Cir­cuit The­ory and the state of Post Key­ne­sian Eco­nom­ics

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I gave the fol­low­ing pre­sen­ta­tion at the 4th Dijon Money con­fer­ence (Decem­ber 10–12 2009):

Steve Keen’s Debt­watch Pod­cast 

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Briefly, my paper explained how var­i­ous conun­drums that have stymied the devel­op­ment of Cir­cuit The­ory for 20 years were in fact the result of con­fus­ing a stock (an ini­tial loan) with a flow (the eco­nomic trans­ac­tions that loan could ini­ti­ate over a year). With a proper dynamic approach, using the “tab­u­lar” method that I out­lined here in “The Rov­ing Cav­a­liers of Credit”, the conun­drums are eas­ily solved–watch the pre­sen­ta­tion to see how (click here for my Pow­er­point pre­sen­ta­tion, and the two Vis­sim files that I ran are linked here and here (you will need to “right click” to down­load them, oth­er­wise you’ll just get a text file). If you don’t have the free Vis­sim Viewer,  it is down­load­able from here. This is one of the Math­cad files that I showed (use a right-click for this one too; it’s poorly structured–written for my use rather than pub­lic consumption–but if you have Math­cadyou’ll be able to fol­low your way around it).

I pre­sented in a par­al­lel ses­sion, the morn­ing after the con­fer­ence din­ner, and had a pre­dictably small audi­ence. How­ever that dis­ad­van­tage had a for­tu­nate side, because that tiny audi­ence included the two con­fer­ence organ­is­ers Louis-Philippe Rochonand Claude Gnos, as well as Basil Moore and Allin Cot­trell. Basil is the ven­er­a­ble father of the propo­si­tion that the money sup­ply is endoge­nously deter­mined, rather than set exoge­nously by the Cen­tral Bank, as is still taught (in wild con­flict with both the empir­i­cal data and actual Cen­tral Bank knowl­edge and prac­tice) in almost all macro­eco­nom­ics courses; Louis-Philippe and Claude are well-known and respected Post Key­ne­sian mon­e­tary econ­o­mists; Allin is a very capa­ble expo­nent of Marx­ian eco­nom­ics, who unlike most Marx­ists uses com­puter mod­el­ling exten­sively in his analy­sis (I just wish he’d update his web­page, which doesn’t appear to have changed since 1997!).

The dis­cus­sion was there­fore pos­si­bly bet­ter than it would have been, had I pre­sented in a ple­nary:

Steve Keen’s Debt­watch Pod­cast 

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How­ever though I was pleased with the way my paper was received by those present, I was very dis­ap­pointed with most of the pre­sen­ta­tions at the con­fer­ence. Though there were some notable exceptions–one of which I’ll com­ment on below–the papers were either non-ana­lytic (“What Keynes said was…”, “Econ­o­mists must take uncer­tainty seri­ously…”), bom­bas­tic (“The fatal flaw in the cap­i­tal­ist sys­tem is …”), or used graph­i­cal ana­lytic meth­ods that could not eas­ily be dis­tin­guished from the con­tent of an ordi­nary macro­eco­nomic text­book. There were one or two block dia­gram expo­si­tions, but they too were graph­i­cal only–mere draw­ings, not influ­ence dia­grams, and cer­tainly not sys­tems dynam­ics mod­els.

There are many lead­ing Post Key­ne­sians who weren’t at this conference–including quite a few who attended the Aus­tralian Soci­ety of Het­ero­dox Econ­o­mists con­fer­ence that Peter Kriesler organ­ises at much the same time every year–so I’m not claim­ing that the papers here are utterly rep­re­sen­ta­tive of the gen­eral state of Post Key­ne­sian eco­nom­ics today. Nev­er­the­less, if they were even mildly rep­re­sen­ta­tive of the work that Post Key­ne­sian econ­o­mists are doing in the midst of the biggest cri­sis that cap­i­tal­ism has faced in sev­enty years–and one which is caus­ing a cri­sis in neo­clas­si­cal eco­nom­ics as well–then they will fail to shift eco­nomic the­ory at all. After ten or fif­teen years of eco­nomic pain, the neo­clas­si­cal ortho­doxy will be reassembled–since it will be true that “there is no alternative”–and Post Key­ne­sians will remain a noisy and largely ignored minor­ity.

Papers like these, though they are intended to crit­i­cise the unre­al­ity of neo­clas­si­cal eco­nom­ics, or to point out issues (uncer­tainty, bounded ratio­nal­ity, open sys­tems, non-ergod­ic­ity, what­ever) that should be taken seri­ously in eco­nom­ics, actu­ally strengthen the resolve of neo­clas­si­cal econ­o­mists to do noth­ing of the sort, since they lack any coher­ent alter­na­tive ana­lytic approach.

Neo­clas­si­cals who attend such presentations–which almost always include dis­parag­ing remarks about the absurd assump­tions neo­clas­si­cal econ­o­mists make–walk away quite jus­ti­fi­ably think­ing that “if that’s the best you can do with real­ism, then I’ll stick to my ‘absurd assump­tions’!”

