Neo­clas­si­cal Eco­nom­ics: mad, bad, and dan­ger­ous to know

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The whole of the most recent Real World Eco­nom­ics Review (for­merly known as the Post-Autis­tic Eco­nom­ics Review) is devoted to the ques­tion of “How should the col­lapse of the world finan­cial sys­tem affect eco­nom­ics?”.

My paper, which led vol­ume 49, is repro­duced below. If you’d like to read the entire vol­ume, click here for the online ver­sion and here for the PDF. You can also go here for back issues, and to sub­scribe for free.

The most impor­tant thing that global finan­cial cri­sis has done for eco­nomic the­ory is to show that neo­clas­si­cal eco­nom­ics is not merely wrong, but dan­ger­ous.

Neo­clas­si­cal eco­nom­ics con­tributed directly to this cri­sis by pro­mot­ing a faith in the innate sta­bil­ity of a mar­ket econ­omy, in a man­ner which in fact increased the ten­dency to insta­bil­ity of the finan­cial sys­tem. With its false belief that all insta­bil­ity in the sys­tem can be traced to inter­ven­tions in the mar­ket, rather than the mar­ket itself, it cham­pi­oned the dereg­u­la­tion of finance and a dra­matic increase in income inequal­ity. Its equi­lib­rium vision of the func­tion­ing of finance mar­kets led to the devel­op­ment of the very finan­cial prod­ucts that are now threat­en­ing the con­tin­ued exis­tence of cap­i­tal­ism itself.

Simul­ta­ne­ously it dis­tracted econ­o­mists from the obvi­ous signs of an impend­ing crisis—the asset mar­ket bub­bles, and above all the ris­ing pri­vate debt that was financ­ing them. Para­dox­i­cally, as capitalism’s “per­fect storm” approached, neo­clas­si­cal macro­econ­o­mists were absorbed in smug self-con­grat­u­la­tion over their appar­ent suc­cess in tam­ing infla­tion and the trade cycle, in what they termed “The Great Mod­er­a­tion”. Ben Bernanke’s con­tri­bu­tion to this is worth quot­ing at length:

… the low-infla­tion era of the past two decades has seen not only sig­nif­i­cant improve­ments in eco­nomic growth and pro­duc­tiv­ity but also a marked reduc­tion in eco­nomic volatil­ity…, a phe­nom­e­non that has been dubbed “the Great Mod­er­a­tion”. Reces­sions have become less fre­quent and milder, and … volatil­ity in out­put and employ­ment has declined sig­nif­i­cantly… The sources of the Great Mod­er­a­tion remain some­what con­tro­ver­sial, but … there is evi­dence for the view that improved con­trol of infla­tion has con­tributed in impor­tant mea­sure to this wel­come change in the econ­omy … (Bernanke, 2004; empha­sis added)

It is all very well to have eco­nomic the­ory dom­i­nated by a school of thought with an innate faith in the sta­bil­ity of mar­kets when those mar­kets are for­ever gaining—whether by growth in the phys­i­cal econ­omy, or via ris­ing prices in the asset mar­kets. In those cir­cum­stances, aca­d­e­mic econ­o­mists aligned to PAECON can rail about the log­i­cal incon­sis­ten­cies in main­stream eco­nom­ics all they want: they will be, and were, ignored by gov­ern­ment, the busi­ness com­mu­nity, and most of the pub­lic, because their con­cerns don’t appear to mat­ter.

They can even be put down as crit­ics of capitalism—worse still, as pro­po­nents of socialism—because it seems to those out­side acad­e­mia, and to neo­clas­si­cal econ­o­mists as well, that what they are attack­ing is not eco­nomic the­ory, but cap­i­tal­ism itself: “You think mar­kets are unsta­ble? Shame on you!”

The story is entirely dif­fer­ent when asset mar­kets crash beneath a moun­tain of debt, and the ensu­ing fall­out threat­ens to take the phys­i­cal econ­omy with it. Now it should be pos­si­ble to have the crit­ics of neo­clas­si­cal eco­nom­ics appre­ci­ated for what we really are: crit­ics of a fun­da­men­tally false the­ory of the oper­a­tions of a mar­ket econ­omy, and ten­ta­tive devel­op­ers of a new, real­is­tic analy­sis of the nature of cap­i­tal­ism, warts and all.

Changing Pedagogy

Given how severe this cri­sis has already proven to be, the reform of eco­nomic the­ory and edu­ca­tion should be an easy and urgent task. But that is not how things will pan out. Though the “irre­sistible force” of the Global Finan­cial Cri­sis is indeed immense, so to is the iner­tia of the “immov­able object” of eco­nomic belief.

Despite the sever­ity of the cri­sis in the real world, aca­d­e­mic neo­clas­si­cal econ­o­mists will con­tinue to teach from the same text­books in 2009 and 2010 that they used in 2008 and ear­lier (lazi­ness will be as influ­en­tial a fac­tor here as ide­o­log­i­cal com­mit­ment). Rebels econ­o­mists will be embold­ened to pro­claim “I told you so” in their non-core sub­jects, but in the core micro,  macro and finance units, it will be busi­ness as usual vir­tu­ally every­where. Many under­grad­u­ate eco­nom­ics stu­dents in the com­ing years will sit gob­s­macked. as their lec­tur­ers recite text­book the­ory as if there is noth­ing extra­or­di­nar­ily dif­fer­ent tak­ing place in the real econ­omy.

