My paper for INET’s Berlin 2012 Conference

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My paper “Instability in Financial Markets: Sources and Remedies” for the INET conference “Paradigm Lost: Rethinking Economics and Politics“, to be held in Berlin on April 12-14, is now available via the INET website.

If you’d like to download it, you can get it either from my INET page, or from a link on the conference program. For copyright reasons I can’t reproduce it here, but I can provide a quick synopsis and some excerpts, so here goes.

A Primer on Minsky

The paper starts with a synopsis on Minsky, since his “Financial Instability Hypothesis” is one of the key foundations of my approach to economics. He has come into vogue these days of course, but to people who’ve known his work for several decades rather than ever since the “Minsky Moment” of late 2007, a better expression would be that he’s “come into vague”. I read papers like Krugman’s “Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo approach”, and for the life of me, I can’t see Minsky there. As I note in my paper:

Now, after the crisis that his theory anticipated, neoclassical economists are paying some attention to his hypothesis, and there has been at least one attempt to build a New Keynesian model of a key phenomenon in Minsky’s hypothesis, a debt-deflation (Krugman and Eggertsson 2010). However, to those of us who are not new to Minsky, it is hard to recognise any vestige of the Financial Instability Hypothesis in Krugman’s work.

My good friend and long term fellow rebel in economics Professor Rod O’Donnell once remarked that neoclassical economists are incapable of reading Keynes: they look at his words and then spout Walras instead. A similar phenomenon applies here: neoclassicals like Krugman read Minsky, and then proceed to build equilibrium models without banks, and think they’re modelling Minsky.

No they’re not: they’re creating an equilibrium-obsessed Walrasian hand puppet and calling it Minsky—just as they did to Keynes with DSGE modelling.


I used the word “equilibrium” twice above, because one clear methodological aspect of Minsky’s thinking is that macroeconomics is about disequilibrium. Neoclassical economists have the world precisely (to use an evocative piece of Australian slang) arse about tit. They believe that if it’s not an equilibrium model it’s not economics.

Nonsense! The precise opposite is the case: if it isn’t disequilbrium, then it isn’t economics.

There’s nothing “radical” about this, which is often the way that neoclassical economists react when I press this point: “assume disequilibrium? How dare you!?”. I dare because “disequilibrium” is so common in real sciences that they don’t even call it that: they call it dynamics. Any dynamic model of a process must start away from its equilibrium, because if you start it in its equilibrium, nothing happens. It’s about time that economists woke up to the need to model the economy dynamically—and to give Krugman his due here, he does admit at the end of his paper that his dynamics are dreadful, and need to be improved:

The major limitation of this analysis, as we see it, is its reliance on strategically crude dynamics. To simplify the analysis, we think of all the action as taking place within a single, aggregated short run, with debt paid down to sustainable levels and prices returned to full ex ante flexibility by the time the next period begins. This sidesteps the important question of just how fast debtors are required to deleverage; it also rules out any consideration of the effects of changes in inflation expectations during the period when the zero lower bound remains binding, a major theme of recent work by Eggertsson (2010a), Christiano et. al. (2009), and others. In future work we hope to get more realistic about the dynamics.

Hurry up Paul: you’re already eight decades behind Irving Fisher, who put the case for dynamics even for those who assume that equilibrium is stable:

‘We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, toward a stable equilibrium… But … New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium…

Theoretically there may be—in fact, at most times there must be—over-or under-production, over- or under-consumption, over- or under-spending, over- or under-saving, over- or under-investment, and over or under everything else. It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will “stay put,” in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave.’ (Fisher 1933, p. 339)

Endogenous Money

One key component of Minsky’s thought is the capacity for the banking sector to create spending power “out of nothing”—to quote Schumpeter. As well as explaining endogenous money, I show that Minsky’s analysis leads to the conclusion that aggregate demand is greater than aggregate supply arising from the sale of goods and services alone—and therefore that rising debt plays a crucial role in a capitalist economy:

If income is to grow, the financial markets, where the various plans to save and invest are reconciled, must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, . . . it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. (Minsky 1963; Minsky 1982) (Minsky 1982, p. 6)

This aggregate demand is spent not just on goods and services, but also on buying financial assets—hence economics and finance are inextricably linked, in opposition to the failed neoclassical attempt to keep them separate in two hermetically sealed jars. This in turn transcends Walras’ Law to give us what I call the Walras-Schumpeter-Minsky Law:

Aggregate demand is income plus the change in debt, and this is expended on both goods and services and financial assets. Therefore in a credit-based economy, there are three sources of aggregate demand, and three ways in which this demand is expended:

