Like a Dog Walk­ing on its Hind Legs”: Krugman’s Min­sky Model

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I recently fired a stray shot at Paul Krug­man over his joke paper “The The­ory of Inter­stel­lar Trade” (Krug­man 2010), for which I have duly apol­o­gized. How­ever in that apol­ogy I noted that Krug­man has also recently pub­lished a draft aca­d­e­mic paper pre­sent­ing a New Key­ne­sian model of debt defla­tion, “Debt, Delever­ag­ing, and the Liq­uid­ity Trap: A Fisher-Min­sky-Koo approach” (Eggerts­son and Krug­man 2010), and I observed that I wish this paper was in fact a joke. Here’s why (this is a mod­i­fied extract from my forth­com­ing sec­ond edi­tion of Debunk­ing Eco­nom­ics, which will be pub­lished by Zed Books in about Sep­tem­ber or Octo­ber this year).

Though I applaud Krug­man for being prob­a­bly the first neo­clas­si­cal econ­o­mist to attempt to model Min­sky after decades of ignor­ing him, the model itself embod­ies every­thing that is bad in neo­clas­si­cal eco­nom­ics.

This reflect poorly, not so much Krugman—who has done the best he can with the neo­clas­si­cal toolset to model what he thinks Min­sky said—but on the toolset itself, which is utterly inap­pro­pri­ate for under­stand­ing the econ­omy in which we actu­ally live.

There is a pat­tern to neo­clas­si­cal attempts to increase the real­ism of their mod­els that is as pre­dictable as sunrise—but nowhere near as beau­ti­ful. The author takes the core model—which can­not gen­er­ate the real world phe­nom­e­non under discussion—and then adds some twist to the basic assump­tions which, hey presto, gen­er­ate the phe­nom­e­non in some highly styl­ized way. The math­e­mat­ics (or geom­e­try) of the twist is expli­cated, pol­icy con­clu­sions (if any) are then drawn, and the paper ends.

The flaw with this game is the very start­ing point, and since Min­sky put it best, I’ll use his words to explain it:

Can “It”—a Great Depression—happen again? And if “It” can hap­pen, why didn’t “It” occur in the years since World War II? These are ques­tions that nat­u­rally fol­low from both the his­tor­i­cal record and the com­par­a­tive suc­cess of the past thirty-five years. To answer these ques­tions it is nec­es­sary to have an eco­nomic the­ory which makes great depres­sions one of the pos­si­ble states in which our type of cap­i­tal­ist econ­omy can find itself. (Min­sky 1982, p. xii; empha­sis added)

The flaw in the neo­clas­si­cal game is that it never achieves Minsky’s final objec­tive, because the “twist” that the author adds to the basic assump­tions of the neo­clas­si­cal model are never incor­po­rated into its core. The basic the­ory there­fore remains one in which the key phe­nom­e­non under investigation—in this case, the cru­cial one Min­sky high­lights of how Depres­sions come about—cannot hap­pen. The core the­ory remains unaltered—rather like a dog that learns how to walk on its hind legs, but which then reverts to four legged loco­mo­tion when the per­for­mance is over.

Fig­ure 1:;

Krug­man him­self is unlikely to stop walk­ing on two legs—he enjoys stand­ing out in the crowd of neo­clas­si­cal quadrupeds—but the pack will return to form once this cri­sis ulti­mately gives way to tran­quil­ity.

The scholarship of ignorance and the ignorance of scholarship

Krugman’s paper cites 19 works, three of which are non-neoclassical—Fisher’s clas­sic 1933 “debt defla­tion” paper, Minsky’s last book Sta­bi­liz­ing an Unsta­ble Econ­omy (Min­sky 1986), and Richard Koo’s The Holy Grail of Macro­eco­nom­ics: Lessons from Japan’s Great Reces­sion (Koo 2009). The other 16 include one empir­i­cal study (McK­in­sey Global Insti­tute 2010) and 15 neo­clas­si­cal papers writ­ten between 1989 (Bernanke and Gertler 1989) and 2010 (Wood­ford 2010)—5 of which are papers by Krug­man or his co-author.

Was this the best he could have done? Hardly! For starters, the one Min­sky ref­er­ence he used was, in my opin­ion, Minsky’s worst book—and I’m speak­ing as some­one in a posi­tion to know. Any­one want­ing to get a han­dle on the Finan­cial Insta­bil­ity Hypoth­e­sis from Min­sky him­self would be far bet­ter advised to read the essays in Can “It” Hap­pen Again? (Min­sky 1982), or his orig­i­nal book John May­nard Keynes (Min­sky 1975)—which despite its title is not a biog­ra­phy, but the first full state­ment of the hypoth­e­sis.

Krugman’s igno­rance of Min­sky prior to the cri­sis was par for the course amongst neo­clas­si­cal authors, since they only read papers pub­lished in what they call the lead­ing journals—such as the Amer­i­can Eco­nomic Review—which rou­tinely reject non-neo­clas­si­cal papers with­out even ref­er­ee­ing them.

Almost all aca­d­e­mic papers on or by Min­sky have been pub­lished in non-main­stream journals—the Amer­i­can Eco­nomic Review (AER), for exam­ple, has pub­lished a grand total of two papers on or by Min­sky, one in 1957 (Min­sky 1957) and the other in 1971 (Min­sky 1971). If the AER and the other so-called lead­ing jour­nals were all you con­sulted as you walked up and down the library aisles, you wouldn’t even know that Min­sky existed—and most neo­clas­si­cals didn’t know of him until after 2007.

