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!“–04-15.gif

    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?“–488-90/61/6147/OL2G100Z/posters/william-hamilton-so-what-s-it-like-to-actually-be-in-a-bear-market-cartoon.jpg

  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.–488-90/60/6067/OLZD100Z/posters/lee-lorenz-he-s-illuminating-something-called-the-book-of-billable-hours-new-yorker-cartoon.jpg

    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“–488-90/60/6067/I7ID100Z/posters/wayne-bressler-baby-reaches-for-mobile-above-crib-that-is-adorned-with-stocks-bonds-dol-new-yorker-cartoon.jpg

  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 PREVENTSFREEMARKET 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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