The same will hap­pen in the aca­d­e­mic jour­nals. The edi­tors of the Amer­i­can Eco­nomic Review and the Eco­nomic Jour­nal are unlikely to con­vert to Post Key­ne­sian or Evo­lu­tion­ary Eco­nom­ics or Econo­physics any time soon—let alone to be replaced by edi­tors who are already prac­ti­tion­ers of non-ortho­dox thought. The bat­tle against neo­clas­si­cal eco­nomic ortho­doxy within uni­ver­si­ties will be long and hard, even though its fail­ure will be appar­ent to those in the non-aca­d­e­mic world.

Much of this will be because neo­clas­si­cal econ­o­mists are gen­uinely naïve about their role in caus­ing this cri­sis. From their per­spec­tive, they will inter­pret the cri­sis as due to poor reg­u­la­tion, and to gov­ern­ment inter­ven­tion in areas that should have been left to the mar­ket. Aspects of the cri­sis that can­not be solely attrib­uted to those causes will be cov­ered by appeal­ing to embell­ish­ments to basic neo­clas­si­cal the­ory. Thus, for exam­ple, the Sub­primes Scam will be por­trayed as some­thing eas­ily explained by the the­ory of asym­met­ric infor­ma­tion.

They will seri­ously believe that the cri­sis calls not for the abo­li­tion of neo­clas­si­cal eco­nom­ics, but for its teach­ings to be more widely known. The very thought that this finan­cial cri­sis should require any change in what they do, let alone neces­si­tate the rejec­tion of neo­clas­si­cal the­ory com­pletely, will strike them as incred­i­ble.

In this sense, they are like the Maxwellian physi­cists about whom Max Planck remarked that “A new sci­en­tific truth does not tri­umph by con­vinc­ing its oppo­nents and mak­ing them see the light, but rather because its oppo­nents even­tu­ally die, and a new gen­er­a­tion grows up that is famil­iar with it” (Kuhn 1970,  p. 150).

But physics is charmed in com­par­i­son to eco­nom­ics, since it is inher­ently an empir­i­cal dis­ci­pline, and quan­tum mechan­ics gave the only expla­na­tion to the empir­i­cally quan­tifi­able black body prob­lem. Planck’s con­fi­dence that a new gen­er­a­tion would take the place of the old was there­fore well-founded. But in eco­nom­ics, not only will the neo­clas­si­cal old guard resist change, they could, if eco­nomic cir­cum­stances sta­bilise, give rise to a new gen­er­a­tion that accepts their inter­pre­ta­tion of the cri­sis. The is how the suc­cess of the Key­ne­sian counter-rev­o­lu­tion came about, and it is why we have we entered this cri­sis with an even more rabid neo­clas­si­cism than con­fronted Keynes in the 1930s.

The first thing that the global finan­cial cri­sis should there­fore do to eco­nom­ics is to gal­vanise stu­dent protest about the lack of debate within aca­d­e­mic eco­nom­ics itself, because dis­si­dent aca­d­e­mic econ­o­mists will be unable to shift the tuition of eco­nom­ics them­selves with­out mas­sive pres­sure from the stu­dent body.

I speak from my own expe­ri­ence, when I was one of many stu­dents who agi­tated against neo­clas­si­cal eco­nom­ics in the early 1970s at Syd­ney Uni­ver­sity, and cam­paigned for the estab­lish­ment of a Polit­i­cal Econ­omy Depart­ment. Were it not for the protests by the stu­dents against what we then rightly saw as a deluded approach to eco­nom­ics, the non-neo­clas­si­cal staff at Syd­ney Uni­ver­sity would have been unable to affect change them­selves.

Though we won that bat­tle at Syd­ney Uni­ver­sity, we lost the war. The eco­nomic down­turn of the mid-1970s allowed for the defeat of what Joan Robin­son aptly called the Bas­tard Key­ne­sian­ism of that era, and its replace­ment by Friedman’s “mon­e­tarism”. Our protests were also wrongly char­ac­terised as being essen­tially anti-cap­i­tal­ist. Though there were indeed many who were anti-cap­i­tal­ist within the Polit­i­cal Econ­omy move­ment, the real tar­get of stu­dent protest was a poor the­ory of how cap­i­tal­ism oper­ates, and not cap­i­tal­ism itself.

Sim­i­lar obser­va­tions can be made about the PAECON move­ment today, where stu­dent dis­sat­is­fac­tion with neo­clas­si­cal eco­nom­ics in France spilled over into a world­wide move­ment. Though the ini­tial impact of the move­ment was sub­stan­tial, neo­clas­si­cal dom­i­nance of eco­nomic ped­a­gogy con­tin­ued unabated. The move­ment per­sisted, but its rel­e­vance to the real econ­omy was not appre­ci­ated because that econ­omy appeared to be boom­ing. Now that the global econ­omy is in cri­sis, stu­dent pres­sure is needed once more to ensure that, this time, real change to eco­nomic ped­a­gogy occurs.

Busi­ness pres­sure is also essen­tial. Busi­ness groups to some degree naively believed that those who pro­claimed the virtues of the mar­ket sys­tem, and who argued on their side in dis­putes over income dis­tri­b­u­tion, were their allies in the acad­emy, while crit­ics of the mar­ket were their ene­mies. I hope that this finan­cial cat­a­stro­phe will con­vince the busi­ness com­mu­nity that its true friends in the acad­emy are those who under­stand the mar­ket sys­tem, whether they crit­i­cise or praise it. As much as we need stu­dents to revolt over the teach­ing of eco­nom­ics, we need busi­ness to bring pres­sure on aca­d­e­mic eco­nom­ics depart­ments to revise their cur­ric­ula because of the finan­cial cri­sis.