Before the “Great Reces­sion” too, you might have been jus­ti­fied in ignor­ing the other journals—such as the Jour­nal of Post Key­ne­sian Eco­nom­ics, the Jour­nal of Eco­nomic Issues, the Review of Polit­i­cal Econ­omy (let alone the Nebraska Jour­nal of Eco­nom­ics and Busi­ness where sev­eral of Hyman’s key papers were pub­lished) because these were “obvi­ously” infe­rior jour­nals, where papers not good enough to make it into the AER, the Eco­nomic Jour­nal, Econo­met­rica and so on were finally pub­lished.

But after the Great Reces­sion, when the authors who fore­saw the cri­sis came almost exclu­sively from the non-neo­clas­si­cal world (Beze­mer 2009; Beze­mer 2010), and who were pub­lished almost exclu­sively in the non-main­stream jour­nals, neo­clas­si­cal econ­o­mists like Krug­man should have eaten hum­ble pie and con­sulted the jour­nals they once ignored.

That might have been dif­fi­cult once: which jour­nals would you look in, if all you knew was that the good stuff—the mod­els that actu­ally pre­dicted what hap­pened—hadn’t been pub­lished in the jour­nals you nor­mally con­sulted? But today, with the Inter­net, that’s not a prob­lem. Aca­d­e­mic econ­o­mists have as their bib­li­o­graphic ver­sion of Google the online ser­vice Econ­lit, and there it’s impos­si­ble to do even a cur­sory search on Min­sky and not find lit­er­ally hun­dreds of papers on or by him. For exam­ple, a search last month on the key­words “Min­sky” and “model” turned up 106 ref­er­ences (includ­ing three by yours truly–Keen 1995; Keen 1996; Keen 2001, and one more will prob­a­bly be there now ; Keen 2011).

Fig­ure 2: The result of a search on “Min­sky” and “model” in Econ­lit

27 of these are avail­able in linked full text (one of which is also by yours truly–Keen 1995; see Fig­ure 3), so that you can down­load them direct to your com­puter from within Econ­lit, while oth­ers can be located by search­ing through other online sources, with­out hav­ing to trun­dle off to a phys­i­cal library to get them. To not have any ref­er­ences at all from this rich lit­er­a­ture is sim­ply poor schol­ar­ship. Were Krug­man a stu­dent of mine, he’d get a fail for this part of his essay.

Fig­ure 3: My paper which is down­load­able directly from Econ­lit

So in attempt­ing to model a debt cri­sis in a cap­i­tal­ist econ­omy, Krug­man has used as his guide Fisher’s piv­otal paper, Minsky’s worst book, and about 10 neo­clas­si­cal ref­er­ences writ­ten by some­one other than him­self and his co-author. How did he fare?

Minsky without money (let alone endogenous money)

One thing I can com­pli­ment Krug­man for is hon­estly about the state of neo­clas­si­cal macro­eco­nomic mod­el­ing before the Great Reces­sion. His paper opens with the obser­va­tion that:

If there is a sin­gle word that appears most fre­quently in dis­cus­sions of the eco­nomic prob­lems now afflict­ing both the United States and Europe, that word is surely “debt”” (Eggerts­son and Krug­man 2010, p. 1)

He then admits that pri­vate debt played no role in neo­clas­si­cal macro­eco­nomic mod­els before the cri­sis:

Given both the promi­nence of debt in pop­u­lar dis­cus­sion of our cur­rent eco­nomic dif­fi­cul­ties and the long tra­di­tion of invok­ing debt as a key fac­tor in major eco­nomic con­trac­tions, one might have expected debt to be at the heart of most main­stream macro­eco­nomic models—especially the analy­sis of mon­e­tary and fis­cal pol­icy. Per­haps some­what sur­pris­ingly, how­ever, it is quite com­mon to abstract alto­gether from this fea­ture of the econ­omy. Even econ­o­mists try­ing to ana­lyze the prob­lems of mon­e­tary and fis­cal pol­icy at the zero lower bound—and yes, that includes the authors—have often adopted rep­re­sen­ta­tive-agent mod­els in which every­one is alike, and in which the shock that pushes the econ­omy into a sit­u­a­tion in which even a zero inter­est rate isn’t low enough takes the form of a shift in everyone’s pref­er­ences. (p. 2; empha­sis added)

How­ever, from this mea culpa, it’s all down­hill, because Krug­man makes no fun­da­men­tal shift from a neo­clas­si­cal approach; all he does is mod­ify his base “New Key­ne­sian” model to incor­po­rate debt as he per­ceives it. On this front, he falls into the neo­clas­si­cal trap of being inca­pable of con­ceiv­ing that aggre­gate debt can have a macro­eco­nomic impact:

Ignor­ing the for­eign com­po­nent, or look­ing at the world as a whole, the over­all level of debt makes no dif­fer­ence to aggre­gate net worth — one person’s lia­bil­ity is another person’s asset. (p. 3)

This one sen­tence estab­lishes that Krug­man has failed to com­pre­hend Min­sky, who realized—as did Schum­peter and Marx before him—that grow­ing debt in boosts aggre­gate demand. Min­sky put it this way:

If income is to grow, the finan­cial mar­kets… must gen­er­ate an aggre­gate demand that, aside from brief inter­vals, is ever ris­ing. For real aggre­gate demand to be increas­ing… it is nec­es­sary that cur­rent spend­ing plans, summed over all sec­tors, be greater than cur­rent received income … It fol­lows that over a period dur­ing which eco­nomic growth takes place, at least some sec­tors finance a part of their spend­ing by emit­ting debt or sell­ing assets. (Min­sky 1982, p. 6)

