INET Interview

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Rob Johnson of INET conducted a very detailed interview with me when I called in to INET’s offices en route to the launch of Debunking Economics. INET has just released a blog entry with this interview in 7 parts:

I’ve embedded the videos below (along with the commentary from INET). I would also urge readers to take a look at INET’s website (and its blog), which both covers and supports a wealth of new approaches to economics.

INET Interview

The two intersecting lines of supply and demand penetrate economics textbooks like Einstein’s mass-energy equivalence penetrates physics textbooks. The theory behind the two lines is inherently flawed, says Steve Keen.

It is not possible logically to derive from individuals and their preferences the aggregate demand and supply curves presented in economic textbooks — unless one is willing to make a host of unrealistic assumptions, such as that all people are alike. That is why the theory is flawed, according to Steve Keen, Professor of Economics at University of Western Sydney in Australia.

The Naked Emperor Dethroned

In part 1 of the INET interview, he talks about the flaws in economic theory, and explains why the second edition of his book, Debunking Economics, carries the subtitle The Naked Emperor Dethroned.

How He Saw “It” Coming

In part 2 of the interview, he talks about how in his search for a realistic framework of capitalism he ended up with the work of Hyman Minsky. Unlike standard theory, Keen says, Minsky emphasizes the role of money and debt in the economy. What firms do is they borrow money to invest during a boom, and then they have to repay part of that debt during a slump. Keen was able to put this simple idea into a mathematical model, in a paper he published in 1995.

The model helped him to predict the financial crisis. Keen is the recipient of the Revere Award, an award given to the economist who first and most cogently warned the world of the coming financial collapse. In this video clip, Keen tells us how being an expert witness in a court case in Perth, Australia, helped him see “it” coming.

Credit Created Out of Thin Air

The neoclassical vision of saving and lending — the standard model being taught in universities — causes economists to be blindsided by the dynamics of debt in the economy, according to Steve Keen. In part 3 of the INET interview, Keen talks about the role of private debt in the economy.

It is true that one person’s debt is another person’s asset, but it is equally true that banks create money when they lend. This kind of endogenous expansion of debt, Keen says, drives economic activity, and most economists are completely oblivious to it.

Predicting a Crash Makes You Lonesome

In part 4 of the INET interview, Steve Keen tells us why he prefers to speak of the credit accelerator, rather than the credit impulse. “An impulse implies it comes and it goes; acceleration is always with you.”

Keen also talks about how tough it was to contend that Australia was doomed. He had, early on, and in a minority of one, publicly warned of the coming crash in the housing market — the mortgage industry was not amused. “It’s personally difficult to continue doing that, but I simply couldn’t see how I was wrong on all this.”

We Must Cancel the Debt

In part 5 of the INET interview, Steve Keen talks about the world economic outlook. “We’re in a depression”, he says. We can avoid one or two decades of near stagnation, Keen warns, but only if we abolish the mountain of debt that is dragging down the major economies. Debt that the financial sector dishonorably extended should not be honored, he says.

On Europe, China, and Brazil

In part 6 of the INET interview, Steve Keen shares his views on Europe, China, and Brazil.

Urging Economists to Put Money into Their Models

In a monetary economy, all transactions are three-sided: There is a buyer, a seller, and a bank that records the transfer of money between the two parties. A realistic model of capitalism should have money in it, says Steve Keen in part 7 of the INET interview.

Keen and his collaborators are using the INET grant to adapt existing software, traditionally employed by engineers, to the needs of economists. The goal is to develop software with which students can model a monetary economy.

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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12 Responses to INET Interview

  1. LCTesla says:

    Steve, you mentioned in the 6th video that Europe is under less of a private debt burden than the US, but this article your blog used to link to tells a different story:
    Was it just household debt you were talking about?

    Also, the Netherlands appear to have a major housing bubble going on:

  2. Dannyb2b says:

    I think the best solution to stimulate demand and reduce the value of outstanding debts is to change how monetary policy is conducted. Instead of the central bank adjusting the interest rate on lending to commercial banks we should have a system were the CB deals directly with the public instead. This is better than using banks as an intermediary channel.