Changing Economics

The ped­a­gogic pres­sure from stu­dents and the wider com­mu­nity has to be matched by the accel­er­ated devel­op­ment of alter­na­tives to neo­clas­si­cal eco­nom­ics. Though we know much more today about the innate flaws in neo­clas­si­cal thought than was known at the time of the Great Depres­sion (Keen 2001), the devel­op­ment of a fully-fledged alter­na­tive to it is still a long way off. There are mul­ti­ple alter­na­tive schools of thought extant—from Post Key­ne­sian to Evo­lu­tion­ary and Behav­ioural Eco­nom­ics, and Econophysics—but these are not devel­oped enough to pro­vide a fully fledged alter­na­tive to neo­clas­si­cal eco­nom­ics.

This should not dis­suade us from dis­pens­ing com­pletely with the neo­clas­si­cal approach. For some sub­stan­tial period, and espe­cially while the actual econ­omy remains in tur­moil, we have to accept a period of tur­moil in the teach­ing of and research into eco­nom­ics. Hang­ing on to parts of a failed par­a­digm sim­ply because it has com­po­nents that other schools lack would be a tragic mis­take, because it is from pre­cisely such relics that a neo­clas­si­cal vision could once again become dom­i­nant when—or rather if—the mar­ket econ­omy emerges from this cri­sis.

Key here should be a rejec­tion of neo­clas­si­cal micro­eco­nom­ics in its entirety. This was the miss­ing com­po­nent of Keynes’s rev­o­lu­tion. While he tried to over­throw macro­eco­nom­ics shib­bo­leths like Say’s Law, he con­tin­ued to accept not merely the micro­eco­nomic con­cepts such as per­fect com­pe­ti­tion, but also their unjus­ti­fied pro­jec­tion into macro­eco­nomic areas—as with his belief that the mar­ginal pro­duc­tiv­ity the­ory of income dis­tri­b­u­tion, which is fun­da­men­tally a micro con­cept, applied at the macro level of wage deter­mi­na­tion.

From this fail­ure to expunge the micro­eco­nomic foun­da­tions of neo­clas­si­cal eco­nom­ics from post-Great Depres­sion eco­nom­ics arose the “micro­foun­da­tions of macro­eco­nom­ics” debate that led ulti­mately to ratio­nal expec­ta­tions rep­re­sen­ta­tive agent macro­eco­nom­ics, in which the econ­omy is mod­elled as a sin­gle util­ity max­imis­ing indi­vid­ual who is blessed with per­fect knowl­edge of the future.

For­tu­nately, behav­ioural eco­nom­ics pro­vides the begin­nings of an alter­na­tive vision as to how indi­vid­u­als oper­ate in a mar­ket envi­ron­ment, while multi-agent mod­el­ling and net­work the­ory give us foun­da­tions for under­stand­ing group dynam­ics in a com­plex soci­ety. They explic­itly empha­sise what neo­clas­si­cal eco­nom­ics has evaded: that aggre­ga­tion of het­ero­ge­neous indi­vid­u­als results in emer­gent prop­er­ties of the group which can­not be reduced to the behav­iour of any “rep­re­sen­ta­tive indi­vid­ual” amongst them. These approaches should replace neo­clas­si­cal micro­eco­nom­ics com­pletely.

The changes to eco­nomic the­ory beyond the micro level involve a com­plete recant­ing of the neo­clas­si­cal vision. The vital first step here is to aban­don the obses­sion with equi­lib­rium.

The fal­lacy that dynamic processes must be mod­elled as if the sys­tem is in con­tin­u­ous equi­lib­rium through time is prob­a­bly the most impor­tant rea­son for the intel­lec­tual fail­ure of neo­clas­si­cal eco­nom­ics. Math­e­mat­ics, sci­ences and engi­neer­ing long ago devel­oped tools to model out of equi­lib­rium processes, and this dynamic approach to think­ing about the econ­omy should become sec­ond nature to econ­o­mists.

An essen­tial ped­a­gogic step here is to hand the teach­ing of math­e­mat­i­cal meth­ods in eco­nom­ics over to math­e­mat­ics depart­ments. Any math­e­mat­i­cal train­ing in eco­nom­ics, if it occurs at all, should come after stu­dents have done at least basic cal­cu­lus, alge­bra and dif­fer­en­tial equations—the last area being one about which most econ­o­mists of all per­sua­sions are woe­fully igno­rant. This simul­ta­ne­ously explains why neo­clas­si­cal econ­o­mists obsess too much about proofs, and why non-neo­clas­si­cal econ­o­mists like those in the Cir­cuit School (Graziani 1989) have had such dif­fi­cul­ties in trans­lat­ing excel­lent ver­bal ideas about credit cre­ation into coher­ent dynamic mod­els of a mon­e­tary pro­duc­tion econ­omy (c.f. Keen 2009).

Neo­clas­si­cal eco­nom­ics has effec­tively insu­lated itself from the great advances made in these gen­uine sci­ences and engi­neer­ing in the last forty years, so that while its con­cepts appear dif­fi­cult, they are quaint in com­par­i­son to the sophis­ti­ca­tion evi­dent today in math­e­mat­ics, engi­neer­ing, com­put­ing, evo­lu­tion­ary biol­ogy and physics. This iso­la­tion must end, and for a sub­stan­tial while eco­nom­ics must eat hum­ble pie and learn from these dis­ci­plines that it has for so long stu­diously ignored. Some researchers from those fields have called for the whole­sale replace­ment of stan­dard eco­nom­ics cur­ric­ula with at least the build­ing blocks of mod­ern thought in these dis­ci­plines, and in the light of the cat­a­stro­phe econ­o­mists have vis­ited upon the real world, their argu­ments carry sub­stan­tial weight.