Schum­peter made the same case in a more sys­tem­atic way, by focus­ing upon the role of entre­pre­neurs in cap­i­tal­ism. He made the point that an entre­pre­neur is some­one with an idea but not nec­es­sar­ily the finance needed to put that idea into motion. The entre­pre­neur there­fore must bor­row money to be able to pur­chase the goods and labor needed to turn her idea into a final prod­uct. This money, bor­rowed from a bank, adds to the demand for exist­ing goods and ser­vices gen­er­ated by the sale of those exist­ing goods and ser­vices:

THE fun­da­men­tal notion that the essence of eco­nomic devel­op­ment con­sists in a dif­fer­ent employ­ment of exist­ing ser­vices of labor and land leads us to the state­ment that the car­ry­ing out of new com­bi­na­tions takes place through the with­drawal of ser­vices of labor and land from their pre­vi­ous employ­ments… this again leads us to two here­sies: first to the heresy that money, and then to the sec­ond heresy that also other means of pay­ment, per­form an essen­tial func­tion, hence that processes in terms of means of pay­ment are not merely reflexes of processes in terms of goods. In every pos­si­ble strain, with rare una­nim­ity, even with impa­tience and moral and intel­lec­tual indig­na­tion, a very long line of the­o­rists have assured us of the oppo­site…

From this it fol­lows, there­fore, that in real life total credit must be greater than it could be if there were only fully cov­ered credit. The credit struc­ture projects not only beyond the exist­ing gold basis, but also beyond the exist­ing com­mod­ity basis. (Schum­peter 1934, pp. 95, 101; empha­sis added)

This argu­ment is a piv­otal part of my analy­sis, in which I define aggre­gate demand as the sum of income plus the change in debt—as reg­u­lar read­ers of this blog would know.

Krug­man also has no under­stand­ing of the endo­gene­ity of credit money—that banks cre­ate an increase in spend­ing power by simul­ta­ne­ously cre­at­ing money and debt. Lack­ing any appre­ci­a­tion of how money is cre­ated in a credit-based econ­omy, Krug­man sees lend­ing as sim­ply a trans­fer of spend­ing power from one agent to another, and nei­ther banks nor money exist in the model he builds.

Instead, in place of the usual neo­clas­si­cal trick of mod­el­ing the entire econ­omy as a sin­gle rep­re­sen­ta­tive agent, he mod­els it as two agents, one of whom is impa­tient while the other is patient. Debt is sim­ply a trans­fer of spend­ing power from the patient agent to the impa­tient one, and there­fore the debt itself has no macro­eco­nomic impact—it sim­ply trans­fers spend­ing power from the patient agent to the impa­tient one. The only way this can have a macro­eco­nomic impact is if the “impa­tient” agent is some­how con­strained in ways that the patient agent is not, and that’s exactly how Krug­man con­cocts a macro­eco­nomic story out of this neo­clas­si­cal micro­eco­nomic fan­tasy:

In what fol­lows, we begin by set­ting out a flex­i­ble-price endow­ment model in which “impa­tient” agents bor­row from “patient” agents [where what is bor­rowed is not money, but ““risk-free bonds denom­i­nated in the con­sump­tion good” (p. 5)], but are sub­ject to a debt limit. If this debt limit is, for some rea­son, sud­denly reduced, the impa­tient agents are forced to cut spend­ing; if the required delever­ag­ing is large enough, the result can eas­ily be to push the econ­omy up against the zero lower bound. If debt takes the form of nom­i­nal oblig­a­tions, Fish­er­ian debt defla­tion mag­ni­fies the effect of the ini­tial shock. (Eggerts­son and Krug­man 2010, p. 3)

He then gen­er­al­izes this with “a sticky-price model in which the delever­ag­ing shock affects out­put instead of, or as well as, prices” (p. 3), brings in nom­i­nal prices with­out money by imag­in­ing “that there is a nom­i­nal gov­ern­ment debt traded in zero sup­ply… We need not explic­itly intro­duce the money sup­ply” (p. 9), mod­els pro­duc­tion under imper­fect com­pe­ti­tion (p. 11)—yes, the pre­ced­ing analy­sis was of a no-pro­duc­tion econ­omy in which agents sim­ply trade exist­ing “endow­ments” of goods dis­trib­uted like Manna from heaven—dds a Cen­tral Bank that sets the inter­est rate (in an econ­omy with­out money) by fol­low­ing a Tay­lor Rule, and on it goes.

The math­e­mat­ics is com­pli­cated, and real brain power was exerted to develop the argument—just as, obvi­ously, it takes real brain power for a poo­dle to learn how to walk on its hind legs. But it is the wrong math­e­mat­ics because the analy­sis com­pares two equi­lib­ria sep­a­rated by time rather than being truly dynamic by ana­lyz­ing change over time regard­less of whether equi­lib­rium applies or not, and wasted brain power because the ini­tial premise—that aggre­gate debt has no macro­eco­nomic effects—was false.