We can and must do bet­ter than that. But to do so, non-ortho­dox econ­o­mists have to find tools that can express their vision of the econ­omy ana­lyt­i­cally, either as math­e­mat­i­cal or com­puter mod­els. If we don’t, then what­ever might be said by “Crit­i­cal Real­ists” about the inap­pro­pri­ate­ness of math­e­mat­i­cal analy­sis in eco­nom­ics, or how one can’t model open sys­tems math­e­mat­i­cally, the crit­ics will be side­lined in a not too dis­tant future by those who do use such models–and who care a good deal less about real­ism than the crit­ics do. Yet again, the crit­ics may win the philo­soph­i­cal bat­tle, only to lose the method­olog­i­cal war.

That’s why I’ve put in the effort to learn the meth­ods of dynam­i­cal analy­sis in math­e­mat­ics (sys­tems of dif­fer­en­tial equa­tions), engi­neer­ing (sys­tems dynam­ics), and com­put­ing (multi-agent mod­els), and it’s why I’m try­ing to develop alter­na­tives to those which make sense in the con­text of eco­nomic modelling–notably my tab­u­lar method to develop sys­tems mod­els.

These dynamic mod­els enable us to put our thought processes into a sys­tem­atic frame­work, and to explore rela­tions that are sim­ply too com­plex to fol­low ver­bally. This is a major ben­e­fit to math­e­mat­i­cal analy­sis that is lost in the cri­tiques non-ortho­dox econ­o­mists tend to make of how neo­clas­si­cals abuse math­e­mat­ics: when we out­line a causal mech­a­nism ver­bally, we are in fact stat­ing a dif­fer­en­tial equa­tion ver­bally. If we say that “Fac­tor X causes changes in vari­able Y”, we are actu­ally say­ing “the rate of change of Y is a func­tion of (amongst other things) Fac­tor X”. In math­e­mat­i­cal nota­tion, this is d/dt (Y) = F(X).

The advan­tage of express­ing these con­cepts math­e­mat­i­cally, as well as ver­bally, is that the math­e­mat­i­cal ren­di­tion keeps track of all the feed­backs and com­plex inter­ac­tions that sim­ply over­whelm our capac­ity to fol­low a com­plex causal process ver­bally, and they give us a means to pro­vide a rough quan­tifi­ca­tion of how strong those feed­back effects are.

The fail­ure to do this within Cir­cuit The­ory is why a sim­ple con­fu­sion of stocks with flows–mistaking the stock of money for the flows that are ini­ti­ated by a given stock of money over a year–has stymied for twenty years the devel­op­ment of Graziani’s bril­liant insights into a work­able the­ory. As I show in the talk above, the sim­ple expres­sion of the flows ini­ti­ated by a loan are suf­fi­cient to solve all the “conun­drums” of Cir­cuit The­ory. The conun­drums were sim­ply the prod­uct of apply­ing the wrong type of analysis–simultaneous equa­tions, “period analy­sis” with its implicit dif­fer­ence equa­tion form, or worse still mere words–to the issue. A sim­ple appli­ca­tion of flow analy­sis in con­tin­u­ous time shows up all those conun­drums for what they really are: con­fu­sions result­ing from bad analy­sis and inap­pro­pri­ate ana­lytic meth­ods.

Now I also have to exhort my fel­low Post Key­ne­sians to learn at least some of the appro­pri­ate meth­ods. Get out of the com­fort zone of ver­bal expo­si­tion, his­to­ri­og­ra­phy, simul­ta­ne­ous equa­tions and graph­i­cal analysis–and even the much more sophis­ti­cated stock-flow con­sis­tent frame­work of God­ley and Lavoie (While this method is cer­tainly a major step in the right direc­tion, using it to try to explain where profit comes from was rather like try­ing to under­stand how a horse runs, using pho­tographs of a run­ning horse taken at one hour intervals)–and learn dif­fer­en­tial equa­tions, or sys­tems dynam­ics, or com­puter pro­gram­ming. It’s hard, but the effort is worth it. And if you don’t do it, then pre­pare to once again be dom­i­nated by neo­clas­si­cal econ­o­mists once the Global Finan­cial Cri­sis has passed.

I’ll end on one very pos­i­tive note: there was one excep­tional piece of work done by a PhD stu­dent (who is also a full-time school teacher) Pas­cal Seppecher. He has devel­oped a multi-agent model in Java that also sim­u­lates the mon­e­tary cir­cuit, and reaches much the same result as I do from a dif­fer­en­tial equa­tions per­spec­tive. His model is called Jamel: Java Agent-based Macro­Eco­nomic Lab­o­ra­tory. It’s a bril­liant piece of work and I do rec­om­mend explor­ing it.

If a full-time school-teacher with a fam­ily can nonethe­less acquire the skills and find the time needed to do qual­ity work like this, then it’s high time aca­d­e­mic Post Key­ne­sians did the same. Stick­ing with what you are used to, when what you are used to merely lets you point out what “should be” done rather than actu­ally doing it, is no longer good enough.

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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  • bur­rah

    They actu­ally believe they are doing good

    Wouldn’t that only be nat­ural?