For exam­ple, in response to a paper crit­i­cal of trends in econo­physics (Gal­le­gatti et al. 2006), the physi­cist Joe McCauley responded that, though some of the objec­tions were valid, the prob­lems in eco­nom­ics proper were far worse. He there­fore sug­gested that:

the econ­o­mists revise their cur­ricu­lum and require that the fol­low­ing top­ics be taught: cal­cu­lus through the advanced level, ordi­nary dif­fer­en­tial equa­tions (includ­ing advanced), par­tial dif­fer­en­tial equa­tions (includ­ing Green func­tions), clas­si­cal mechan­ics through mod­ern non­lin­ear dynam­ics, sta­tis­ti­cal physics, sto­chas­tic processes (includ­ing solv­ing Smoluchowski–Fokker–Planck equa­tions), com­puter pro­gram­ming (C, Pas­cal, etc.) and, for com­plex­ity, cell biol­ogy. Time for such classes can be obtained in part by elim­i­nat­ing micro- and macro-eco­nom­ics classes from the cur­ricu­lum. The stu­dents will then face a much harder cur­ricu­lum, and those who sur­vive will come out ahead. So might soci­ety as a whole. (McCauley 2006, p. 608; empha­sis added)

The eco­nomic the­ory that should even­tu­ally emerge from the rejec­tion of neo­clas­si­cal eco­nom­ics and the basic adop­tion of dynamic meth­ods will come much closer than neo­clas­si­cal eco­nom­ics could ever do to meet­ing Marshall’s dic­tum that “The Mecca of the econ­o­mist lies in eco­nomic biol­ogy rather than in eco­nomic dynam­ics” (Mar­shall 1920: xiv). As Veblen cor­rectly sur­mised over a cen­tury ago (Veblen 1898), the fail­ure of eco­nom­ics to become an evo­lu­tion­ary sci­ence is the prod­uct of the opti­mis­ing frame­work of the under­ly­ing par­a­digm, which is inher­ently anti­thet­i­cal to the process of evo­lu­tion­ary change. This rea­son, above all oth­ers, is why the neo­clas­si­cal mantra that the econ­omy must be per­ceived as the out­come of the deci­sions of util­ity max­imis­ing indi­vid­u­als must be rejected.

Eco­nom­ics also has to become fun­da­men­tally a mon­e­tary dis­ci­pline, right from the con­sid­er­a­tion of how indi­vid­u­als make mar­ket deci­sions through to our under­stand­ing of macro­eco­nom­ics. The myth of “the money illu­sion” (which can only true in a world with­out debt) has to be dis­pelled from day one, while our macro­eco­nom­ics has to be that of a mon­e­tary econ­omy in which nom­i­nal mag­ni­tudes matter—precisely because they are the link between the value of cur­rent out­put and the financ­ing of accu­mu­lated debt. The dan­gers of exces­sive debt and defla­tion sim­ply can­not be com­pre­hended from a neo­clas­si­cal per­spec­tive, which—along with the inabil­ity to rea­son out­side the con­fines of equilibrium—explains the profession’s fail­ure to assim­i­late Fisher’s pre­scient warn­ings (Fisher 1933; few peo­ple realise that Friedman’s pre­ferred rate of infla­tion in his “Opti­mum Quan­tity of Money” paper was “a decline in prices at the rate of at least 5 per cent per year, and per­haps decid­edly more”; Fried­man 1969, p. 46, empha­sis added).

The dis­ci­pline must also become fun­da­men­tally empir­i­cal, in con­trast to the faux empiri­cism of econo­met­rics. By this I mean bas­ing itself on the eco­nomic and finan­cial data first and foremost—the col­lec­tion and inter­pre­ta­tion of which has been the hall­mark of con­tri­bu­tions by econophysicists—and by respect­ing eco­nomic his­tory, a topic that has been expunged from eco­nom­ics depart­ments around the world. It, along with a non-Whig approach to the his­tory of eco­nomic thought, should be restored to the eco­nom­ics cur­ricu­lum. Names that cur­rently are absent from mod­ern eco­nom­ics courses (Marx, Veblen, Keynes, Fisher, Kalecki, Schum­peter, Min­sky, Sraffa, Good­win, to name a few) should abound in such courses.

Iron­i­cally, one of the best calls for a focus on the empir­i­cal data sans a pre­ced­ing eco­nomic model came from two of the most com­mit­ted neo­clas­si­cal authors, 2004 Nobel Prize win­ners Finn Kyd­land and Edward Prescott, when they noted that “the report­ing of facts—without assum­ing the data are gen­er­ated by some prob­a­bil­ity model—is an impor­tant sci­en­tific activ­ity. We see no rea­son for eco­nom­ics to be an excep­tion” (Kyd­land & Prescott 1990, p. 3). The fail­ure of these authors to live up to their own stan­dards1 should not be repli­cated in post-neo­clas­si­cal eco­nom­ics.


About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Aac


    We are agree­ment 90% except for:

    The crises that are cur­rently occur­ring are a fault of bad gov­ern­ment reg­u­la­tion, based upon a faulty belief that free­ing mar­kets to the great­est pos­si­ble extend will result in the best out­comes.”