1.    Demand from income earned by selling goods and services, which primarily finances consumption of goods and services;

2.    Demand from rising entrepreneurial debt, which primarily finances investment; and

3.    Demand from rising Ponzi debt, which primarily finances the purchase of existing assets.

Neoclassical Misinterpretations of Fisher, Minsky & Banking

“How do you misinterpret me? Let me count the ways…”

There are so many ways in which neoclassical economists misinterpret non-neoclassical thinkers like Fisher and Minsky that I could write a book on the topic. This section focuses on just one facet of how they get it wrong: by ignoring banks, and treating loans as transfers from “savers” to “spenders” with no bank in between.

This is precisely how Krugman models debt in his recent paper:

In what follows, we begin by setting out a flexible-price endowment model in which “impatient” agents borrow from “patient” agents, but are subject to a debt limit. If this debt limit is, for some reason, suddenly reduced, the impatient agents are forced to cut spending… (Krugman and Eggertsson 2010, p. 3)

This is debt without banks—and without the endogenous creation of money—and it explains why neoclassical economists don’t think that the level of private debt matters.

With that vision of debt, a change in the level of debt isn’t important, because the borrower’s increase in spending power is counteracted by the lender’s fall in spending power. Here’s the lending process as neoclassicals like Krugman see it:

Assets Deposits (Liabilities)
Action/Actor Patient Impatient
Make Loan +Lend -Lend

Krugman therefore reassures his blog readers that there’s nothing to worry about when private debt levels rise or fall:

People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. (Krugman 2011)

That would be reassuring if true, since we could then ignore data like this:

Unfortunately, real lending is better described by the next table:

Bank Assets Bank Deposits (Liabilities)
Action/Actor Patient Impatient
Make Loan +Lend -Lend

In the real world, a bank loan increases “Impatient”‘s spending power without reducing “Patient”‘s, so that the level of private debt does matter.

Applying Minsky to Macroeconomic Data

In particular, the rate of change of debt matters because that tells us how much of demand is debt financed. When you add the change in debt to GDP, you get total aggregate demand, and that makes it exceedingly clear why the economic crisis occurred: the growth of debt collapsed, and took the economy with it:

Since change in debt is part of aggregate demand, the acceleration of debt—the rate of change of its rate of change—affects change in aggregate demand. This in turn has impacts on the change in employment.

It also impacts on change in asset prices. The relationship between accelerating debt and rising asset prices is clear even in the very volatile world of the stock market:

It is undeniable in the property market:


Since asset market volatility is driven by the acceleration of private debt, the Minskian solution to instability in finance markets is to somehow sever the link between debt and asset prices. I put forward two ideas.

Jubilee Shares

Currently, shares last for the life of the issuing company, and 99% of the trade on the stock market is in the secondary market. The Jubilee Shares proposal would allow shares to last forever as now when purchased on the primary issue market, but would have them switch to a defined life of (say) 50 years after a limited number of sales on the secondary market (say 7 sales). This would encourage primary share purchases, and also make it highly unlikely that anyone would use borrow money to buy Jubilee shares on the secondary market.

Property Income Limited Leverage

Currently lending to buy property is allegedly based on the income of the borrower—which gives borrowers an incentive to actually want higher leverage over time. “The PILL” would limit the amount that can be lent to some multiple (say 10 times) of the income generating capacity of the property itself.

End of Synopsis

There’s much more detail in the paper itself, and when the conference is held my talk on it will also be available on the INET website.

Attending the conference

The conference itself has only 300 invitees, and INET had overwhelming demand from students for the 25 places they reserved for them. Rather than letting the over 500 other applicants miss out, these other applicants can watch the conference live from a special live video broadcast room at the Adlon Hotel, right next to the conference venue itself in Berlin. Click here for details if you’re one of those 563 applicants.

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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81 Responses to My paper for INET’s Berlin 2012 Conference

  1. RJ says:

    “Is a classical recipe for war”

    Rubbish. a few Govt journal entries to reduce poverty and unemployment and improve living standards will not cause a war.

  2. centerline says:

    How private interests profit from the creation of public debt?

    Just to scratch the surface…. First there is a dividend paid to the private parties. That is chump change though. Next up is proximity. For example, speculation in various markets based on insider information, ability to influence policies for private gains, ability to borrow at rates no one else has access to, etc. Also, there is control. Just take a look at how campaigns for politicians are run now or how legislation is handled, etc. It all bows down to money interests. When you have this level of control over a nation’s government, the possibilities are endless in how wealth can be extracted.