Krug­man at least acknowl­edges the for­mer problem—that the dynam­ics are crude:

The major lim­i­ta­tion of this analy­sis, as we see it, is its reliance on strate­gi­cally crude dynam­ics. To sim­plify the analy­sis, we think of all the action as tak­ing place within a sin­gle, aggre­gated short run, with debt paid down to sus­tain­able lev­els and prices returned to full ex ante flex­i­bil­ity by the time the next period begins. (p. 23)

But even here, I doubt that he would con­sider gen­uine dynamic mod­el­ing with­out the clumsy neo­clas­si­cal device of assum­ing that all eco­nomic processes involve move­ments from one equi­lib­rium to another. Cer­tainly this paper remains true to the per­spec­tive he gave in 1996 when speak­ing to the Euro­pean Asso­ci­a­tion for Evo­lu­tion­ary Polit­i­cal Econ­omy:

I like to think that I am more open-minded about alter­na­tive approaches to eco­nom­ics than most, but I am basi­cally a max­i­miza­tion-and-equi­lib­rium kind of guy. Indeed, I am quite fanat­i­cal about defend­ing the rel­e­vance of stan­dard eco­nomic mod­els in many sit­u­a­tions…

He described him­self as an “evo­lu­tion groupie” to this audi­ence, but then made the telling obser­va­tion that:

Most econ­o­mists who try to apply evo­lu­tion­ary con­cepts start from some deep dis­sat­is­fac­tion with eco­nom­ics as it is. I won’t say that I am entirely happy with the state of eco­nom­ics. But let us be hon­est: I have done very well within the world of con­ven­tional eco­nom­ics. I have pushed the enve­lope, but not bro­ken it, and have received very wide­spread accep­tance for my ideas. What this means is that I may have more sym­pa­thy for stan­dard eco­nom­ics than most of you. My crit­i­cisms are those of some­one who loves the field and has seen that affec­tion repaid.

Krugman’s obser­va­tions on method­ol­ogy in this speech also high­light why he was inca­pable of truly com­pre­hend­ing Minsky—because he still starts from the premise that neo­clas­si­cal eco­nom­ics itself has proven to be false, that macro­eco­nom­ics must be based on indi­vid­ual behav­ior:

Eco­nom­ics is about what indi­vid­u­als do: not classes, not “cor­re­la­tions of forces”, but indi­vid­ual actors. This is not to deny the rel­e­vance of higher lev­els of analy­sis, but they must be grounded in indi­vid­ual behav­ior. Method­olog­i­cal indi­vid­u­al­ism is of the essence. (Krug­man 1996; emphases added)

No it’s not: method­olog­i­cal indi­vid­u­al­ism is part of the prob­lem, as the Son­nen­schein-Man­tel-Debreu con­di­tions establish—a point that neo­clas­si­cal econ­o­mists have failed to com­pre­hend, but whose import was real­ized by Alan Kir­man:

If we are to progress fur­ther we may well be forced to the­o­rise in terms of groups who have col­lec­tively coher­ent behav­iour. Thus demand and expen­di­ture func­tions if they are to be set against real­ity must be defined at some rea­son­ably high level of aggre­ga­tion. The idea that we should start at the level of the iso­lated indi­vid­ual is one which we may well have to aban­don. (Kir­man 1989, p. 138)

So while Krug­man reaches some pol­icy con­clu­sions with which I concur—such as argu­ing against gov­ern­ment aus­ter­ity pro­grams dur­ing a debt-defla­tion­ary crisis—his analy­sis is proof for the pros­e­cu­tion that even “cut­ting edge” neo­clas­si­cal eco­nom­ics, by con­tin­u­ing to ignore the role of aggre­gate debt, is part of the prob­lem of the Great Reces­sion, not part of its solu­tion.


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Eggerts­son, G. B. and P. Krug­man (2010). Debt, Delever­ag­ing, and the Liq­uid­ity Trap: A Fisher-Min­sky-Koo approach.

Keen, S. (1995). “Finance and Eco­nomic Break­down: Mod­el­ing Minsky’s ‘Finan­cial Insta­bil­ity Hypoth­e­sis.’.” Jour­nal of Post Key­ne­sian Eco­nom­ics
17(4): 607–635.

Keen, S. (1996). “The Chaos of Finance: The Chaotic and Marx­ian Foun­da­tions of Minsky’s ‘Finan­cial Insta­bil­ity Hypoth­e­sis.’.” Economies et Soci­etes
30(2–3): 55–82.

Keen, S. (2001). Minsky’s The­sis: Key­ne­sian or Marx­ian? The eco­nomic legacy of Hyman Min­sky. Vol­ume 1. Finan­cial Key­ne­sian­ism and mar­ket insta­bil­ity. R. Bellofiore and P. Ferri. Chel­tenham, U.K., Edward Elgar: 106–120.

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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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  • yre­brac

    Fas­ci­nat­ing that Krug­man has an upfront dec­la­ra­tion of his bias and even a pub­lic con­fes­sion of an unwill­ing­ness to judge ideas on their mer­its alone.
    ..then again, it’s SNAFU for the aca­d­e­mic estab­lish­ment.
    Steve, I am curi­ous about what you per­son­ally think it will take for Minsky’s ideas to gain wide­spread accep­tance — or to at least become more widely debated. His­tor­i­cally we have seen the wrong idea take root for hun­dreds of years many times. What keeps you moti­vated to fight the cause for Min­sky so to speak?