  • mahaish

    They actu­ally believe they are doing good–a sense of self­less­ness per­vades their work, which is ironic since it’s based on the belief that peo­ple are moti­vated by self-inter­est. Some­how they seem to be immune, which is weird”

    well this could be the first great dis­cov­ery of the 21st cen­tury, that neo clas­si­cal econ­o­mists have all taken the next evo­lu­tion­ary step in our human story, of erad­i­cat­ing nar­ci­cism from their char­ac­ter make up. 🙂

    i think the pub­lish­ers of nature should be all over this ground break­ing leap in human con­sious­ness 🙂



    Rather than hav­ing 4 — 6 pri­vate banks with reserve deposits at the RBA, why not allow every adult cit­i­zen (who wants to par­tic­i­pate), act as a pri­vate bank witin the same pri­vate ‘bank­ing’ guide­lines. Would it be a safer and fairer sys­tem. An inter­bank set­tl­ment sys­tem would need to be set up but could be a gov­ern­ment run infra­struc­ture.

  • janis
  • Inter­est­ing post Prof Keen.

    As a PK from the early 1990’s I really do admire your work. I think it is bril­liant, and I want to see more.

    … and part of me also wants to encour­age other PK econ­o­mists to go down the path of more dynam­ics, more math­e­mat­ics.

    But the real­ist in me knows that the econ­o­mist look­ing for the a solu­tion will always be chas­ing their tail.

    I know that a lot of what PK econ­o­mists have to say has some valid­ity. I also know that some of what mon­e­tarists, neo­clas­si­cals and pure key­ne­sians (and a host of oth­ers) also has some mean­ing.

    In other words I am the ulti­mate het­ero­dox econ­o­mist. 🙂

    There is no ‘one’ the­ory.

    It changes. One may work for a while, then another.

    The sheep men­tal­ity of econ­o­mists means that herd­ing behav­iour will favour one the­ory over another for an extended period.

    The ‘one’ the­ory may change over time, but it will always ulti­mately be wrong and even­tu­ally replaced with another ‘wrong’ the­ory.

    My per­sonal phi­los­o­phy with eco­nom­ics is to go with a gut feel. I admire the advances made in the math­e­mat­i­cal parts of eco­nom­ics and have in my own small way helped to advance them. But in the end eco­nom­ics can never be tamed. Eco­nom­ics is like a Siber­ian tiger fresh from a kill, physics is like a gold coast tiger fresh from a feed. Nei­ther is truly tame or under­stood, one how­ever is totally wild and will never be under­stood.

    Now, what you might ask is .… what about the chang­ing the­o­ries the­ory?

    Most likely it is wrong! 🙂

  • Steve, I think I know where you are going with this. I am going to have to read come cir­cuit the­ory lit­er­a­ture. In any case, I have lis­tened to you long enough to real­ize the stated, no math­e­mat­i­cal solu­tion I have used in online debates for years push­ing the idea of debt defla­tion toward a group of hyper­in­fla­tion bears fits right into your ideas. It has been my idea for years to stop the com­pound inter­est game or at least stop it at the point of bank assets and cap­i­tal far exceed­ing deposits and the point where the peo­ple behind banks get filthy rich while the rest of us become debt slaves. The gov­ern­ment should prob­a­bly own bank­ing, if we could keep it away from the politi­cians and the influ­ence of invest­ment bankers and the multi­na­tion­als. This would prob­a­bly be eas­ier in a true con­sti­tu­tional gov­ern­ment as was set up in the US and later destroyed and reduced to a bid­ding war Democ­racy that we see today. Few under­stand that the com­pound inter­est game col­lapses. I have used your model of com­pound­ing since Christ for years to demon­strate that it had to col­lapse over and over again. Every­one knows they had gold coins back then and more than one to boot, so where are the quadrillion dol­lars we should have if it even lasted 500 years? I am going to endeavor to write my own the­o­ries on my blog once I get all my ideas in some kind of order. I might have to write a hit and miss series to iron out what is true and what is not true. But I think I get your idea in that a sys­tem that gets beyond the math­e­mat­i­cal prob­lem needs to be devel­oped. I have heard you say we need to limit stock to 20 years. I think if we merely lim­ited the man­u­fac­ture of money for the pur­pose of spec­u­la­tion that would get rid of most of the prob­lems. The free mar­ket works as long as some­one doesn’t cram exces­sive amounts of credit into the sys­tem. The Minskey moments have always fol­lowed high lev­els of spec­u­la­tion and bank lend­ing that bor­ders on fraud. These have always been aided and abet­ted by the gov­ern­ment backed sys­tem of frac­tional reserve bank­ing and pro­tected indus­tries. In about every case other than the Tulip mania, a flex­i­ble money sup­ply through a cen­tral bank and gov­ern­ment granted title of nobil­ity has been involved.