    You are say­ing that gov­ern­ments have been per­suaded by neo-clas­si­cals that unreg­u­lated mar­kets are best. I would agree with that. Then you also agree that there has been inter­fer­ence (FHOG for exam­ple) by the gov­ern­ment, which I guess is not reg­u­la­tion, that has also been dam­ag­ing. Is this inter­fer­ence caused by the neo-clas­si­cals or it sim­ply gov­ern­ment seek­ing to win the next elec­tion. I would argue it’s the lat­ter. Gov­ern­ment has no right in inter­fer­ing in mar­kets (ie. price fix­ing) just as they have no right in inter­fer­ing with the judi­ciary. Gov­ern­ment how­ever have every right in enforc­ing reg­u­la­tion but here again is where they have let us down.

    Mar­kets will never be free and sub­ject to demo­c­ra­tic con­straints until the busi­ness class – as a sys­tem of power – can be dealt with first. … They extol neolib­er­al­ism, a sys­tem of pub­lic sub­sidy, pri­vate profit – essen­tially a sys­tem of state pro­tec­tion for the rich, free mar­ket dis­ci­pline for the rest – clothed in the ideal of the mar­ket.”

    Again agree; the phrase I asso­ciate with all that is sim­ply ‘cor­rup­tion’. The idea that our gov­ern­ment gives tax pay­ers money to unpro­duc­tive enter­prises at the expense of pro­duc­tive enter­prises is again sim­ply to win the next elec­tion. They may even be right in that it saves jobs but only tem­porar­ily as in the long run if you have peo­ple doing things that don’t assist pro­duc­tion then you are wast­ing time as those peo­ple should be actively seek­ing to be pro­duc­tive whether it be start­ing their own enter­prise or re-edu­cat­ing them­selves in another field.

    Keen has pointed out that the abil­ity of a freed finan­cial sys­tem to gen­er­ate endoge­nous credit under dereg­u­lated con­di­tions will still result in the cre­ation of spec­u­late bub­bles in asset mar­kets”

    Yes, you will always get bub­bles as people’s desires, such as I must have the lat­est shoes and will pay any­thing for them, will run ahead of them­selves. Big bub­bles can be depressed by lim­it­ing lever­age. Steve’s formulation’s show this to be the case with his Min­sky debt cycles going chaotic under large debt. Thus as much as I respect and encour­age Steve’s work I think it is com­mon knowl­edge that lever­age is the killer. You may say that neo-clas­si­cals dis­re­gard debt but I doubt it. There’s now way the Fed or the RBA did not see this com­ing; there’s just too many bub­bles lit­tered through­out his­tory. I refuse to believe that Costello and Swan are unaware of the dan­gers of too much debt. In other words they are guilty of inflict­ing great pain to the ordi­nary cit­i­zen and for that they should pay along with the rest of the rat bags. One could say that the peo­ple voted them in and the peo­ple deserve what they get – caveat emp­tor – and I would say yes.

    In sum­mary; you would like to pur­sue the cor­po­rate crim­i­nals as I would but I would go much fur­ther and pur­sue the politi­cians as they know damn well what they are doing. They had a job to do and they didn’t do it.

  • Aac


    The inbal­ances in the world he refers to is the way the Cred­i­tor nations buys US assets. He also asys that if the the West col­lapses devel­op­ing nations would be hit hard­est. My guess is that the BRIC nations would be on the top of that list. 

    For China to gain real power it would need to be polit­i­cally and finan­cially sta­ble in the eyes of the rest of the world so that other coun­tries would but Chi­nese assets as they do US assets. In other words peo­ple may say China is great but the tell is whether peo­ple are putting their money where their mouths are. Clearly they are not — at present.

  • home­s4aussies

    Philip, ear­lier I neglected to respond to your gen­er­ous offer to send Stapledon’s data in Excel for­mat — that would be great. Thank you. Could you email the file to

  • Philip


    I agree with you, though the con­fu­sion may occur because of what I see as neo­clas­si­cal belief. Because mar­kets are sup­pos­edly in equi­lib­rium or close to equi­lib­rium, then the crises can’t be caused by mar­kets – another cause has to be found – which is gov­ern­ment. I tend to think it is a com­bi­na­tion of both. Whether it is self-serv­ing politi­cians or the rich (mil­lion­aires, bil­lion­aires, cor­po­ra­tions and cor­po­rate exec­u­tives) who defile the mar­ket, there is plenty of blame to go around, not just denounc­ing the gov­ern­ment.

    I’ve dis­cov­ered that neo­clas­si­cals often have a strange def­i­n­i­tion of what con­sti­tutes a free mar­ket: when the poor have been stripped of gov­ern­ment help, not the rich. We’re sup­posed to believe that an econ­omy is in equi­lib­rium when mar­ket dis­tor­tions are caused by the lack of sup­ply in pro­fes­sional ser­vices, IPR, bailouts, numer­ous sub­si­dies, etc. The grow­ing strength of IPR and the growth in PR, mar­ket­ing, and adver­tis­ing (mostly mis­in­for­ma­tion and dis­in­for­ma­tion) fur­ther under­mines mar­kets, when Aus­tralia is sup­posed to be becom­ing more free mar­ket, not less.


    Prob­a­bly the emi­nent US social philoso­pher of the 20th cen­tury, John Dewey, once remarked: “As long as pol­i­tics is the shadow cast on soci­ety by big busi­ness, the atten­u­a­tion of the shadow will not change the sub­stance.”

    Going after politi­cians, while use­ful, will not change the sub­stance.