  • mahaish

    We need a shared and sane one to com­pete them out of exis­tence.”

    its a prob­lem isnt it,

    had an inter­est­ing con­ver­sa­tion with an eco­nomic advi­sor to one of our polit­i­cal mas­ters recently,

    a very sim­ple ques­tion i posed,

    what did he believe in,

    do deposits cre­ate loans or loans cre­ate deposits?

    his answer,

    he hadnt really thought about it and he’d have to get back to me.

    says it all i think,’

    we have a hell of a job chang­ing the vision thing me thinks

  • I think it will take the per­sis­tence of this down­turn well past the period that is expected by the neo­clas­si­cal major­ity now–and it’s already well into that ter­ri­tory, even though they defined the reces­sion as end­ing 18 months ago. You need a sense of despair to arise before they’ll stop grasp­ing at their con­ven­tional beliefs.

    And you need an at least rudi­men­tary alternative–which is what I’m work­ing on. Keynes didn’t pro­vide a coher­ent enough alter­na­tive, so it was easy for neo­clas­si­cals to assim­i­late what they could tol­er­ate of his model and ignore the rest (they are the Borg of the intel­li­gentsia). What I am pro­duc­ing can’t be assim­i­lated into a neo­clas­si­cal vision, so I’m hop­ing that this might give me a bet­ter out­come than Keynes expe­ri­enced.

  • mahaish

    ” Why is it that the Neo­clas­si­cal par­a­digm has such a hold on the pro­fes­sional mind? It is not really very con­vinc­ing. Per­fect com­pe­ti­tion was already a non-starter for me when I was in school in the 1980s. Now that it has melted down com­pletely, one would expect a Ren­nai­sance of new think­ing. But the pro­fes­sion seems to be just stuck.”

    its one of those laws of beau­racracy demand side,

    never let the facts get in the way of a good argue­ment, or in this case a bad argue­ment,

    bad ideas have to become self evi­dent

    well we have to wait till it becomes self evi­dent to the polit­i­cal sys­tem about these fig­ments of the imag­i­na­tion mas­querad­ing as a sound propo­si­tion.

    real­ity comes with a pitch fork attached, and if ever we stray to far from real­ity, through our grand delu­sions, we get a timely reminder care of a rapidly approach­ing pitch fork.

    this time we took one right where the sun dont shine,

    next time it will be between the eyes and we’ll go down for the count,

    ulti­mately our prag­ma­tism will trump a bad idea,

    but we are stub­born crea­tures

  • Geoff Davies

    I once read Krug­man (I for­get where) say­ing some­thing like “We make very silly assump­tions in our mod­els, but …”. He *knows* the assump­tions are silly. He thinks that’s OK.

    These peo­ple have no idea how to make a use­ful the­ory. It goes back to Wal­ras, who said, para­phras­ing, “I don’t have to test my model, because I know my axioms rep­re­sent real­ity and I know my log­i­cal deduc­tions are cor­rect”. Then Mil­ton Fried­man said “the more sig­nif­i­cant the the­ory, the more unre­al­is­tic the assump­tions”. He may have been grop­ing for the idea of a good first approx­i­ma­tion, but nei­ther he nor his many wor­ship­pers found it. I have called such think­ing “pseudo-sci­ence”. They think because it has a lot of maths it must be sci­ence, but they’re utterly con­fused. See more on this at
    and scroll down to Sta­tus of the Neo­clas­si­cal The­ory if you don’t want to read the whole thing.

  • Philip

    What non­sense — it takes a 10 sec­ond look at the Sta­ple­don House Price Index to see how false that is.

    Much the same is said here, in the fol­low­ing arti­cle:

    As if the Real Estate Insti­tute of Aus­tralia can be an unbi­ased par­tic­i­pant.

  • Steve, I think the biggest ques­tion is “when do gov­ern­ments go broke?” I have thought this one over. Do we fall in for a world mon­e­tary sys­tem con­trolled by a super group of men who led us down this path in the first place? It appears to me that this is the path to world­wide debt peon­age and not a path out of a depres­sion.

  • yre­brac

    Good luck, and the more the alter­na­tive ideas enter the pub­lic sphere through media such as this blog, the eas­ier it will be I am sure. I can still recall the blank look on the pre­sen­ters face when they asked “what we can do to pre­vent another GFC?” and I believe you replied “elim­i­nate cap­i­tal growth”. That got my atten­tion, but these ideas do need to ger­mi­nate for a while to gain accep­tance.

  • Lyon­wiss

    Aca­d­e­mics wants to write research papers and have them pub­lished. Uni­ver­sity bureau­cra­cies are not only bean coun­ters, they are also paper coun­ters. Pro­mo­tion depends on the num­ber of papers pub­lished. Pub­lish­ing papers is not the same thing as actu­ally doing research.

    Hav­ing read too many eco­nomic papers that I care to admit, I have worked out the “secret” for­mula for the volu­mi­nous pub­li­ca­tion of the sub­ject. The “recipe” for pub­li­ca­tion suc­cess is as fol­lows.

    Step 1: Cite the work of as many poten­tial ref­er­ees to your paper as pos­si­ble, as this will soothe their egos and shows that you are one of them. Make sure that your paper is seen as merely an exten­sion of the work of one of the gurus and you are not going to “rock the boat”, chal­leng­ing the estab­lish­ment.

    Step 2: For the bulk of your paper, bam­boo­zle your readers/referees with a com­pli­cated model or argu­ment, mak­ing any assump­tions you need (how­ever unre­al­is­tic), because Mil­ton Fried­man has already cov­ered you with his essay on “the method­ol­ogy of pos­i­tive eco­nom­ics”. If you have enough com­plex­ity in math­e­mat­ics or argu­ment, it is likely that the reader/referee will not bother to fol­low the heart of your paper in detail.

