SASE 2011 Presentation: The Failure of Neoclassical Macro & the Monetary Circuit Theory Alternative

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This is the presentation I gave at the 2011 conference of the Society for the Advancement of Socio-Economics (SASE) annual conference in Madrid last week:

It combines four themes that will be prominent in my public talks from now on:

  • Neoclassical economists don't understand neoclassical economics;
  • Neoclassical "representative agent" macroeconomics (both the so-called New Classical and New Keynesian variants) violate fundamental research by neoclassical economists into the foundations of neoclassical theory;
  • The Credit Accelerator explains the Great Depression and the Great Recession (here my arguments are similar to those of Richard Koo, and the Credit Accelerator is the same concept initially derived by Biggs, Mayer and Pick that they called the Credit Impulse); and
  • The "Monetary Circuit Theory" model (my thanks to Mike Honeychurch for suggesting this name for my approach).

I had some software hassles--I changed the screen resolution after loading my screen capture program, which caused it to crash!--so I had to "dub" the talk later, and so there's a bit of chatter about that at the start, and the sound levels are rather low. So my apologies, but it's all I had time for when also coping with a brand new HP laptop that has been having BSOD events so regularly that I am now pining for Mephistopheles, my Dell laptop that I left back in Sydney.

In the 30 minutes I had, I only covered about half the material in the Powerpoint slides; a similar issue will apply when I present at the Central Bank of Argentina's annual conference on Thursday. Hopefully one day I'll get the chance to present this talk over an hour or so, which would be needed to cover all the information in it.

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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18 Responses to SASE 2011 Presentation: The Failure of Neoclassical Macro & the Monetary Circuit Theory Alternative

  1. TruthIsThereIsNoTruth says:

    hello Steve,

    Could you please explain slides 44 and 45. This is really con­fus­ing me, my under­stand­ing is that if you lag a vari­able, you are bring­ing past val­ues for­ward, there­fore the lagged vari­able is the explan­o­tary vari­able. I am at pain to under­stand where my under­stand­ing is incor­rect in this case.

  2. RickW says:

    How widely accepted is your mod­el­ling? Who is lis­ten­ing — apart from me of course!

    Have you tested what sub­tle changes can be made to resta­bilise the sys­tem once it is headed for col­lapse? Were you seri­ous sug­gest­ing that there should be wage increases?

  3. Steve Keen says:

    Hi TININT,

    What I mean is that changes in the CA pre­cede changes in stock and prop­erty prices. But as you know, my spe­cialty is math­e­mat­i­cal mod­el­ing rather than stats (let alone eCONo­met­rics), so my lan­guage here can be sloppy, and I have used rou­tines I’ve writ­ten in Math­cad to do the stats there rather than a stan­dard econo­met­ric package.

    Given com­ments here that the tim­ing looks the other way around on the images, I’ve sent the data to a col­league to check with stan­dard sta­tis­ti­cal pack­ages, in case I did make a mis­take in my rou­tines. Once I get word back–one way or the other–from that col­league, I’ll post the results and the orig­i­nal data here.

  4. Steve Keen says:

    Accep­tance is pretty wide in the finance com­mu­nity these days Rick, and I am in Argentina right now as a guest of their Cen­tral Bank. Within the Post Key­ne­sian camp there are disputes–the Chartalist-Circuitist issue–but my work is influ­en­tial there as well, if decid­edly unpop­u­lar with some indi­vid­u­als in that camp.

    On the wages issue, infla­tion would reduce the bur­den of out­stand­ing pri­vate sec­tor debt, and a wage rise would be a much more direct way to cause infla­tion than fid­dling with Base Money, which is the cur­rent US Fed pol­icy (com­bined with defla­tion­ary bud­get deficit reduc­tions by the Fed­eral Gov­ern­ment). But there’s Buckley’s chance of that pol­icy being fol­lowed in prac­tice of course.

    And test­ing these mod­els is a long way down the track. If I had a research team, or if there was an entire com­mu­nity of schol­ars (as the neo­clas­si­cals have with their mis­guided the­o­ries), then it would have already hap­pened. But as a one man show, it sim­ply hasn’t been pos­si­ble for me to go beyond build­ing them in the first instance.

  5. Nebbiolo71 says:

    Hi Steve,

    I’m con­tin­u­ously fol­low­ing your work since more than a year now but I still haven’t really fig­ured out exactly what are the dis­pute between you and the char­tal­ists (I sup­pose espe­cially Bill Mitchell? 😉 …which I also fol­low con­ti­nously) and the MMT.

    Another thing, back in Swe­den I believe we have a sim­i­lar sit­u­a­tion as you’ve got in Aus­tralia regard­ing an asset bub­ble (even if the Swedish ver­sion has been fueled by other means, mainly tax cuts on salaries and prop­er­ties). Have you ever had the oppor­tu­nity to study this and apply your models?