    The “leakage” is fairly significant and cannot be ignored. Nor can the desire to control the system for the sake of power and greed. Public and private debts are tied together is so many unintended ways. It seems you guys routinely miss this when you boil the world down to balancing double-entry accounting entries on a 2 dimensional ledger paper.

  3. centerline says:

    “Rubbish. a few Govt journal entries to reduce poverty and unemployment and improve living standards will not cause a war.”

    Really? As if the effects on one currency have no real effects on another? On international trade? On the prices of commodites and standards of living at home and elsewhere?

    In a closed system, you may be right. The problem is that this is not a closed system and we aren’t quite yet living in a one government, one currency world.

  4. TruthIsThereIsNoTruth says:

    Blissex – re your remedies comment.

    Don’t cloud the theoretical fantasy with practical consideration. It’s fairly obvious that the tax and regulatory system is the most practically appropriate mechanism for influencing economic activity. But what fun would that be. Here’s an analogy – runaway electrical train, we can either switch off the mains or superman can fly down from the clouds and flex his muscles. Remember now, we’ve got a movie to make.

  5. Steve Hummel says:

    The problem with the economy and the money system is that people are not sovereign, governments, producers and Banks are. If you’d remedy this problem so that individuals didn’t have to rely upon a job to survive you would be free to eliminate waste and anti-social production left and right. And no, production would not suffer in any way, technology already makes many jobs actually redundant, boring or utterly meaningless, plus the actual waste of resources is so prevalent that we miss most of it. Waste is the dark energy of the economic world, its hard for those hung up on employment to keep the economy half assed going to recognize that…….with technology increasingly reducing human effort and even human input all the time, jobless “recoveries are the new norm.

    Liberation from wage slavery is a deeper and more important problem/goal than unemployment/production/asset inflation etc. These need to be addressed, yes, most especially asset inflation, but until you deal with the wage slavery….how can one even say the system is free without being pretensious. Its this unrecognized cognitive dissonance that lies at the heart of the current crisis and the negative effects of economics as a whole.

    Systems were made for Man, not Man for Systems. When we begin to tailor our economic and monetary systems on that insight is when the vector toward collapse of all human and natural systems will begin to change direction.

  6. centerline says:

    Steve – sorry being so much of pain today. But, too many posts just rub my fur the wrong way.

    Krugman, from what I have read over the last few years, seems to ignore a basic reality that everyone else knows… that there is an imbalance in the notion that one mans debt is another mans asset. In essence, ignoring that a wealth transfer mechanism exists within the system in the profiteering from the creation of government debt and the endogenous creation of money.

    The transfer I wager is exponential in nature – offset only by exponential growth – which is clearly not sustainable.

    Trying to explain this way using double-entry accounting a la Accounting 101 class = fail. I fear for the profession of economics, but on this course will not regret is passing. Engineering of some sort is bound to replace it in time.

  7. mahaish says:

    mmt supports endogenous money, steve,

    they might have a problem with rj’s defence of krugman .

  8. mahaish says:

    randal wray on financial instability,

    talk alot about minsky

  9. Dragunov says:

    Hey Steve. A bit of a digression, but I’m hoping you can write a piece on Austrian economics sometime. Your book had a decent layperson’s introduction to Sraffian and Marxist economics but skipped over the arguments and methodology of the Austrians. Maybe you can just give your thoughts on this post if you’re busy.

  10. Steve Hummel says:

    Iconoclasm like instability is a good, especially after long periods of orthodoxy and corruption have reeked havoc on human systems and human populations. This is the reason I and many others are drawn to Steve’s thinking and work. But there’s iconoclasm and then there’s iconoclasm. There’s theoretical iconoclasm and then there’s philosophical iconoclasm. The latter is what Humanity is really longing for and that is in fact most needed with the converging economic/financial/monetary/energy and ecological crises confronting us.

    What if the real problem is a failure to look and question deeply enough, to fail to work and act quickly enough and the failure to ignore critique from every expected and unexpected direction because disaster is still disaster for our progeny even if it is 50 years off instead of 5. Paradigm change is NECESSARY. That is the REAL truth. Philosophical change FIRST. Let theoretical and policy changes follow from there. As Aristotle said, “We learn by doing.” The world will not end if individuals are sovereign instead of slaves…yes slaves.