  • I don’t believe Elliot­wave under­stands what is going on. What is called print­ing is noth­ing more than cre­at­ing the liq­uid­ity already needed to keep the banks afloat. The reserves every­one pre­tends were already there are in the form of $100 bills which are in the matresses of peo­ple in Rus­sia, Mex­ico, South Amer­ica and other coun­tries. The banks didn’t have assets that would liq­ui­date to pay each other. We are far from hyper­in­fla­tion and the spec­u­la­tors in gold will panic and sell. You are right that in the end gold will be some­thing you want to hold, but the buck is going to make a lot of gains in real assets like homes in the next few years. The China game is about to col­lapse for lack of demand for what they have built in a crack up, unsus­tain­able boom. I hap­pen to know some of the guys you men­tioned in your post. I am not call­ing a top in gold here, but there is a good chance it is in, as the world liq­uid­ity prob­lems of not enough dol­lars is begin­ning to show up. Gold will trade much lower before it does what most gold bugs think it is going to do. The mar­ket and eco­nomic sit­u­a­tion will force most to sell at lower prices than we see today.

  • Hi PKian,

    My ambi­tion in a sen­tence is to con­struct an accu­rate descrip­tive model of cap­i­tal­ism: get the causal link­ages more or less cor­rect even if it’s too com­plex a model to be able to fit it to data in any mean­ing­ful sense, let alone make quan­ti­ta­tive pre­dic­tions. But if I can describe the qual­i­ta­tive behav­iour of the sys­tem with it, I’ll be happy.

    BTW, most impressed with your site–it’s Defla­tion­ite for every­one else here. You have some very use­ful data there, and is that a pro­pri­etary graph­ing pack­age you’re using or one you devel­oped your­self?

  • Goldilock­sis­ableach­blond

    re: Steve @ # 63,72

    I work with econ­o­mists and it’s delu­sional think­ing rather than mal­ice that explains their beliefs. They actu­ally believe they are doing good–a sense of self­less­ness per­vades their work…”

    ” If neo­clas­si­cals really prac­ticed what they preached, their own moti­va­tions for cham­pi­oning their beliefs would be non-altru­is­tic. In fact most of them are cham­pi­ons of free trade, etc., because they gen­uinely (if falsely) believe these poli­cies are for the gen­eral good.”

    While undoubt­edly so for SOME econ­o­mists , I don’t think it’s true of the bulk of those who’ve con­structed the neolib­eral mon­stros­ity. I believe they have acted out of pure self-inter­est , and would shame­lessly pro­mote mod­els show­ing the earth is flat , if it suited their goals.

    Michael Hud­son is much closer to the mark , IMO :

    excerpts: book describes the “intel­lec­tual engi­neer­ing” that has turned the eco­nom­ics dis­ci­pline into a pub­lic rela­tions exer­cise for the ren­tier classes crit­i­cized by the clas­si­cal econ­o­mists: land­lords, bankers and monop­o­lists. It was largely to counter crit­i­cisms of their unearned income and wealth, after all, that the post-clas­si­cal reac­tion aimed to limit the con­cep­tual “tool­box” of econ­o­mists to become so unre­al­is­tic, nar­row-minded and self-serv­ing to the sta­tus quo. It has ended up as an intel­lec­tual ploy to dis­tract atten­tion away from the finan­cial and prop­erty dynam­ics that are polar­iz­ing our world between debtors and cred­i­tors, prop­erty own­ers and renters, while steer­ing pol­i­tics from democ­racy to oli­garchy.”

    Such dis­dain for empir­i­cal ver­i­fi­ca­tion is not found in the phys­i­cal sci­ences. Its pop­u­lar­ity in the social sci­ences is spon­sored by vested inter­ests. There is always self-inter­est behind method­olog­i­cal mad­ness. That is because suc­cess requires heavy sub­si­dies from spe­cial inter­ests, who ben­e­fit from an erro­neous, mis­lead­ing or decep­tive eco­nomic logic. Why pro­mote unre­al­is­tic abstrac­tions, after all, if not to dis­tract atten­tion from reforms aimed at cre­at­ing rules that oblige peo­ple actu­ally to earn their income rather than sim­ply extract­ing it from the rest of the econ­omy?”

  • Yeah, there’s that side to it too. I’m talk­ing about your gar­den-vari­ety neoclassicals–like some in my own School at UWS, or at UNSW or Syd­ney uni, some I’ve met in the Pro­duc­tiv­ity Com­mis­sion (which isn’t), etc. Some of the lead­ing lights are more con­sciously ide­o­log­i­cal (Fried­man was clearly so), but often too there they believe their own bull­shit (it appears that Fried­man did), or they are unaware of the con­se­quences of putting their bull­shit into prac­tice.

    So I agree with Michael that a lot of this was spon­sored by spe­cial inter­est groups–and on that front I am still dis­mayed to see the extent to which fund­ing will in fact alter people’s per­spec­tives in social sci­ences. But at the same time I think more dam­age is done by delu­sion and unaware­ness of the con­se­quences than by out­right mal­ice.

  • ak


    I am read­ing the Hudson’s arti­cle and Paul Krugman’s post…

    Eco­nom­ics is the sci­ence of un-learn­ing.

  • ango­phera

    Merry Christ­mas to All

    Thanks once again for pro­vid­ing this forum. I learn some­thing every time I visit.

    BTW I vis­ited Defla­tion­ite. Inter­est­ing mate­r­ial. Thank you PK.