  6. Steve Keen says:

    Wel­come aboard Nebbiolo71,

    As for Swe­den, I’m sorry but that hasn’t turned up on my radar; once we get an online data­base rolling, hope­fully data will be avail­able for easy com­par­i­son across coun­tries, but I don’t have any for Swe­den yet.

    On Char­tal­ism ver­sus Cir­cuit The­ory, I have been hold­ing back from writ­ing a cri­tique for some time but will soon be embark­ing on one. I don’t dis­pute their account­ing of how gov­ern­ment financ­ing works, or the need for a gov­ern­ment deficit when the pri­vate sec­tor is fal­ter­ing. I do ques­tion their eco­nom­ics, which I see as being essen­tially sta­tic in nature (despite their argu­ments about stock-flow con­sis­tent mod­el­ing) and based on an erro­neous con­ser­va­tion law, their rel­a­tive non-consideration of the role of pri­vate sec­tor credit creation–which as you know is my main ana­lytic focus–and their ten­dency to treat the pri­vate sec­tor as an aggre­ga­tion, whereas I argue (from a Cir­cuit per­spec­tive) that at least three classes must be dis­tin­guished to con­sider pri­vate sec­tor dynam­ics prop­erly: work­ers, cap­i­tal­ists and bankers.

    Those are pre­lim­i­nary remarks only. I won’t pub­lish a detailed analy­sis and cri­tique until I’m ready.

  7. Nebbiolo71 says:

    Hi Steve and thanks for your prompt reply (from down-under?)!

    My sus­pi­cion of the ori­gin of the dis­pute, sta­tic ver­sus dynamic mod­el­ing, was some­what right then and I’m look­ing for­ward to read your com­ing pub­li­ca­tion of your more explicit cri­tique of the MMT model/Chartalism.

    From an Euro­pean per­spec­tive it’s extremely inter­est­ing and promis­ing to see that so much new think­ing is com­ing from down-under and I’m not only talk­ing about your (and Bill Mitchell’s) work but also work from peo­ple like Geoff Davies.

    Regard­ing Swe­den, it’s cur­rently con­sid­ered one of the Euro­pean tiger economies but per­son­ally I think the econ­omy is mostly fueled by the credit impulse injected by the still ongo­ing hous­ing bub­ble. Of course, in addi­tion, because of not being part of EURO, Swedish export indus­try has flour­ished when the cur­rency has been floating/adapting but this doesn’t explain all.

    For years the increase in house­hold debt has been in the range of 6–8 % of GDP and is now reach­ing 100% in total (of GDP), total pri­vate debt clos­ing in on the 300% of GDP. The inter­est­ing is that this period of growth started by quite high unem­ploy­ment (cre­ated dur­ing the last Swedish finan­cial cri­sis in 1993 when the gov­ern­ment tried to tie the cur­rency to the EURO…) that hasn’t changed/improved despite the growth of GDP. The ratio between mean income and aver­age debt is sim­i­lar to the fig­ures you’ve pub­lished on Aus­tralia, maybe even a bit worse.

    What wor­ries me (an a whole bunch of oth­ers) is what hap­pens once the increase in house­hold debt declines or worse, if peo­ple start­ing to pay back loans instead of tak­ing on new ones. Read­ing your work on the sub­ject doesn’t really dis­pel these dark clouds… 😉 …when I think your analy­sis would point out a strong reces­sion or even depres­sion, given the mag­ni­tude of the debt (espe­cially if the world is on a pro­tec­tion­ism route, given the impor­tance of export in Swe­den) — am I right?

  8. sirius says:

    Maybe Ben Bernanke will start read­ing your blog ?

    Bernanke Swan­Song ?

    a video with David Stock­man — I am only 2 min 50 into view­ing and it is scathing of Bernanke

  9. Frank says:

    Here is an inter­est­ing one:

    First hand expe­ri­ence of false economies.

  10. Steve Keen says:

    Those sound like cri­sis level fig­ures to me Nebbiolo–similar to the USA which is much worse than Aus­tralia on debt to GDP. And your export vul­ner­a­bil­ity sounds like a replay of Japan, which slumped very badly when the Great Reces­sion began since its exports plummeted.

  11. RickW says:

    This link gives the finan­cial data for Swe­den:
    I con­sider the net for­eign invest­ment posi­tion to be a good indi­ca­tor of the health of an econ­omy. I started look­ing at this a while back because it seems there is debt every­where but there must be credit in the sys­tem to bal­ance the debt.

    This data shows Sweden’s net posi­tion at Q1/2011 was –SEK628bn against a quar­terly GDP of SEK853bn or say –18% of annual GDP. Even bet­ter news is that it improved from the pre­vi­ous quarter.