  • Aac


    John Dewey is more or less say­ing that restrain­ing the behav­iour of cor­po­ra­tions is more impor­tant than restrain­ing the behav­iour of gov­ern­ments that are sup­posed to gov­ern the behav­iour of the cor­po­ra­tions.

    I’m not sure how you would restrain cor­po­ra­tions with­out first restrain­ing the behav­iour of gov­ern­ment. Den­ninger has a blog on the very sub­ject at where he quotes from the US’s Dec­la­ra­tion of Inde­pen­dence:

    That to secure these rights, Gov­ern­ments are insti­tuted among Men, deriv­ing their just pow­ers from the con­sent of the gov­erned, — That when­ever any Form of Gov­ern­ment becomes destruc­tive of these ends, it is the Right of the Peo­ple to alter or to abol­ish it, and to insti­tute new Gov­ern­ment, lay­ing its foun­da­tion on such prin­ci­ples and orga­niz­ing its pow­ers in such form, as to them shall seem most likely to effect their Safety and Hap­pi­ness.”

    Thus the prob­lem of lead­ers even­tu­ally becom­ing cor­rupts is well known. The ques­tion arises how best to pre­vent the cor­rup­tion; it’s near impos­si­ble as con­sti­tu­tions etc… can all be even­tu­ally over­rid­den. At present in The Aus­tralian”,25197,25213487–5013871,00.html we have:

    Uni­ver­sity of New Eng­land law lec­turer and for­mer Nation­als party offi­cer Bryan Pape has chal­lenged the Rudd Government’s $900 bonus to work­ing Aus­tralians, argu­ing that it is not cov­ered by tax law because it is a gift.”

    Thus is it legal?. Note whether peo­ple deserve/need the 900 is another mat­ter and if they did then is a ‘gift’ the right way to go about it.

    Lead­ers are in a posi­tion of trust and break­ing that trust is very seri­ous busi­ness indeed.

  • Aac

    If peo­ple on this blog are not aware of the BrisCon­nec­tions fiasco then please read:

    Mac­quarie bank in col­lu­sion with the Queens­land Gov­ern­ment set­pup BrisCon­nec­tions which has shares trad­ing on the ASX at 0.1c but with a lia­bil­ity of $2. Ordi­nary Aus­tralians look­ing at the project with­out read­ing the prospec­tus said to them­selves! Wow what a great buy, and infra­struc­ture project so cheap.

    These retail investors share some blame for not read­ing the prospec­tus but they cer­tainly do not deserve to be destroyed by press­ing the Enter key on the key­word. Most peo­ple would be for­given for believ­ing that buy­ing shares would never invoke such a mas­sive lia­bil­ity. In fact every­one I have men­tioned this case to have said that they can’t believe that it is even pos­si­ble to sell shares that way. I encour­age read­ers of this blog to write to the Queens­land Gov­ern­ment and Mac­quarie bank and to show dis­gust (dis­claimer – I dO NOT own shares of any type).

    This case is one of epic pro­por­tions and to think the Queens­land Gov­ern­ment is back­ing it is to know that we have crossed the Rubi­con.


    Philip, Lyon­wiss etc,

    It would be fun­da­men­tally naive to think that politi­cians give a “rats” about any par­tic­u­lar school of eco­nomic thought.Much more so if one were to sup­pose they actu­ally knew any­thing about it.

    No. Politi­cians oper­ate on a sin­gu­lar belief sys­tem; to get re-elected. That’s all, noth­ing more. They feed at the pub­lic trough, so your vote mat­ters.

    And what bet­ter way to secure your vote than buy it and voila; KR’s polls show the high­est since that other social­ist PM Bob Hawke. And all he has done is fol­low the advice of the world’s lead­ing econ­o­mists.

    The GFC has handed KR his Key­ne­sian license to loot Aussie tax­pay­ers. He’s still out spend­ing, so the bil hasn’t come due just yet. But it will even­tu­ally. That will be the time to deter­mine whether it has been well spent.

  • Rustypenny


    Many many ini­tial shares have calls, which is what these BrisCon­nect shares are about.

    The con­cept of lim­ited lia­bil­ity, is the limit of any uncalled amount on the shares, bar­ring NL min­ing com­pa­nies.

    Most peo­ple do not encounter this as they usu­ally encounter shares on the sec­ondary mar­ket, but this igno­rance should not be excused.


    RE: The lat­est US stock mar­ket rally.

    Naked Cap­i­tal­ism explains the tech­ni­cal­i­ties of a let­ter writ­ten by an insider at an AIG deriv­a­tives desk, explain­ing how US Bank prof­its were manip­u­lated cour­tesy of AIG trade unwinds. Just more scam­ming and loot­ing but this time with direct par­tic­i­pa­tion for Gei­th­ner.

    What this all means is that the state­ments by major banks, i.e. JPM, Citi, and BofA, regard­ing abnor­mal prof­itabil­ity in Jan­u­ary and Feb­ru­ary were true, how­ever these prof­its were 1) one-time in nature due to whole­sale unwinds of AIG port­fo­lios, 2) entirely at the expense of AIG, and thus tax­pay­ers, 3) exe­cuted with Tim Geithner’s (and thus the administration’s) full knowl­edge and intent, 4) were basi­cally a trans­fer of money from tax­pay­ers to banks (in yet another form) using AIG as an inter­me­di­ary.

    If one con­sid­ers that this rally was sparked and then fuelled by sen­ti­ment towards the banks and their sup­posed return to “prof­itabil­ity” in Jan­u­ary and Feb­ru­ary, you could be for­given for think­ing the worst is over. But then again, maybe it is not. Maybe that’s what we are all expected to believe.