    .…… I am now start­ing to notice a much broader move­ment tak­ing place with­out being bound to any par­tic­u­lar ide­ol­ogy.…”

    I think you are spot on. FWIW I think this is broad based and expand­ing. My “sig­nif­i­cant other” who hap­pens to be a his­tory major thinks that the Inter­Web­Net­Thingy is going to make the cru­cial dif­fer­ence.

    BTW The first fibre optic cable to Africa just came ashore in Tan­za­nia. The other end of the link is in India. There has been explo­sive growth in mobile phone net­works in Africa for some years.

    Grameen bank hasn’t skipped a beat dur­ing the GFC. The Stephanie Alexan­der Kitchen Gar­den Pro­gram is now in 91 schools Aus­tralia-wide.

    Other mod­els are emerg­ing. I doubt that all of these genies can be put back in their bot­tles.


  • Gib­ber

    like the defla­tion­ite site.

    I see you have had a look at Spain, Ire­land and Malaysia. Very inter­est­ing set of graphs.

    Are you able to repeat the analy­sis on Aus­tralia / New Zealand? 

    I’m liv­ing in New Zealand and I’ve seen the Auck­land hous­ing mar­ket rebound strongly this year. From Nov 2007 to Nov 2008 there was a drop. From Nov 2008 to Nov 2009 there has been 12% growth in the Auck­land hous­ing mar­ket. The feel­ing I have is that the herd is once again in a frenzy to get into prop­erty. Cul­tur­ally, New Zealand retail investors have devel­oped a deep sus­pi­cion of other means of invest­ment, so there seems to be a very strong cul­tural meme to go to prop­erty. The New Zealand invest­ment scene has led to a very poor retail investor per­cep­tion of pro­tec­tion in New Zealand with respect to Finance firms and the NZ share­mar­ket.

    Bunch of data for New Zealand at

    John Pem­ber­ton has done some work at ana­lyz­ing RBNZ data at

    Links to RBNZ data at

    The New Zealand gov­ern­ment didn’t have a lot of debt when the GFC hit. They are rem­e­dy­ing that while they wait for the econ­omy to rebound. The MSM seems to have a grow­ing set of arti­cles and infor­ma­tion that is pur­port­ing to sup­port the view that the econ­omy is com­ing out of reces­sion and growth is, once again, pos­i­tive.

    Don’t know about Aus­tralia data sources. I look at Aus­tralia and won­der why it stays high. Is it the Growth Lob­bies pork­ing of the real estate mar­ket via force feed­ing immi­gra­tion lev­els that con­stantly pro­duce a demand/supply ten­sion to the pric­ing upside?

    There seems to be a belief in New Zealand that high immi­gra­tion will “save the econ­omy” via pres­sure on rents and demand for more hous­ing to be built.

    I place this post in the cat­e­gory of “If you don’t ask, you don’t get”. That is, no expec­ta­tion you will look at the New Zealand sce­nario. But if you do then it would be very inter­st­ing for me.

  • mahaish

    But at the same time I think more dam­age is done by delu­sion and unaware­ness of the con­se­quences than by out­right mal­ice”

    yes , greenspans notion before the gfc that the mar­ket will pun­ish any exu­ber­ence and mal­prac­tice has one big flaw in it, in that mar­kets are about doing deals and wor­ry­ing about the con­se­quences later. because of the cor­po­rate vail we only find out about cor­rup­tion and incom­pe­tence after it has hap­pened not before, espe­cially when the so called guardians of the sys­tem arent look­ing too hard. and find­ing out after the fact doesnt help all those who have suf­fered as a con­se­quence.

  • ak

    The attempt to muz­zle China using an EU-like kind of dik­tat (so-called “com­pro­mise”) has failed. I am not refer­ring to the actual cli­mate change con­tro­versy — just to the polit­i­cal and eco­nom­i­cal spin around it.

    This doesn’t sur­prise me at all.
    It will be very inter­est­ing to see what comes next:
    1. Rein­tro­duc­ing tar­iffs and get­ting rid of glob­al­i­sa­tion
    2. Print­ing enough money to drown China
    3. Noth­ing at all fol­lowed by the great rebal­anc­ing of global power

    As I men­tioned already, before he passed away, Paul Samuel­son had revised his posi­tion on free trade when he had dis­cov­ered that the sys­tem of forc­ing poor in devel­op­ing coun­tries to do low-paid work and free­ing up work­force in the US to do bet­ter things had been been hacked.

  • GSM

    “The attempt to muz­zle China using an EU-like kind of dik­tat (so-called “com­pro­mise”) has failed. I am not refer­ring to the actual cli­mate change con­tro­versy – just to the polit­i­cal and eco­nom­i­cal spin around it.”

