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.

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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.