    The US is worse than this but not all invest­ments are the same because US enti­ties get favoured treat­ment and earn higher income on loans than do for­eign­ers hav­ing assets in the US. How­ever US is still going back­wards at a blis­ter­ing pace.

    Aus­tralia is much worse at around –88% of GDP but was mak­ing good gains up till end of 2010 then hit by bad weather giv­ing poor BoP in Q1 2011. Some of the recent invest­ment in Aus­tralia has been in pro­duc­tive assets but a lot of that invest­ment comes from off­shore — notably China. In 2009 Aus­tralia was worse than Ire­land. Aus­tralians have a high pro­por­tion of their wealth tied up in the hous­ing Ponzi scheme that the Fed­eral Gov­ern­ment encour­ages in var­i­ous ways.

    I am baf­fled by the stu­pid­ity of econ­o­mists who fail to fac­tor in the sig­nif­i­cance of debt in an eco­nomic model. I have sig­nif­i­cant con­cern that the only way for­ward will be through infla­tion to devalue cur­rent debt and my sav­ings with it. The incom­pe­tents who encour­aged the debt get rewarded, those who enjoyed the ben­e­fits of the debt get for­given and those who worked long and hard to save are proven stu­pid. What a mess!

  12. sirius says:

    News just come in…

    Greece???” says “yes”…to…austerity and more raids from __________?

    I always “love” intim­i­da­tion in our “demo­c­ra­tic systems”…

    One of those who voted against it — a deputy of the rul­ing party — was imme­di­ately expelled by the Greek prime min­is­ter George Papandreou. ”

    What­ever the real (physics) energy sav­ings the pri­vate sec­tor makes you can count on “gov­ern­ment” to more than off­set them…

    The gov­ern­ment resorts to the old tried and tested favourite of “let’s build a road”.

    In this case a high speed rail link (dubbed “HS2”) for the “com­mon good” esti­mated to cost a mon­e­tary 33 bil­lion UK pounds.

    So what if we have to “destroy some GDP” in the form of houses, gar­dens and agri­cul­tural land that lay in the new path for this rail link?

    Ah but ’tis for the ‘com­mon good’” explains the bar­ris­ter who will now be able to travel to the North of the UK from Lon­don on the same day rather than begin his jour­ney the day before.

    (Do we really need bar­ris­ters from London?).

    As I pre­vi­ously stated dou­ble the work­ing speed of a mode of trans­port and you dou­ble the energy used (based upon the human view of what is the accept­able max­i­mum time for a journey).

    All this in time of energy and resource constraints.

    We have to dis­tin­guish between “good gov­er­nance” and “bad governance”.

    The clown car accelerates.

  13. sirius says:

    Clar­ity for prior post.

    The high speed rail link is to be built in the UK.

  14. alainton says:


    Hi, Im won­der­ing about the lead-lag issue — it does seem an unre­solved puzzle.

    Im won­der­ing if a ‘table­top’ model might resolve it — the idea come from growth of small busi­nesses modelling.

    At any one time there are firms that are form­ing (com­ing onto the table­top) firms grow­ing, or declin­ing (slid­ing off) and dying (falling off). I wish I could remem­ber a reference.

    Same with debt, new loans aris­ing, some grow­ing and com­pound­ing, some default­ing and some being paid off and paid off completely.

    Invest­ment comes from accel­er­a­tion of credit for new loans.

    Exist­ing loans com­pound, if debt restricts firm bud­get con­straint too much then even accel­er­a­tion of credit wont go to invest­ment if go towards pay­ing off inter­est and inter­est on interest.

    So at times of very high debt a credit accel­er­a­tion can sim­ply go towards restor­ing bal­ance sheets, and when bal­ance sheets are restored firms are safe to accel­er­ate credit to expand — its a two way street — both lead and lag effects?

  15. Brian Hanley says:

    Saw on Kash Mansori’s blog that he says the USA’s banks have greater expo­sure to Greek debt than the euro­pean banks do. US Finan­cials have been sell­ing CDS’s on Greek debt to the Euro­peans. See:

    I have to ask the ques­tion, because it makes sense given the struc­ture of the “too-big-to-fail” game. Have both USA and EU financiers/bankers been con­spir­ing to stick the US tax­payer with the bill for the EU? One can model it as sim­ply a ratio­nal response to the game’s struc­ture. No player in the finan­cial sys­tem loses in that sce­nario, and it could explain the huge (and I think oth­er­wise utterly non­sen­si­cal) dif­fer­en­tial between EU and USA behav­ior rel­a­tive to Greek debt.

    There is also the ques­tion as to exactly what the expo­sure really is, which is dis­cussed on the blog with­out resolution.