    The big thing to come out of the Hoax­en­hagen sum­mit was the con­tin­u­a­tion of the Kyoto Pro­to­cal rort that pro­pogates growth in trad­ing of car­bon cred­its. Esti­mated to be in the many Tril­lions in sev­eral years, des­tined to be sucked from yours and mine pock­ets, through the mighty GS fil­tra­tion sys­tem and end­ing in some dark slush fund bucket of unwor­thy and deceit­ful politi­cians. Mon­ck­ton puts it well;

    Actu­ally, the devel­op­ing coun­tries and their rul­ing despots err demo­c­ra­tic social­ist govts are far more open about the true mean­ing of this world­wide hoax — ie it’s only about money- and they insist “wealthy” coun­tries like Aus­tralia pony up many Bil­lions to their grubby Swiss banks in order for them to play too. This is an attempt at wealth redis­tri­b­u­tion on a world class scale , some­thing World Social­ism has only dreamt of. Thank­fully, it col­lapsed into a mean­ing­less purile mess and Aus­tralians were saved the trauma of see­ing yet more of their HARD EARNED pub­lic trea­sure frit­tered away by Com­rades Kevin and Penny on their roman­tic notions of Social­ist Nanny Govt grandeur — which in fact is all a pre­lude any­way to Rudd’s bid for the UN Sec pozzie.

    I think that enough of the world has actu­ally now woken up to this mon­strous scam. A nice Xmas present for us all to enjoy!

  • GSM

    More on BIG car­bon and the par­a­sitic Indus­try it sup­ports at your and my expense. I love how my tax dol­lars are so pru­dently spent;

    Our taxes are now fund­ing Fed­eral Car­bon Cops. We are far closer to a total­i­tar­ian state than we could even imag­ine. I’m not sure how any­one can pos­si­bly model that or in fact that eco­nomic mod­els even mat­ter- when Govt ordains what eco­nomic the­ory suites it’s pri­or­ity to remain in power no mat­ter what.In these cir­cum­stances, merit has lit­tle to offer unless it full­fils the aims of Govt pro­pa­ganda;

  • Tel


    there was a recent story about Mon­ck­ton being pushed in the back by a Dan­ish police­man as Mon­ck­ton tried to walk away from the con­fer­ence (he was an invited “observer” of the pro­ceed­ings but then was turned away with­out notice). Mon­ck­ton received a blow to the head from the fall and was knocked out for a short while.

    This is appar­ently stan­dard police behav­iour these days and serves to remind every­one how dif­fer­ence of opin­ion is dealt with. Any­one who val­ues diver­sity and free­dom has to ask them­selves whether they choose to tol­er­ate this, or pre­fer to watch our soci­ety slowly slip into thug­gery and gang­ster­ism.

    How do macro-econ­o­mists model this by the way? Does rule by fear make work­ers more pro­duc­tive? Of course, the answer is that econ­o­mists politely look the other way, ignor­ing any­thing remotely attached to the real world and look for some sta­tis­ti­cal series to base their results on. Ret­ro­spec­tive expla­na­tion can always be found to fill in the blanks.

  • GSM

    Zealotry, espe­cially by a rul­ing power, in any form is dam­ag­ing and at the very least highly sus­pi­cious. At worst, it becomes tyrrany, impos­ing all man­ner of sub­ju­ga­tion on pop­u­la­tions meter­ing out spe­cial atten­tion from the state on “non- believ­ers” and “deniers”. You only need to look at the reli­gious fanati­cism unleashed by the catholic church dur­ing the cen­turies long Inqui­si­tion. Yes, I am mak­ing a com­par­i­son between “old” reli­gion and the “new” reli­gion of Cli­mate fear mon­ger­ing. For a polit­i­cal com­par­i­son, Fas­cism /Nazism had sim­i­lar hum­ble begin­nings.

    The thought police are mobilised and now deployed against the pub­lic. Free­dom, in most of it’s forms , is at stake. Eco­nom­ics are just a tool to facil­i­tate the polit­i­cal pol­icy of the day. What is right, wrong or accu­rate in eco­nomic the­ory doesn’t even enter into the equa­tion.

  • Ramanan/superpoincare

    While this method is cer­tainly a major step in the right direc­tion, using it to try to explain where profit comes from was rather like try­ing to under­stand how a horse runs, using pho­tographs of a run­ning horse taken at one hour inter­vals

    Hi Steve: I do not believe this. Being a fan of the work of God­ley and Lavoie, makes me want to write some­thing here. It is triv­ial in most cases in their mod­els to shift to con­tin­u­ous time. You may call some of their assump­tions con­tro­ver­sial, but they are bang on tar­get with “money cre­ation” (quick answer: Govt sec­tor)

    I also believe that your mod­els do not achieve this. I hope you take this as an intel­lec­tual attack rather than a per­sonal one (because I do not know you per­son­ally) and I am not even in aca­d­e­mics.

    If you remem­ber, the com­men­tor JKH offered a detailed (and artic­u­late) crit­i­cism of your mod­els

    Com­ment #106 in

    I whole-heart­edly agree with JKH. I have not seen your response to that crit­i­cism. The rea­son I am tak­ing efforts to push this debate is because I believe there is some­thing you are miss­ing and we are a part of one “debunk­ing eco­nom­ics” e-team. I dropped this quote in a cou­ple of places — Galileo once said that “By deny­ing sci­en­tific prin­ci­ples, one may main­tain any para­dox” and to me it seems like 

    By deny­ing account­ing prin­ci­ples, econ­o­mists may main­tain any para­dox”

    For exam­ple your def­i­n­i­tion of reserves is not con­sis­tent with what banks use. To really under­stand what reserves are, I refer you to Sean Carmody’s writ­ing on how reserves change.