    Step 3: It is vitally impor­tant that in your con­clu­sions that you only make mod­est claims in sup­port­ing the sta­tus quo, such as eg the evi­dence or the model lends sup­port to the effi­cient mar­ket hypoth­e­sis or glob­al­iza­tion or what­ever. Quite often, your con­clu­sions do not have to fol­low from what you did in Step 2. Any strong con­clu­sions, par­tic­u­larly when chal­leng­ing the sta­tus quo, will lead a much closer scrutiny of your paper by the ref­eree, who is tak­ing a career risk in accept­ing your paper. As the addi­tional effort is not per­son­ally rewarded, the eco­nom­i­cally ratio­nal action for the ref­eree is to sim­ply reject the paper. 

    This “recipe” leads to career suc­cess for many, as there are thou­sands of papers pub­lished by many eco­nomic pro­fes­sors who have made lit­tle dif­fer­ence to eco­nom­ics in any way which mat­ters. The “Egg and Krug” paper is good exam­ple of the “recipe” in action. Read­ing between the lines in some of what Krug­man wrote, I sug­gest that he appears to admit to play­ing such a game.

    Aca­d­e­mic col­lu­sion in partly caus­ing the global finan­cial cri­sis has been doc­u­mented in the “Inside Job”, which won the recent Oscar for best doc­u­men­tary. Noth­ing really sur­pris­ing there, but worth see­ing nev­er­the­less. The fraud involv­ing acad­e­mia is prob­a­bly quite exten­sive eg the recent res­ig­na­tion of Gut­ten­berg, the Ger­man for­eign min­is­ter. Full marks to Steve for fight­ing such an aca­d­e­mic fraud.

  • mahaish

    trea­sury can spend with­out cre­at­ing a debt instru­ment man­nfm11,

    made eas­ier by the fact that we have min­i­mal dif­fer­ence between the cen­tral bank tar­get rate and the rate paid on bank reserves.

  • DrBob127

    The Author is Geof­frey Rogow and he has a LinkedIn account:

    But I’m not a pre­mium mem­ber, so I can’t con­tact him. I won­der if there is any­one with a suit­able account that is will­ing to send him an inMail and ask him?

  • Pingback: Steve Keen on Krugman on Minsky – Smart Taxes Network()

  • Here is the very sim­ple debunk­ing of Krug­man et al.:

    If debt is not impor­tant, why do we need it?”

  • Lyon­wiss, this is such a lovely state­ment of how aca­d­e­mic eco­nom­ics became the morass that it is that I’d like to make it a post. Would that be OK with you?

  • Mahaish is tech­ni­cally cor­rect man­nfm11: pri­vate banks can go broke, cen­tral banks can­not. Gov­ern­ments with a cap­tive Cen­tral Bank (which excludes the EU) face what Janos Kor­nai called “a soft bud­get con­straint”, so that if their spend­ing exceeds their rev­enues, they can effec­tively ignore it.

    This presents no prob­lems for a coun­try run­ning a cur­rent account surplus–like Japan. Prob­lems arise when the coun­try is run­ning a deficit–and that applies to many coun­tries now caught in a debt-defla­tion (or approach­ing one).

  • ak

    It took me a few min­utes of search­ing:
    “Write to Geof­frey Rogow at

  • bret­t123

    It’s inter­est­ing that the 2 coun­tries at the top of the Econ­o­mist Hous­ing Sur­vey are Aus­tralia and Hong Kong. I doubt there are many coun­tries in the world more impacted by China. On a recent visit to Hong Kong it was fairly obvi­ous Man­darin Speak­ers made up a huge per­cent­age of the shop­pers.

    It’s obvi­ous if the China bub­ble col­lapses so too does Austalia. The ques­tion is how much does it need to col­lapse by to impact Aus­tralia.

    Steve, I know you are mega busy — but I think this needs more analy­sis from you. At the moment it looks like Aus­tralia will stay out of reces­sion as long as China keeps going. Any reces­sion caused by a Chi­nese col­lapse will know as the “Chi­nese Com­mod­ity Crash” or some­thing sim­i­lar. It won’t be “GFC mark two”. No one will con­sider it debt related — though that is prob­a­bly the under­ly­ing cause.

    As Glenn Stevens noted:

    With the terms of trade at their cur­rent level, Australia’s nom­i­nal GDP is about 13 per cent higher … than it would have been had the terms of trade been at their 100-year aver­age level”

    We won’t see prop­erty prices or the debt to GDP ratio return to long term aver­ages until this stops.

  • ak

    Isn’t the hid­den “mes­sage in the bot­tle” as fol­lows:

