Behav­ioral Finance Lec­ture 09: Mod­el­ing Endoge­nous Money

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In this lec­ture I con­tinue the devel­op­ment of the QED model of a pure credit econ­omy began in the last lec­ture, includ­ing mod­el­ling pro­duc­tion and devel­op­ing a pric­ing equa­tion to pro­duce a com­bined mon­e­tary-phys­i­cal model. (see NOTE below if you can’t see this video in your browser)

Pow­er­point Slides (QED Files Free down­load; Debt­Watch Mem­bers: Part 1 Part 2; CfESI mem­bers: Part 1 Part 2)

In the sec­ond half of the lec­ture, I use the model devel­oped in the first half to show that money is not neu­tral in a credit-based economy–a higher rate of money cre­ation results in a fall in unemployment–and also model a credit crunch. I also model two gov­ern­ment poli­cies to counter a crunch: giv­ing money to the banks (which Obama did) and giv­ing it to the debtors (which the Aus­tralian gov­ern­ment did). Con­ven­tional money mul­ti­plier the­ory argues that the for­mer is more effec­tive; I show that the lat­ter is about three times bet­ter than the for­mer.


It appears that I’ve been upload­ing these videos in HTML5 for­mat, which isn’t sup­ported on some browsers–specifically Inter­net Explorer 6–8! For­tu­nately there is a workaround for this: installing Google Chrome Frame (as a plu­gin to IE I expect).

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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  • alain­ton

    Watch after sup­per — but first a US report from 2000 of the Trea­sury pan­ick­ing that it would pay off the entire national debt by 2012 and that that this would be dis­as­trous

  • alain­ton


    You used heuris­tic as a noun but meant its adjec­tive mean­ing which is quite dif­fer­ent

    It would be more cor­rect to say ‘used as a heuris­tic first approx­i­ma­tion’

  • enor­lin

    I’m reflect­ing on the fact that a 2nd year engi­neer­ing stu­dent tak­ing an intro­duc­tory course in con­trol the­ory would prob­a­bly have a bet­ter under­stand­ing of the mod­el­ling pre­sented in this lec­ture, than would an econ stu­dent at grad level or beyond. That’s almost a bit scary.

  • Yes it is Enor­lin (and as it hap­pens, Trond Andresen teaches such courses at the Nor­we­gian Uni­ver­sity of Tech­nol­ogy in Trond­heim, Nor­way). That’s why I always rec­om­mend that any bud­ding non-ortho­dox econ­o­mist do a course in sys­tems engi­neer­ing first.

  • alain­ton

    It was a pretty bravura achieve­ment when you derived kaleckis equa­tion from a sraf­fan sur­plus approach with a dynamic mon­e­tary flow — I almost choked on my cof­fee see­ing the video — no won­der you were pleased with your­self its a kind of post-Key­ne­sian holy grail. No longer sep­a­rate lumps and camps — but the prospect of a coher­ent approach. Well done. It will take a while im sure before its noticed.

  • Thanks Andrew,

    Yes I was delighted when it dropped out like that. I also was pleased that it began from the neo­clas­si­cal holy grail of the inter­ac­tion of sup­ply and demand–but in my case in a dynamic rather than sta­tic frame­work..

    Curi­ously, I went to a very good sem­i­nar with John Eatwell on Thurs­day, and as well as start­ing his cri­tique of Neo­clas­si­cal eco­nom­ics from the same point that I do–the Son­nen­schein-Man­tel-Debreu conditions–he con­cluded that what non-neo­clas­si­cals need is a pric­ing equa­tion which breaks away from the slav­ish equi­lib­rium fix­a­tion of neo­clas­si­cal eco­nom­ics. I didn’t have the oppor­tu­nity to tell him that it already exists.

  • Derek R

    Must admit that I was excited to see how much fur­ther the model has pro­gressed since it was last dis­cussed it on the blog.

  • alain­ton

    Steve I was won­der­ing if you were going to say any­thing about Garegani’s death (leav­ing aside his magpi ten­den­cies with the Sraffa papers)

    I was reminded of a key his­tor­i­cal moment of when Gare­gani ques­tioned Samuel­son at a lec­ture say­ing his pro­duc­tion func­tion depended on a con­stant cap­i­tal / labour ration in every sec­tor. Ironic as of course that was the same cri­tique that led to the LTV falling down, and then Samuel­son admit­ting defeat, but him and the world car­ry­ing on as nor­mal.

    But here is the crux is not that the same cri­tique that could be nailed at the cur­rent devel­op­ment of your macro mod­els, not yet firms with high prof­its rates spawn­ing, not yet invest­ment real­lo­ca­tions being made via an equity mar­ket with oth­ers forced to rely on debt. Not yet cre­ative destruc­tion of indi­vid­ual firms and profit lines. 

    So — being dev­ils advo­cate — deposit it being a dynamic mon­e­tary model is it not just the kind of dynamic mon­e­tary model — long period — mon­e­tary model Wal­ras ide­ally wanted to com­plete but could never find math­e­mat­i­cally tractable? Is the chal­lenge not to com­plete a full model of the clas­si­cal com­pe­ti­tion process where effec­tive demand drops out — Gara­ga­nis life chal­lenge?