  • dig­i­talchris

    Hi Steve,

    and every­one else. I’m a newby and until this point, an observer; I have been read­ing your blog and the numer­ous very help­ful / insight­ful com­ments for a while now (and told every­one I can about it). I have not stud­ied eco­nom­ics (so a lot of the ref­er­ences made have required me to research them to attempt some basic under­stand­ing of their con­text in var­i­ous posts) but I have still found a lot of what I read to imme­di­ately make sense. I sup­pose this can be attrib­uted to my lack of philo­soph­i­cal bias or maybe it’s just that the begin­ners mind is full of so many more pos­si­bil­i­ties.

    What­ever the case, since I have become ‘a stu­dent of Keen’ I have had some ideas that I fig­ured I could share with a whole bunch of less naive and more edu­cated peo­ple in order to give you some enter­tain­ment and hope­fully get some direction…but I don’t want to hijack this forum. So where can i go to dis­cuss eco­nomic ideas I might have or is it in line with the site pro­to­col to bring them up here??

    EG. One thing I’ve been mulling over is the con­cept of nation­al­is­ing America’s car man­u­fac­tur­ers rather than bail­ing them out (or the banks for that mat­ter) I have a fair bit of ratio­nale around this. Another is the idea that a lack of emo­tional intel­li­gence in high level finan­cial deci­sion mak­ing is what ulti­mately led to the real­ity of today…and other ideas…so much to talk about…

    Hav­ing men­tioned that, I am aware of the premise of the site being a broad dis­cus­sion of the rea­sons behind the immi­nent debt defla­tion and strate­gies that could help us respond to this but you see Steve, it’s very hard not to get think­ing about all kinds of related top­ics when one reads your thoughts reg­u­larly. Thank you for think­ing dif­fer­ently.

  • Aac

    Rustypenny said,
    “Most peo­ple do not encounter this as they usu­ally encounter shares on the sec­ondary mar­ket, but this igno­rance should not be excused.”

    Ah, so because reail investors wer­ent as smart as Mac Back they deserve to be in 10s of mil­lions of dol­lars of debt.

    Has there ever been a case where retail investors could buy shares online and be liable for 10s of mil­lions of dol­lars.

    Mac­quarie Banks is a crim­i­nal entity that deserves to be destroyed. Any­one that sup­ports them deserves what’s com­ming.

  • dig­i­talchris

    To Macca,

    Just read your post ‘Re: The lat­est US Stock mar­ket rally’. It inter­ests me because I had a sneak­ing sus­pi­cion that the Jan Citi fig­ures were
    cooked for two rea­sons:

    It seemed impos­si­ble –all of us here know how badly in trou­ble that bunch and their rel­a­tives are. It was totally incon­ceiv­able for me to imag­ine they had made any money at all…

    If I was in pol­i­tics you might call me a ‘hol­low­man’ although that would be entirely untrue and quite hurt­ful! I hap­pen to be an insider in the world of ‘selected pub­lic words and phrases that stick’ and I use my power for good not evil. So when I see some­thing like the Citi announce­ment I look through my unique prism. And I saw a mas­sive LIE (or ok — mis­rep­re­sen­ta­tion). Alan Kholer recently said (if I remem­ber cor­rectly) that there’s noth­ing like a des­per­ate banker and he’s right. They’ll stop at noth­ing. I had already assumed they would sim­ply lie since there was no other option that I could see so It wasn’t really a sur­prise to hear that ‘unex­pected profit announce­ment’. I think I laughed out loud. It was an attempt to ‘restore con­fi­dence’ and then on top of that we had the Gei­th­ner Plan for toxic waste which (once care­fully worded details were out) was equally wel­comed by des­per­ate investors. I’m scared that it’s got to that.

  • Philip


    Point taken. Over the years, I have seen glim­mers of alter­na­tive think­ing of eco­nom­ics by polit­i­cal par­ties, in this case, the Greens. I remem­ber a while ago I stum­bled upon the WA Greens’ web­site. To my sur­prise, they had an exten­sive com­men­tary on neo­clas­si­cal the­ory and it’s flaws, mak­ing heavy use of Keen’s Debunk­ing Eco­nom­ics. It’s not much, but it is some­thing.

    I think there are at least some gov­ern­ment offi­cials and politi­cians who may know some­thing about the non­sen­si­cal the­ory that pol­icy is based upon — who they are I don’t know but it would be inter­est­ing to find out.

  • Frank

    East doesn’t nec­es­sar­ily mean ‘China’. I think that we are look­ing at a non-USD cen­tric world. Rubles, Yuan, Yen and Euro will be as impor­tant as USD.

  • evan


    I also was impressed with Bendigo Bank’s com­mu­nity focus, etc. 

    Then this (Jan 09):

    What a shame. Firstly, the Bendigo Bank chooses to deal with the crim­i­nal syn­di­cates at Mac­quarie Bank. Sec­ondly, they seem to think it is a good idea to fur­ther inflate the nation’s credit bub­bles by pro­mot­ing mar­gin lend­ing (which I think is prob­a­bly the most per­ni­cious form of credit cre­ation avail­able to unso­phis­ti­cated “investors”).

    If other com­mu­nity banks are any bet­ter then I’d like to hear about it. Out of curi­ousity I spoke to a loans offi­cer and a branch man­ager at the Banana­coast Credit Union, head­quar­tered in Coffs Har­bour. They were lovely peo­ple who were will­ing to lend me six times my gross annual salary for a home loan, with only a 5% deposit… and this was in late Jan­u­ary 2009!