    1. Imag­ine that a gov­ern­ment in a coun­try with a per­sis­tent CA deficit (and a sig­nif­i­cant stock of pri­vate for­eign debt) decides to ignore “bond vig­i­lantes” and stim­u­lates the econ­omy by “money emis­sion” not off­set by tax­a­tion.
    2. The very likely reac­tion of so-called for­eign investors is the with­drawal of for­eign deposits from the bank­ing sys­tem (these are denom­i­nated in the local cur­rency but would obvi­ously be con­verted into another “harder” cur­rency) and sell­ing off the bonds (again — the sit­u­a­tion is sim­i­lar). If this hap­pens to the USD — it imme­di­ately loses the global cur­rency sta­tus and a major global finan­cial insta­bil­ity devel­ops. This would also mean severe weak­en­ing of their polit­i­cal influ­ence — but wouldn’t it be actu­ally good for the Amer­i­cans and for the rest of the world? If it hap­pens in Aus­tralia we would most likely fol­low the path of Argentina. I think that a severe weak­en­ing of the local cur­rency may hap­pen any­way in Aus­tralia as a result of real­is­ing prof­its from the carry trade.
    3. A bank run would mean either insol­vency or effec­tive nation­al­i­sa­tion of the pri­vate bank­ing sys­tem (the Reserve Bank would need to replace the for­eign deposits with their own deposits in the bank­ing sys­tem by buy­ing debt from the pri­vate banks). But as a result the over­grown finan­cial indus­try is neutered — the pri­vate debt is still there but half-nation­alised.
    4. The process would lead to severe weak­en­ing of the cur­rency (like in Argentina or Ice­land) and may trig­ger a burst of cost-push infla­tion (which would actu­ally reduce the bur­den of debt com­pared with income and simul­ta­ne­ously reduce the value of sav­ings of the so-called “mid­dle class”).
    5. The gov­ern­ment can fol­low Dr. Mahathir bin Mohamad and impose cap­i­tal con­trols effec­tively entrap­ping for­eign investors and spec­u­la­tors by deny­ing them an oppor­tu­nity to drain the local bank­ing sys­tem from for­eign cur­ren­cies and mod­er­at­ing the impact of the exchange rate gyra­tion on the real econ­omy.
    6. Finally the coun­try would be left unable to run any CA deficit for years and has to fully finance its import by export. Local invest­ment has to rely on local financ­ing (sup­ported by the Gov­ern­ment).
    7. The local indus­try would recover (see Argentina) as weak cur­rency would stim­u­late export how­ever the level of con­sump­tion com­pared with the period before the adjust­ment would be lower what may require active income redis­tri­b­u­tion poli­cies.

    Of course the tran­si­tion could be painful, would lead to aus­ter­ity but wouldn’t it be still less painful than a pro­longed reces­sion and wouldn’t it actu­ally solve the prob­lem by the “cre­ative destruc­tion” (nation­al­i­sa­tion) of the finance indus­try and par­tial de-glob­al­i­sa­tion? I know that there are cer­tain polit­i­cal risks as there would be enor­mous for­eign pres­sure (see Ice­land) for the Gov­ern­ment to guar­an­tee the value of for­eign deposits and effec­tively con­vert the pri­vate debt denom­i­nated in the local cur­rency into pub­lic debt denom­i­nated in the for­eign cur­ren­cies but as long as the Gov­ern­ment doesn’t blink and sup­port to poorer social groups is main­tained, all should be fine.

  • Thanks AK, I’ve writ­ten to him.

  • Yes that’s huge Brett. I’ll need to mea­sure that against the debt dynam­ics when I fin­ish Debunk­ing v2.

    How­ever, com­pare that to the size of the debt con­tri­bu­tion to aggre­gate demand at its peak in 2008: it was equiv­a­lent to 22% of GDP.

  • That’s a pretty good read of the “mes­sage in the bot­tle” AK, but I wouldn’t want to state exactly that out­come before I’ve mod­eled it com­pletely. I expect it would be far more dis­rup­tive than you imply here–for a start in the USA, with 40% of prof­its com­ing from the finance sec­tor, ter­mi­nat­ing that source of profits–and real­iz­ing how much rebuild­ing of indus­try would be needed to bring the trade deficit back to zero–would be hugely dis­rup­tive. The same applies in spades to Aus­tralia (though “spades” may save us as well, given our huge min­eral export­ing capac­ity).

  • Lyon­wiss

    Sure, Steve. I’m flat­tered. The com­ment is now in the pub­lic domain. Unless the fraud is more openly and widely acknowl­edged, there can be no change and no real progress in eco­nomic knowl­edge. (Please cor­rect any typos etc. you see fit.)

  • yre­brac

    So well put it could be model in itself. Now who’s mod­el­ling acad­e­mia?

  • ak


    So you are also firmly in the “fraud” camp? I have days when I may agree with this view (when I read about aus­ter­ity mea­sures in the EU), how­ever…

    I’ve recently read “Pre­dictably Irra­tional” by Dan Ariely who is a bril­liant psy­chol­o­gist try­ing to advance behav­ioural eco­nom­ics. I wish every­one had read that book even if some con­clu­sions the author reaches can be dis­puted.

    It looks that there is an absolute dis­con­nect between what we know about human behav­iour from sci­en­tific exper­i­ments and the mar­ginal util­ity the­ory which form the basis of all the maths sophistry present in neo­clas­si­cal micro­eco­nom­ics.

    What if such a thing as util­ity func­tion sim­ply doesn’t exist ? There is a cer­tain kind of very com­plex (and indeed human) “deci­sion-mak­ing logic” deter­min­ing our behav­iour (as described by Ariely) but this logic has very lit­tle in com­mon with the naive con­cept of the mar­gin­al­ists from the 19th cen­tury.

    In my opin­ion we can­not assume that mea­sures of “util­ity” (sat­is­fac­tion) acquired from con­sum­ing mul­ti­ple goods con­sti­tute a met­ric space because there is no met­ric (even if we try to aver­age the choices made by an indi­vid­ual con­sumer):
    since the “util­ity” (and the choice made) highly depends on the per­sonal (emo­tional) con­text and the social con­text of the deci­sion.

    We have to take into con­sid­er­a­tion the real deci­sion mak­ing process.
    If we can­not mea­sure the mar­ginal util­ity and draw (even aver­aged over time) indif­fer­ence curves then there is noth­ing to max­i­mize I am afraid.

