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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  • LCTesla

    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:–07-2011/dutch-show-how-not-to-run-housing-policy-com-au/

  • Dan­ny­b2b

    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.

  • alain­ton

    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.

  • alain­ton

    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.

  • LCTesla

    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.

  • bar­ry­thomp­son

    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.

  • RJ

    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.

  • Matthew K

    @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!!

  • cliffy


    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.

  • cliffy

    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.

  • mahaish

    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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