcting for these errors makes it feasible that the economic damages from climate change are at least an order of magnitude worse than forecast by economists, and may be so great as to threaten the survival of human civilization.Las predicciones de los economistas del daño a la economía causado por el cambio climático son demasiado optimistas en comparación con las advertencias de los científicos sobre el daño a la biosfera. Esto se debe ante todo a que los economistas predicen los daños usando tres métodos espurios: suponen que un 90% del PIB no será afectado por el cambio climático porque ocurre puertas adentro; usan la relación actual entre temperatura y PIB como proxy del impacto del calentamiento global, y encuestas que diluyen las advertencias extremas de los científicos con las expectativas optimistas de los economistas. Nordhaus ha malinterpretado la literatura científica para justificar el uso de una función suave que describa el daño del cambio climático al PIB. Cuando se corrigen estos errores los daños pueden ser al menos un orden de magnitud peores que los que predicen los economistas y tan graves que amenazan la supervivencia de la civilización humana.As previsões dos economistas sobre danos à economia devido à mudança climática são excessivamente otimistas em comparação com as advertências doscientistas sobre os danos à biosfera. Isso ocorre principalmente porque os economistas prevêem os danos usando três métodos espúrios: eles presumem que 90% do PIB não será afetado pelas mudanças climáticas porque elas ocorrem em ambientes fechados; eles usam a relação atual entre temperatura e PIB como um proxy para o impacto do aquecimento global e pesquisas que diluem os alertas extremos dos cientistas com as expectativas otimistas dos economistas. Nordhaus interpretou mal a literatura científica para justificar o uso de uma função suave para descrever os danosda mudança climática ao PIB. Quando esses erros são corrigidos, o dano pode ser pelo menos uma ordem de magnitude pior do que os economistas prevêem e tão grave que ameaça a sobrevivência da civilização humana