    If we accept that there is no objec­tive mea­sure of “util­ity” for an indi­vid­ual, the con­cept of con­sumer sur­plus instantly loses its sense:
    and we have to tackle the old para­dox of value (the prices of dia­monds and water) again.

    (An exam­ple — if I buy 5 bot­tles of milk per week I buy them for 1 dol­lar each, it’s not that I would buy the first for, let’s say $6 and then the sec­ond for $4.50 or even $0.5 if given such a chance. After buy­ing the first I would stop, exhaust­ing my bud­get for milk, get really angry and drink water instead — no room for any sur­plus because the out­come would have been com­pletely dif­fer­ent. So this mar­gin­al­ist logic is com­pletely flawed even from the com­mon sense point of view).

    We may need to start build­ing math­e­mat­i­cal mod­els of real human con­sumers from scratch (pos­si­bly using multi-agent approach) I am afraid…

    This very foun­da­tion of micro­eco­nom­ics is in my opin­ion the weak­est point of neo­clas­si­cal eco­nom­ics. If we inval­i­date that ele­ment, the whole “ratio­nal expec­ta­tions” approach used in macro­eco­nom­ics doesn’t make much sense. 

    I am not refer­ring to the vul­garised and sim­pli­fied ver­sion of con­sumer choice the­ory taught to high-school stu­dents. I am refer­ring to what’s pre­sented to stu­dents of Stan­ford Uni­ver­sity. It is still the same par­a­digm — we are util­ity func­tion max­imis­ing automata mak­ing repet­i­tive choices over and over again, only the maths is a bit more com­plex:

    So if the stu­dents of a lead­ing Amer­i­can uni­ver­sity are con­di­tioned by solv­ing these quite com­plex (but fake) math­e­mat­i­cal prob­lems (they have prob­a­bly 5 years of cram­ming of this stuff), do you still think that they don’t have a very strong excuse to ignore the real­ity when it comes to explain­ing the macro­eco­nom­i­cal phe­nom­ena like debt-defla­tion? I am sure that some of the older pro­fes­sors know that the offi­cial the­ory is rather incor­rect but these poor guys who later form the intel­lec­tual elite of the United States of Amer­ica have been prob­a­bly brain­washed enough…

  • Whoo Hoo! Steve Keen Tak­ing The Ax To Paul K: I read the Egg/Krug and I thought it was a ‘joke paper’ too!

    Like putting a small sweater on a very fat man you can clearly see all the holes!

    The fol­low­ing is my opin­ion which is not shared by oth­ers who are eco­nom­i­cally inclined: the ‘pro­fes­sional polit­i­cal econ­o­mists’ (such as Krug­man) are pitch­men first and last. There is noth­ing to any of them besides their abil­ity to fill a role that was cre­ated specif­i­cally for them to fill in the first place. 

    Ben Bernanke is highly regarded as an eco­nomic intel­lec­tual, his papers are widely cited and he is held in the high­est regard by any­one with a stake in the Ponzi Econ­omy which means most ‘invest­ment pro­fes­sion­als’. Whither Ben­jamin Shalom Bernanke of North Augusta, South Car­olina?

    There is absolutely noth­ing uncon­ven­tional to any­thing Bernanke has done: all by the book ‘Cen­tral Bank­ing for Dum­mies’. He doesn’t know the dif­fer­ence between infla­tion and defla­tion for starters he can­not con­coct rea­son­able poli­cies. FDR bought gold in 1933–34 in order to devalue the dol­lar. The Fed bought Trea­suries at the same time. It all was a big (pub­lic rela­tions) deal and the deval­u­a­tion did indeed increase com­mod­ity prices and led to a stock mar­ket rally (within a bear mar­ket, of course). See Scott Sum­ner:

    Bernanke imi­tated the Bank of Japan even as he warned against doing so. The money insti­tu­tion has taken on a life of its own: Bernanke sim­ply hitched a ride: obvi­ously not the ride he wanted. He’d like to be the new Keynes or at least the Fried­man and now he is Rasputin, respon­si­ble for the food riots and Chi­nese hyper­in­fla­tion along with the deaths of mil­lions of poor, help­less SUVs and giant pickup trucks.

    Bernanke’s tak­ing it in the neck along w/ Lucas and Fried­man. They deserve it. Bernanke looks like a wax fig­ure of a human being: he’s dead and stuffed with a tape recorder put inside. I just Googled ‘Lucas eco­nom­ics jack­ass’ and got 900,000 returns. Fried­man is unmasked as a sim­ple Wall Street- enabling crook.

    The ‘sans culottes’ aren’t but that doesn’t mean they are always wrong: Thoma (who seems to be angling for Krugman’s NY Times slot), DeLong, Auer­back, M. Hud­son (who is right about tax pol­icy and is short the pseudo- sci­ence). They are all nice guys and the cer­tainly love their moth­ers.

    Don’t look now but another Min­sky Moment is on its way! This will kill off the Aus­tri­ans who know the road, as critic Clement Green­burg so famously said, but don’t know how to drive.

    Who is left? Mod­ern Mon­e­tary The­ory has to merge some­how with steady- state which is hard eco­nom­ics within a pol­icy vac­uum. Where do we go from here? I thought Steve Wald­man hinted @ a steady state model, plus I get to plug Her­man Daly (don’t worry, I plug Steve Keen plenty):

    Any­way, in the long run we’re all dead and the way things are going that run will be shorter than a lot of peo­ple expect.