    Demon est Deus inversus, The devil is God upside down. Insecurity, scarcity, hopelessness, apathy and enslavement to external conditions cannot be better than security, actual and potential abundance, hope, love and individual liberty and self determinism. Yes, I am a crazy person, but I’m a looking crazy person even more than I am a thinking crazy person. I tilt at windmills, but I have an 18 year old son who I would prefer to have a long and fruitful life instead of a neo-feudal struggle, an ecologically chaotic and perilous dystopia or even a civilization killing nuclear reaction to NOT making deep enough changes.

    Finally, remember that true paradigm changes are evolutionary, inclusive and transformational. Man is Man, but he has potential that he is not utilizing and actualizing. Reactions tend to destroy structure, but paradigm changes renew and include them. Profit and work are worthy economic purposes, but destructive primary ones. Facilitating the meeting of goods and services with consumers is a deeper and more adequate primary purpose under which profit and work can fit quite well and even be transformed.

  11. RJ says:

    Debt has two sides (an asset and a liability) and is simply created by journal entries.

    Private debt matters as does non monetary sovereign Govt debt. Monetary sovereign Govt debt by itself is completely and utterly irrelevant. Yet this is what many so called experts focus on.

    What matters is the amount of money and financial assets required for consumption and savings. Too much money going into consumption causes problem. Too little = unemployment. Too much into savings without Govt bonds might cause asset inflation.

    A level of debt is needed to keep the economy ticking over and to meet our savings requirements. An imbalance between private and monetary sovereign Govt debt can cause issues. As can too much or too little Govt bonds. Or the banks holding too many Govt bonds etc.

    This is where the research should be directed. It isn’t in large part because most economists do not understand (in fact they are clueless) how our money and banking system works. Or what debt (or money) is and the relationship to money.

  12. NeilW says:

    “Debt has two sides (an asset and a liability) and is simply created by journal entries.”

    There is more than one definition of debt.

    It is utterly vital to maintain flexibility over terms. Trying to railroad a particular definition is not going to help if whoever you are talking to has a different viewpoint.

    Half the battle with economics seems to be working out what world-view and therefore what underlying normative assumptions the person you are talking to has. Then you have to tailor the discussion to that.

  13. Pingback: My paper for INET’s Berlin 2012 Conference Read… « zumoit

  14. centerline says:

    The basic premise that a simple journal entry is the magic answer to the financial woes of nations is about as absurd as it gets. Likewise, viewing the world of debts and assets in such a 2 dimensional and static manner completely misses the mark (reality). There are many different types of debts with different terms, mechanisms of creation/destruction, etc. – hasn’t Steve been pointing out that acceleration and velocity matter? Heck, modern economics to date has completely ignored endogeneous money creation! What does that tell you about the “science” of economics. It is not science (yet). It is dogma passed off as a science because limited mathematics are involved.

    Even more disturbing is that most people don’t even stop to ask about the nature of debt and why debt creation continues to morph and move outside of regulated space. Chasing it with new economic thinking in the manner I have seen so far is akin to forensics herein.

    Considering that money is a key component of the fabric of society, it is painfully clear how dangerous the professional of economics is to world peace and prosperity.

    Neilw’s last post above is more on the path I have been pointing out here after having become frustrated seeing more X=Y+Z drivel without looking at the nature of the variables themselves.

  15. Steve Hummel says:

    Profit in aggregate i.e. macro-economically speaking, is really just waste, no? So if you utilize a mechanism like a compensated (to retailers) retail discount (to consumers) you’ve got balance. Seeings how this price discount is on or after retail sale it is in no way actually central planning. It is simply enabling individuals to decide what they want to purchase and then eliminating the dross for consumers while also making retailers whole and enabling them to pay their bills and make a margin of profit on a micro-economic level.

  16. Steve Hummel says:

    True price is the cost of production. Banks create money ex nihilo and other than a reasonable amount of profit (and reasonable profit is probably much less than they make now) the rest could easily be canceled out as waste with the above mechanism. For instance, if a bank distributes $200k for a mortgage and there is a 20% discount during that period of production the bank discounts the loan to $160k to the consumer. They of course are compensated back that $40k, but most of that is cancelled out either in their expenses, their reasonable profit or returned to their reserves. Meanwhile The inflationary aspect of the asset is negated so far as the consumer is concerned, profit remains a part of the system, reserves are maintained as well as macro-economic balance.

  17. Steve Keen says:

    I certainly hope they would Mahaish.

  18. Steve Keen says:

    Then you’d better read him more carefully RJ.

  19. RJ says:

    Here is a good article from Roger Mitchell website. Most still have not woken up it the impact of this change

    Yet economics is simple, and that simplicity can be understood by young people, if not by adults. So here is the first attempt.