    Each adult citizen could have an account with the RBA. In order to stimulate the CB would expand the money supply by creating new funds that are transfered to the citizens account. These funds are not debt, they do not need to be repaid. In times when stimulus is required the cb could transfer 100 dollars a week to recipients for example. When the economy is running at potential then the cb could conduct neutral policy and simply leave the accounts unchanged.

  3. alainton says:

    Slightly bizarre EU plan to spend 100s of millions on a ‘deep thought’ type systems dynamics model to predict next financial crisis!


    cant understand the Net asset sales element in your

    Income + Change in Debt = Output + Net Asset Sales;

    National income accounts dont include land sales and purchases in their estimates of gross fixed capital formation – so can agree with you if you mean you mean land purchases minus land sales – where the land value is the Georgian unimproved land value, but all other assets including financial assets are included in national accounts?

    It could be rewritten as

    Net change in land value = income+change in debt/Output

    Showing how land values are inflated by credit – and reinforcing the position that a LVT can be levied at a rate equal to the growth in mortgage debt to balance this out.

  4. alainton says:

    Apologies my misunderstanding of national income accounting, financial assets not related to investment in fixed capital are also excluded, as are net change in inventories and Faux frais operating costs. land improvements are included. So I presume you mean all of these exclusions by ‘net change in assets’. You can still separate these out and make the same point about the relationship between change in debt and land values.

  5. LCTesla says:

    I’m not sure how relevant this is to your question, but I think “net asset sales” relates to how people typically buy only assets on credit since they need to pay interest on the debt somehow and an asset can provide the required revenue stream whereas a consumption item can not. A mortgage on a house might at first seem like an exception but it’s really not. The revenue stream is represented by the need not to pay rent expenses.

  6. barrythompson says:

    Steve, another great interview.

    Just one point. Fiscal stimulus can, in principle, ‘solve everything’ if you consider it this way: a high debt:income ratio can be eased by either abolishing the debt or by raising incomes. Income growth (real GDP plus inflation) can be achieved through large-scale government deficit spending for investment, job creation and welfare payments.

    But I agree with you that the combintion of fiscal stimulus and reducing the face value of over-sized mortgages is a good idea. The USA, which has had rapid foreclosures and reduction of house prices, plus 10% of GDP deficits, may well emerge from its lost decade much earlier than the rest of the Western world.

  7. RJ says:

    “can be achieved through large-scale government deficit spending for investment, job creation and welfare payments.”

    Or preferably larger deficits by reducing tax as well as say higher unemployment payments and pensions.

    If tax was slashed then people would have more money to either spend or pay down debt

    In effect Govt debt (created by a journal entry) would replace private debt

    And debt is never an issue for a country with their own central bank. In fact we need a lot more Govt debt to fund pension savings. As Govt debt equals non Govt financial assets that pension funds can invest money in.

  8. Matthew K says:

    @RJ ‘And debt is never an issue for a country with their own central bank.’

    Because money can be expanded infinitely without collapse because a journal entry told you so?

    Perhaps we should let the auditors run the businesses and the cartographers run the wars!!

  9. cliffy says:


    Let me argue the case for the banks.

    Banks enable people to connect with one of the primary drivers within humanity, and that is the desire to connect with the infinite.

    The world has consumed 25% of it’s real non-renewable resources.

    Without the banking system allowing consumption to be expressed in a sense of increase in the nominal value of assets, that desire within us all would see that 25% be much much higher.

  10. cliffy says:

    Further, Alaintan, it simply is the case that the banking system is floodwater to a river-plane of alternative endeavors the receding back from which reveals contemporary profitable pockets of productivity from which all of humanity leverages up from into a better future.

    The water restricted piping that is safe past experience based punts on the future from within a constrained financial sector is destined to deliver sub-optimal progress.

  11. mahaish says:

    900 mil for a super computer alainton,

    and like everything that has to do with a computer,

    it will be garbage in , garbage out,

    or to be more specific about the eu,

    ridicoulous assumption in, nonsensicle answer out

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