  • Philip

    The Guardian jour­nal­ist George Mon­biot has a good arti­cle on what should’ve been in place of for­eign exchange.

  • Jim

    Thank you for the link to the recent George Soros inter­view. I think George Soros is one of the few high pro­file peo­ple that under­stands the seri­ous­ness of the GFC. Back in Octo­ber he was inter­viewed again and acu­rately pre­dicted the GFC would get worse mainly because he could clearly see the author­i­ties were doing too lit­tle, too late. It was a great inter­view, but what really got my atten­tion is you could see that this hard­ened man was actu­ally very ner­vous about what he could see hap­pen­ing around him and was even more pes­simistic than Steve Keen about the future (believe it or not!). 

    If you are inter­ested, here is the link:-

  • Frank

    Philip, Jim

    The ban­cor will be imple­mented as a mod­i­fied SDR under the aus­pices of new finan­cial reg­u­la­tory bod­ies. This is a part of what the G20 is expected to be able to deliver.

  • Frank


    Very inter­est­ing inter­view — I fully agree with every­thing said, and it is inter­est­ing to see how Obama tries to fol­low Mr.Soros’s advice as much as pos­si­ble. I enthu­si­as­ti­cally sup­port the idea that stim­u­lus through invest­ment in new tech and infra­struc­ture is the way for­ward.

    I dis­agree with Soros’s asser­tion that the future can­not be pre­dicted. It is just that the wrong types of model are in use. The mod­els must include our­selves — either by play­ing games (Sec­ond Life), by sim­u­lat­ing human intel­li­gence, or by direct impo­si­tion (com­mand econ­omy)

  • Philip


    I remem­ber Steve say­ing some­thing about the rate of fore­clo­sures been kept arti­fi­cially low by banks “pres­sur­ing” home­own­ers to vol­un­tar­ily sell before they tech­ni­cally went bank­rupt. Appar­ently, this was keep­ing the fore­clo­sure rate four times lower than what it would really be. Any ideas about this? (I could be wrong on this one).

  • home­s4aussies

    Seems plau­si­ble to me, Philip. Much talk about banks attempt­ing “work­outs” with cor­po­rates, so I imag­ine they would be under­tak­ing a whole range of mea­sures to lower the risk asso­ci­ated with the mort­gage books which make up about 50% of the big 4’s assets. Could explain some of the dis­par­ity between bank loans and RMBS loans that the RBA has been dis­cussing in lat­est Finan­cial Sta­bil­ity Reviews.

  • Rustypenny


    Ah, so because retail investors wer­ent as smart as Mac Back they deserve to be in 10s of mil­lions of dol­lars of debt.”

    You don’t have to be smart as Mac Bank to know shares can poten­tially have calls out­stand­ing.

    That is the con­cept of lim­ited lia­bil­ity, you are liable to any unpaid amount that can be called on the share.

    If you don’t under­stand that fact, then you shouldn’t be buy­ing shares.

    [quote]Has there ever been a case where retail investors could buy shares online and be liable for 10s of mil­lions of dollars.[/quote]

    IPO’s galore.

    [quote]Macquarie Banks is a crim­i­nal entity that deserves to be destroyed. Any­one that sup­ports them deserves what’s comming.[/quote]

    No, shift­ing the down­side of risk to retail clients should never be excused.

    The same exists with Storm Finan­cial clients, peo­ple with dozens of invest­ment prop­er­ties. They are keen to enjoy 25% returns per year, they are keen to increase rental returns 100% in two years, to be com­pletely indul­gent in greed. You don’t buy a BrisCon­nect share in this envi­ron­ment for other than the desire to fleece some­one else. There is a down­side risk to this, and it is com­ing home to roost.

    It is an obscene claim to say its the greed of the few who caused this. It’s the greed of many, baby boomers and ‘aspi­ra­tional’ class alike pay­ing reck­less amounts for assets and attempt­ing to shift this bur­den buy increases yields regard­less of them not be sus­tain­able.

  • yer­selfis­steam

    Steve, hi from a first timer who is very impressed with your analy­sis which is the only expla­na­tion I’ve heard that seems to make any sense of the mess we are in.

    I gather from your writ­ings that you think we just have to take our med­i­cine as part of the recov­ery. Is there a model to explain how many will have to loose every­thing so that oth­ers can get their hands on enough cash to pay off their debts? ie to get aggre­gate house­hold debt lev­els back to a sus­tain­able 25–50% from the 150%+ is there a model or even rule of thumb to describe the depth of the depres­sion?

    If debt were to be retired are there pre­ferred recip­i­ents of this generosity?ie house­hold or busi­ness? par­tial or total?

    I was a teenager in the ’70’s, the last period of high infla­tion. You have men­tioned inflat­ing our way out of debt- do you think this cure mightn’t be as bad as the dis­ease?

    After (and while) the dust set­tles we obvi­ously need to renew the sys­tem. Money at it’s most basic is the medium of exchange. Bank­ing requires that we allow the banker to use money as if it were a com­mod­ity, and we allow banks to make money out of money. This is a cor­rup­tion of money, but can be work­able if the process is kept in check. The only other way to do this should be gam­bling, which of course is what the var­i­ous money mar­kets have become. Is this over-sim­pli­fi­ca­tion to say that all activ­i­ties (beyond lim­ited credit cre­ation for banks) which “use money to make money”( rather than goods and ser­vices) should be elim­i­nated?

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