    Before August 15, 1971, the United States government was on a gold standard. This meant, the U.S. government needed to own gold before it could pay its bills.

    It didn’t pay its bills with gold. No, it paid with dollars. But unless it owned gold, the U.S. was not allowed to create its own dollars. That was the law. No gold, no dollars to pay bills.

    And when the government didn’t have enough gold to make dollars to pay its bills, it had to get dollars from someone else. Either it had to borrow dollars, or it to levy taxes.

    Not being able to create dollars, whenever you want to, is called being “monetarily non-sovereign.” You and I are monetarily non-sovereign. We can’t just create dollars. We can’t pay our bills unless we obtain dollars from someone else. Our states, counties and cities are monetarily non-sovereign. They have to obtain dollars from taxes or borrowing. They are not allowed to make dollars out of thin air. That is the law.

    On August 15, 1971, President Nixon announced that the U.S. would change the law. No longer would we need to have gold. The federal government would simply create dollars without having gold. No gold. No problem. President Nixon made us MONETARILY SOVEREIGN.

    And this changed everything.

    Today, in America, only the federal government is Monetarily Sovereign. Only the federal government can create dollars out of thin air. The federal government is unique.

    Here is how you and I pay our bills:

    Personal Income (salary, investments)
    + Personal Borrowing
    Personal dollars available to pay our bills

    In order to pay our bills, we need to have a source of dollars. We are monetarily non-sovereign

    And states, counties and cities pay their bills the same way the same way:

    State Income (taxes)
    + State Borrowing
    State dollars available to pay state bills

    Yes, the states, counties and cities also need a source of dollars, to pay their bills. They too are monetarily non-sovereign.

    That’s the way it is, and that’s the way it always has been. So naturally, many people think the federal government works the same way. And once it did, but now it doesn’t. Not after 1971. Here’s what the federal government does with any money it receives:

    Federal Borrowing
    + Federal Taxing
    Dollars destroyed

    What??! The federal government destroys all that tax money you and your parents send it?? And the government even destroys all the money it borrows??

    That’s right. etc

  20. RJ says:

    Money is nothing more than a series of journal entries. Always backed by debt. We just need more Govt debt to solve our current problems.

    Very simple. But economists need to keep it complex to justify their existence.

  21. centerline says:

    Dammit Steve. How dare you and so many others make economics so complex as RJ has so masterfully pointed out! I feel so betrayed!

    (Just kidding. And I either have to assume RJ is very ignorant – or very smart and loves the friction. I wager it is the latter. Made me smile though. For that I say thank you. Cheers).

  22. mahaish says:

    no probs steve,

    infact bill mitchell (mmt) tends to have the good prof krugman in the cross hairs alot, and his aim is pretty good, just like yours steve.

    this is one of many examples, and the discussion of the mechanics of banking is particularly relevant and very much in tune with horizontal endogenous money.

    steve “indiana jones” keen in his acubra and karki pants hunting down all sorts of neo classical prey, ehh 😉

  23. Pingback: Why Krugman is wrong, and how. The importance of debt. | Bursting bubbles & myths

  24. Steve Hummel says:


    Money is aliiiitle bit more complicated than that. Its definitely more complicated than it has to be, thats true. Number one in a private monetary system sovereign interest does build up to rediculous amounts which necessitate equally rediculous taxation which exacerbates an inherent gap in purchasing power enforced by cost accounting conventions like the fact that labor is not the only cost of business thus enforcing scarcity of that very purchasing power. Now there are cranks that focus only on interest as the problem here and I understand that this is not where the real problem exists because of the time variant between interest and money generated by the wheel of commerce and number of times that payrolls are generated in a years time….however, the scarcity of purchasing power is again inherent in every financial/productive cycle so that price will always exceed the “grasp” of effective demand. Keynes, as I pointed out a ways back acknowledged this gap.

    The trick with money is changing to a Distributive monetary and financial system and so filling the micro-economic gap in purchasing power with a dividend and balancing the macro-economy with a discount mechanism. This threads the needle between the suppossed irreconcilable positions of political parties in a re-distributive money system and solving all kinds of problems inherent in that scarcity driven mindset. Creating this sufficiency and maintaining it can open doors we’ve never been through economically, ecologically, psychologically and culturally. Thats a goal worth pursuing.

  25. RJ says:

    “Number one in a private monetary system sovereign interest ”

    In you are referring to interest that can not be paid back. No it does not build up as I believe Steve along with others have pointed out. Interest recycles

    The interest that can not be paid back so banks can own the world is fiction

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