The debt issue in Neoclassical economics

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My presentation at the Rosa Luxembourg Foundation in Berlin today on how Neoclassical economics misunderstands the role of private debt in a capitalist economy. I show how to use my Minsky program to model both the Neoclassical “Loanable Funds” vision of lending and the empirically-informed Post Keynesian “Endogenous Money” model.

I’m also about to start a Kickstarter campaign to raise additional funds to develop Minsky. Please “watch this space” and be ready to help promote this campaign and help fund it. Minsky as it stands has been written by one programmer in about 800 hours. I want to be able to hire 3 programmers for a minimum of 2 years to fully develop the program.

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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36 Responses to The debt issue in Neoclassical economics

  1. Bhaskara II says:

    Cartoons related to the above:

    “Our financial report stinks so bad, when I brought it home, my dog rolled on it!”

    “Hi, Everyone! Were here today for a counting class!”

    “It’s not an accounting breakthrough, Sam. It’s wrong.”

    “When did the computer start writing itself a paycheck?”

    “All I can say Thompson, is that there should be a Nobel Prize for accountancy.”

    “Who is our most creative accountant?”

    “That’s the report. Now, would anyone like to carp?”

    Other Cartoons:

    (Chart plunges) “It was at this point, gentlemen, that reality intruded.”

    “So what’s it like to actually be in a bear market?”

  2. Bhaskara II says:

    More Cartoons Picked Out:

    “Archeologist with magnifying glass translates hieroglyphics” at ruins.
    “And then, at the height of their power, they seem to have succumbed to a mysterious people known as ‘the bottom-line types.'”
    Click picture for larger image.

    “He’s illuminating something called ‘The Book of Billable Hours.'”
    One monk talking about another monk dressed as a businessman.

    “I’ve done the numbers, and I will marry you.”
    Woman to suitor in office, accepting his proposal of marriage. Refers to NPR show “Marketplace”

  3. Steve Keen says:

    Very cute! We need some levity on this blog–and the planet.

  4. Steve Hummel says:

    Baskara II,

    (Caps are for emphasis only, not to be interpreted as yelling)

    Thank you for the excellent exegesis of accounting, and the short comings of MMT.

    “When real things are transacted between entities these MMT bloggers have left that out. Most newly created currency or credits are created to purchase goods, services, peoples time, and real things. To count the creation of currency but to omit the purchases made is poor accounting and might be considered dishonest.”

    Quite correct and of course this is an effective definition/description of cost accounting whose effects ON THE INDIVIDUAL AND CONSEQUENTLY ON THE SYSTEM…..are what they are, no more and CERTAINLY no less for every dollar actually entering, re-entering or remaining in the economy.

    To quote from one of my above posts:

    These are a few of the conventions of cost accounting:
    1) Labor costs (wages and salaries) are never the totality of costs
    2) All costs must go into price

    This convention/rule if graphed would show two upward sloping lines the bottom one labeled total incomes, the top one labeled total prices and as the lines moved horizontally through time they would diverge, in other words there would be a continually increasing gap between incomes and prices or a dictionary definition of price inflation…..IN THE NORMAL OPERATION OF THE ECONOMY.

    And so we see that the NATURE of the system ITSELF is price inflationary. Now depreciation can mitigate this problem FOR BUSINESSES, BUT NOT FOR INDIVIDUALS, AND CONSEQUENTLY EVENTUALLY THE ENTIRETY OF THE SYSTEM ITSELF.

    Velocity of money of course does not apply to the individual because money does not just drop from the sky it comes to the individual almost entirely via commerce/businesses in the form of pay for work or loans which of course always incur an additional cost to the individual.

    And so we see that the conventions of cost accounting enforce price inflation. THIS IS A FLAW IN THE ACCOUNTING SYSTEM WHICH PREVENTS “FREE” MARKET ECONOMIC THINKING FROM ACTUALLY BEING FREE.

    Furthermore, no injection of money by government or private Banks can compensate for these flawed effects BECAUSE as these monies actually enter the economy cost accounting’s conventions are immediately enforced and reinforced.

    So what IS the solution to this conundrum? Why a supplement of income directly to the individual which bypasses the normal commercial route where the rules of cost accounting……RULE!!! And then of course an additional mechanism at retail sale of a general discount to consumers to alleviate any possible cost push or demand pull inflation, and the totals of which retailers are compensated for so that they can remain whole on their margins.

    This changes the currently inadequate consumer financial paradigm of work for pay and loan ONLY, to Dividend AND work for pay and/or loan if desired and creditable. It also changes the entire psychology of the economy and money system from halting and austere scarcity to free flowing adequacy. And of course the tremendous abundance of productivity that technology bestows upon us is thus available technically without restriction, and increasingly so with innovation and increasing efficiency.

    Grace, the free gift, as an additional monetary/financial policy IS the answer. This may be anathema to the 800 lb. gorrillas of the too big to fail Banks whose biggest market consumer finance will undoubtedly be curtailed by such a policy, poor things, but it will be freedom in fact instead of merely words….for the individual.

  5. Bill Wilson says:

    There is a debate going on in NZ at the moment about bank profits.
    to wit: “In 2011, Australian banks made a pre-tax return of 1.19 percent on assets, compared with a global average of 0.36 percent.”

    I was wondering whether these “assets” of a bank are a real, or are they just this book-keeping entry you talk about and therefore a fiction.
    If the actual assets were substantially less than reported, the profits would be much higher percentage wise…….no?

  6. mahaish says:

    mmt is trying to explain the financial relationship between the consolidated government sector and the banking system bk,

    and the context of this, is there attack on the igbc(inter temporal government budgetary contraint paradigm thats prevelent these days,.

    all these other debates may be important, but i dont think they effect the validity of the arguements mmt are pushing, in regards to the monetary system.

    there primary focus is on the financial relationships, and they defer to others when it comes to other things

  7. Bhaskara II says:

    Professor Keen,

    “Very cute! We need some levity on this blog–and the planet.”

    I’m glad the cartoons provide some levity. I got a good laugh out of some of them and hope some one else would get some enjoyment out of them too.

  8. Harry Smith says:

    Predication result:

    This was my comment:
    >Wed, 17 Aug 2011 10:05:55 +1000
    > Government will run out of money very soon. Because high interest rate makes
    > most of our companies less profits, ATO will get less tax from those
    > companies. At mean while companies will axe more employees and ATO will get
    > less personal income tax. Government has to get more tax from other sources.
    > That is in a negative cycle, it cannot run for long until crash.

    This is today’s (20 Dec 2012) news:

    Swan dumps budget surplus pledge
    By chief political correspondent Simon Cullen | ABC – 4 hours ago

    The Federal Government has all but dumped its promise to deliver a budget surplus this financial year, arguing the move will help protect the economy and jobs in the face of falling tax revenue.
    Treasurer Wayne Swan made the announcement after new figures showed a $4 billion write down in tax revenue during the first four months of the financial year.
    “Obviously, dramatically lower tax revenue now makes it unlikely that there will be a surplus in 2012-13,” he told reporters in Canberra this afternoon.
    “It’s not because the Government is spending too much, it’s because we didn’t collect the amount of taxes that we expected to collect.

  9. Harry Smith says:

    21 December 2012, I provide a Global Financial Market Alert to you.
    Please check the result in the next several weeks.

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