    How much of CDS lia­bil­ity is col­lat­er­al­ized? (i.e. Is there col­lat­eral, and to what degree does the col­lat­eral cover the posi­tion on paper?)
    And what, pre­cisely, is the form of the col­lat­eral? (i.e. To what degree is each col­lat­eral posted liq­uid? Is the col­lat­eral itself an inflated asset? And if it is traced back, is the same col­lat­eral pledged mul­ti­ple times over to cover dif­fer­ent CDS’s?)

    Unless you know the answer to those ques­tions, it is impos­si­ble to eval­u­ate, and as far as I know, there is sim­ply no source for such data.

  16. Steve Keen says:

    Hi Andrew,

    I’ve got that feed­back from my more sta­tis­ti­cally capa­ble col­league, and I did get my leads/lags wrong–relying on my own rou­tines led me astray some­what. There are lead/lag rela­tion­ships which are unsta­ble but the rela­tion­ships are sta­tis­ti­cally sig­nif­i­cant. Once I’ve given the cur­rent post on Home­less­ness enough time for air, I’ll pub­lish my colleague’s results and the orig­i­nal data for oth­ers to examine.

  17. A. Kadlcik says:

    Hello Steve,

    About neo­clas­si­cal econ­o­mists not read­ing their lit­er­a­ture. I wouldn’t be sur­prised about that. Now my expe­ri­ence with “higher learn­ing” is not on the research part of the equa­tion but on the study­ing part (human­i­ties, social sci­ences). I have been amazed time and again at the out­put of the so called research which has been empir­i­cally fal­si­fi­able, mean­ing­less (with­out mean­ing and/or incon­se­quen­tial), or inter­nally incon­sis­tent. (Not all has been bad, there have been also some true gems.)

    I have won­dered about that and my con­clu­sion is that there must be a silent “gentleman’s agree­ment” not to crit­i­cise each oth­ers’ works and thusly, keep the bulk of the acad­e­mia in busi­ness. (Most likely the not read­ing one’s lit­er­a­ture part is there as well because it is not at all unusual to read things claimed as new which, in the end, have been said before — sev­eral times — and more eloquently.)

    Now, onto eco­nom­ics. Although here my “exper­tise” is very lim­ited, I have nonethe­less been under the impres­sion that quite a lot of eco­nom­ics — at least the kind which lay­men and the like are likely to hear about, at least from the main­stream sources — is based on one strange premise: the abil­ity to cre­ate a pre­dictable model of essen­tially a chaotic sys­tem (economy).

    I mean, we have sophis­ti­cated math­e­mat­i­cal mod­els and for­mu­las — which by the way com­pletely sur­pass my com­pe­tency to under­stand them — yet, it seems, in order for them to work, they must assume the chaotic ele­ment, or ran­dom­ness, away. Such an act may indeed cre­ate a beau­ti­ful theory/model but if it is unfit to describe real­ity, why have it in the first place.

  18. alainton says:

    Hi Steve,

    Just a hunch but ive been won­der­ing if the lead-lag issue might be closely related to a fun­da­men­tal cap­i­tal the­ory problem.

    That is the prob­lem that you cant use the fisher stock-flow view of cap­i­tal and, at the same time, use mar­ginal pro­duc­tiv­ity the­ory to deter­mine the “opti­mal” level of cap­i­tal, and then have mar­ginal effi­ciency of invest­ment the­ory deter­mine the opti­mal level of invest­ment — you no longer have a flow invest­ment term, its overde­ter­mined. You can have one but not both the­o­ries — and Fisher seems to be right.

    Now to avoid this prob­lem neo-classicism devel­oped Tobins-q, as much loved by Lucas.

    But it doesn’t work — neo­clas­si­cal eco­nom­ics argues that the fluc­tu­a­tions in Tobin’s q are due to bub­bles and crashes which can be fore­casted by the mar­ket value of equi­ties and bonds mov­ing up faster that the cost of cor­po­rate fixed assets in a bub­ble, or drop­ping faster than the cost of cor­po­rate fixed assets in a crash.

    The trou­ble is that empir­i­cal work shows that exactly the oppo­site occurs (Nitzen and Bitch­ler 2010)

    This had already been pre­dicted by Hen­nesy (2004)
    because of debt over­hang. and Bolton, Chen and Wang (2009) who pre­dict an inverse rela­tion between mar­ginal Tobin’s q and invest­ment when the firm draws on its credit line.

    Just a hunch but i’m won­der­ing what hap­pens when you plug the accel­er­a­tion of debt into these debt over­hang equa­tions, in macro­eco­nomic terms. Can it explain the invest­ment cycle in a way which knocks the final nail in the cof­fin of the mar­ginal pro­duc­tiv­ity the­ory of capital?

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