    As far as for­mal mod­el­ing goes, Chap­ters 7 & 9 of G&L talks of a pure credit econ­omy. The real world is not a pure credit econ­omy because there is the gov­ern­ment sec­tor but for the sake of abstrac­tion, I have no issues con­sid­er­ing a pure credit econ­omy. It is impor­tant in a credit econ­omy, how­ever to have real assets like machin­ery parts and/or real estate. The for­mal mod­el­ing then is to describe how house­holds, firms and banks work together to pro­duce those real assets. Since real assets are assets with­out a lia­bil­ity, one can say that the abstract econ­omy has achieved some­thing. Finan­cial assets will always sum to zero sim­ply because of the logic of account­ing. This prin­ci­ple is absolutely sacred and it is like a con­ser­va­tion prin­ci­ple. Bor­row­ing words from JKH, “This is how I would model it ver­bally. I can’t fathom why higher math­e­mat­ics would be required to con­firm this idea” 

    I also have some­thing to say about your use of stock-flow con­sis­tency. You men­tion in your papers that it is triv­ial because d/dt (Stocks) = Flows. How­ever this is not gen­eral. The more accu­rate one is 

    d/dt (Stocks) = Flow + Stocks. 

    Some coef­fi­cient have time dimen­sions of –1 can be mul­ti­ply­ing the stocks on RHS. You seem to be doing right here but:

    e.g in your equa­tions for work­ers deposits, there should be another time like wF_D which let us say is gam­maF_D. You may just think its a rede­f­i­n­i­tion but w appears else­where as well and rede­f­i­n­i­tion is not so straight­for­ward. It is eas­ier to look at this from a dif­fer­ence equa­tion viwe­point. (if you like, infin­i­tes­i­mal inter­vals ;)) Con­sump­tion is both from wages and accu­mu­lated wealth. This is a minor point but you may miss (1-gamma) fac­tors in your mod­els. How­ever in com­pli­cated exam­ples, its likely that you miss such terms. In words, house­holds con­sume both out of their wages and accu­mu­lated wealth (even in con­tin­u­ous time)

    More impor­tantly sound account­ing is a nec­es­sary but not a suf­fi­cient con­di­tion for stock-flow con­sis­tency

    I will wait for your reply to JKH since I remem­ber you men­tioned that you will let us all know after the con­fer­ence and also on some­thing on what I have to say.

  • ak


    I am sorry but as a non-econ­o­mist I think you are not cor­rect in stat­ing that:

    d/dt (Stocks) = Flow + Stocks

    1. Check the units. How can you add dollars/month (flow) to dol­lars?

    2. Think about elec­tri­cal cur­rents and charge. dQ/dt = i (Q is charge, i is cur­rent)

    3. Think about flow of water and water vol­ume.

    So how is it pos­si­ble that only in eco­nom­ics you can add stock and flow?

  • Ramanan/superpoincare


    That was just a minor point but there is a coef­fi­cient mul­ti­ply­ing Stocks on RHS so that it ends up dimen­sion­ally cor­rect. Units if you like. 

    The funny thing is that accord­ing me to Steve has d/dt(Stocks) = w*Stocks but has ignored flows in one of the equa­tions for work­ers’ con­sump­tion. There is an inflow as wages but no out­flow of *con­sump­tion out of wages*. Just out­flow out of assets. 

    Also this crit­i­cism is just a minor one — the major one is that a pure credit econ­omy can­not have net finan­cial assets.

  • ak


    I fully agree that a pure credit econ­omy can­not have net finan­cial assets. I believe that Steve’s point is that a sim­pli­fied model based on pure credit money has cer­tain fea­tures sim­i­lar to the real econ­omy, specif­i­cally cer­tain defi­cien­cies of the Cir­cuit model have been addressed. I believe that the issue of credit destruc­tion or rather recy­cling of credit money has been addressed already.

    Let’s wait for the next edi­tion of the model and see what is going to be added. 

    I think that the “net finan­cial assets” issue has been overem­pha­sized as what mat­ters more to the most of peo­ple are real assets. Money is a medium needed in the pro­duc­tion and to acquire real assets. 

    What I would really like to see is a model help­ing to show (or to dis­prove) the the­sis that a sov­er­eign gov­ern­ment is only con­strained by the pro­duc­tive capac­i­ties of econ­omy in sus­tain­ing non-infla­tion­ary deficits. I think that the his­tory of the 1970-ies in Europe or his­tory of some Latin Amer­i­can coun­tries in gen­eral may con­tain exam­ples show­ing that the gov­ern­ments may be much more con­strained in their deficit spend­ing for exam­ple by the fact that deficit spend­ing may lead to an exces­sive growth of the pub­lic sec­tor what in turn fuels infla­tion.

    The fol­low­ing has been writ­ten by prof Bal­cerow­icz, famous (and often hated) for his dis­in­fla­tion poli­cies ( I may not agree with some of his views):

    Latin Amer­i­can economies, or the clas­si­cal instru­ment will have to be used: first of all, a rad­i­cal reduc­tion of the bud­get deficit, tight­en­ing mon­e­tary pol­icy, and one spe­cific type, I should add, because I thought that if you had a state-dom­i­nated econ­omy, if state enter­prises are dom­i­nat­ing, then there is no coun­ter­weight to the influ­ence of the work­ers, and the wage set­ting becomes infla­tion­ary, and this is where I argue for … a con­trol on wages. This was a Pol­ish con­tri­bu­tion to sta­bi­liza­tion. We have stud­ied it much before, but once you have a pri­vate econ­omy, then nat­ural forces started to oper­ate, and it is in the inter­est of the own­ers and man­agers to resist exces­sive wage pres­sures, and also pri­vate enter­prises are more pro­duc­tive so that they can offer more rea­son­able real wage increases.”

  • AK is com­pletely cor­rect in a later com­ment on your equa­tion Ramanan–the cor­rect equa­tion in con­tin­u­ous time is:

    d/dt (Stocks) = Flows”.

    In a dis­crete time for­mat the cor­rect equa­tion is some­thing close to what you write, but not the same. Then it is

    Stocks[t] = Stocks[t-dt] + Flows[t-dt]

    I have great respect for Wynne Godley’s work too, and Marc as well. My point is that what Wynne devel­oped as an account­ing frame­work was very very good, but suf­fers from the lim­i­ta­tions of apply­ing dis­crete time meth­ods to con­tin­u­ous time prob­lems. Yes you can move from dis­crete to con­tin­u­ous time IF you use “dt” as your time unit rather than just using “1”, which assumes that all processes take one time unit. Unfor­tu­nately the lat­ter is the com­mon prac­tice in both most eco­nom­ics and most of Marc & Wynne’s mod­els.

    My reac­tion when Wynne first showed his sys­tem to me (in 2000 at the Jerome Levy cen­tre in New York) was that it was a bril­liant con­cept that was half-way there to a decent mod­el­ling frame­work: the account­ing of flows was bril­liant, but the under­ly­ing engine was kludgy com­pared to the engines that I knew abounded in engi­neer­ing and math­e­mat­ics cir­cles (Math­e­mat­ica to Math­cad to Simulink and so on). So I regard Wynne’s work as an inspi­ra­tion for the approach I’ve now devel­oped that imple­ments an account­ing frame­work in con­tin­u­ous time.

    Wynne actu­ally used his model to build a sim­u­la­tion of the Good­win growth cycle while I was there–making the point that you can move from dis­crete to con­tin­u­ous time if you take small enough timesteps.

    How­ever then you encounter all sorts of issues once you build a com­plex model (in the tech­ni­cal sense) that a sim­ple “dt” approach isn’t good enough to sim­u­late such sys­tems in real com­puter time–which is why math­e­mati­cians devel­oped tech­niques like Runge-Kutta etc. to make it pos­si­ble to do the sim­u­la­tions much more rapidly.

    The quick answer to money cre­ation is not “Govt Sec­tor”: it is “both Govt and pri­vate sec­tor”. I am attempt­ing to build mod­els that have both–actually I have built a first pass at such a model–and I would hope that Char­tal­ists have a sim­i­lar ambi­tion.

    Thanks for the reminder re JKH’s cri­tique; would you mind remind­ing me again in mid Jan­u­ary because (as unfor­tu­nately hap­pens all too often to me now) I have two prior dead­lines that I have to meet?

  • Hi Ramanan,

    No, the flow out of the wages account is pro­por­tional to the vol­ume in it at the time. This is where dimen­sional analysis–which ak and other engi­neers here can tell you about in great detail–is impor­tant. I use “w*WD” in my first run through the model sim­ply because econ­o­mists are so igno­rant on dynam­ics in gen­eral that to throw in all the dimen­sion­ally cor­rect ele­ments right away would cause the MEGO effect (“My Eyes Glaze Over”). I there­fore have to show them the basic idea first–that it’s pos­si­ble to make a profit–and later intro­duce dimen­sion­ally cor­rect terms.

    Later in the paper I replace w with (1-s)/tau_W where tau_W is the time lag in work­ers’ con­sump­tion. Then the dimen­sion­al­ity of the equa­tion is obvi­ously cor­rect

    d/dt (Stock) = rate of change of stock with respect to time = Stock divided by time lag.

    On the major crit­i­cism, I am quite aware of that. My point is that implicit in that statement–“a pure credit econ­omy can­not have net finan­cial assets”–is the belief that such a sys­tem couldn’t func­tion. One rea­son for build­ing to model is to show that the implicit con­clu­sion doesn’t fol­low from the premise: a pure credit econ­omy can func­tion quite eas­ily with­out net finan­cial assets.

    Again this is why I cham­pion bring­ing dynamic think­ing into eco­nom­ics: peo­ple can make what appear to be pro­found state­ments about eco­nom­ics, which when prop­erly analysed can amount to much ado about noth­ing.