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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  • The Poly­Cap­i­tal­ist

    Dear Steve,

    This is off topic but I was won­der­ing if you have or could take a look at and com­ment on the analy­sis and solu­tion ideas in Richard Duncan’s new book, ‘The New Depres­sion’. Like you he seems to have a good grasp of the role of pri­vate debt and credit although the two of you seem to be com­ing at it from some­what dif­fer­ent angles.

    Dun­can was also recently asked on the show Cap­i­tal Account, which you’ve also been on, about the debt jubilee idea. He dis­missed the idea but it didn’t seem to me that he was famil­iar with your ideas on this or under­stood exactly what you are propos­ing very well (in fair­ness to Dun­can, the show host didn’t explain the jubilee idea well).

    Thanks,

    TPC

    P.S. Good luck with Min­sky and great idea to put it on Kick­starter.

  • David Pitkin

    It stood out to me as well that in your model with bank loans and entre­pre­neurs we also increase the veloc­ity of the money that is in the econ­omy. A strong fac­tor in dri­ving the GDP up and to the right.

  • Harry Smith

    Today is 2 Decem­ber 2012, I pro­vide a Global Finan­cial Mar­ket Alert to you.
    Please check the result in the next sev­eral weeks.

    Last two alerts we have pro­vided were at 9am 19 Octo­ber 2012 and 7 March 2012

  • koonyeow

    Let’s Kick­start it, Steve.

  • koonyeow

    Kick­start­ing, visu­ally.

  • koonyeow
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  • Dale Pierce

    I’ve fol­lowed Bill Mitchell and the UMKC folks for a few years. Your stuff was ini­tially too far over my head, but now I’m start­ing to get it. One thing about econ­o­mists, includ­ing you, is that you all sound equally sure that you are right, no mat­ter how right or how wrong you actu­ally are. Paul Krug­man, for exam­ple, always impressed me prior to my own MMT epiphany. I didn’t know, at the time, that the whole “Nobel Prize” schtick in eco­nom­ics was a bank-sec­tor put-up job.

    So, as a new fan, please let me thank you for a par­tic­u­larly lucid and focused talk today. BTW, I won­der whether you have ever thought about doing Min­sky as an open-source project. It seems like an appro­pri­ate under­tak­ing.

  • Thanks Dale,

    Min­sky is Open Source:

    https://sourceforge.net/p/minsky/home/Home/

    And yes, I agree–that’s a real sin of econ­o­mists, and I’m as guilty of it as any of my col­leagues.

  • Thanks TPC,

    I’ve just pur­chased Duncan’s book on Kin­dle. I’ll see if I can read it in 2013 and assess it.

    Cheers, Steve

  • Dale Pierce

    One thing that occurred to me while lis­ten­ing:

    …money is the lia­bil­ity of the bank­ing sec­tor to the rest of the econ­omy.”

    It wasn’t clear to me how gen­eral this state­ment was intended to be, so I took it to mean that money on the *banks’ bal­ance sheets* is to be defined this way or looked at in this way. Money in my pocket or money in a cof­fee can buried in the back yard can’t be a lia­bil­ity of the bank­ing sec­tor.

    There is also a lit­tle ver­bal dis­so­nance between this state­ment and the line we always hear from MMT blog­gers that money (along with T-bonds etc.) are all “lia­bil­i­ties of the issu­ing gov­ern­ment.” MMT puts a lot of empha­sis on the fact that hor­i­zon­tal money cre­ated by bank loans is sub­se­quently destroyed when loans are repaid, whereas ver­ti­cal money cre­ated when gov­ern­ment spends stays in the econ­omy, usu­ally per­ma­nently, as cit­i­zens accu­mu­late finan­cial assets and gov­ern­ments accu­mu­late pub­lic debt.

    I don’t mean there is any con­tra­dic­tion — I see that the banks’ bal­ance sheets and my cof­fee can roll up into one cat­e­gory in the big­ger T account of the con­sol­i­dated gov­ern­ment sec­tor. I’m just liable to get mixed up at the inter­face between the two dis­cus­sions, and I sup­pose that oth­ers may be too.

    Thanks again

  • Mich

    GDP flat­lines”.
    The mix up between Value and Amount of money. This model wouldn’t pre­vent there is increase in knowl­edge, tech­ni­cal advance­ments, higher pro­duc­tiv­ity, lower cost of pro­duc­tiv­ity, new prod­ucts and so more wealth and progress, would it.
    So the total Value goes up, I would call this true eco­nomic growth. With the Amount of money kept con­stant it would mean the value of a unit of money goes up.
    Of course the reverse sit­u­a­tion is shown in the other sim­u­la­tion. GDP can grow expo­nen­tially with grow­ing Amount of money, even with shrink­ing total Value (decreas­ing total wealth, Ponzi econ­omy). In other words GDP in not equal to true eco­nomic growth. Shouldn’t econ­o­mists point this out to the world and come up with some­thing bet­ter.

  • Bhaskara II

    Dale Pierce:

    MMT blog­gers argu­ments are pur­ported to be account­ing argu­ments. Most MMT blog­gers I have read seem to have left huge impor­tant things out of their “account­ing.” They break account­ing rules. Most MMT blog­gers only “account” for ONLY FINANCIAL ASSETS. That account­ing is incom­plete, thus flawed, and wrong. The parts they leave out are where the losses would occur and who would bear those losses. 

    Thus their pol­icy rec­om­men­da­tions are most likely to prove to be counter pro­duc­tive to the cit­i­zenry.

    I men­tioned some of the MMT ideas to some peo­ple around me to see if prob­lems of their the­o­ries and rec­om­men­da­tions we also obvi­ous to oth­ers. I’m sure that most non econ­o­mists can poke holes in the MMT the­ory or pol­icy rec­om­men­da­tions imme­di­ately.

    Are these MMT blog­gers for real? 

    Many are sell­ing one huge bridge.* 

    *In case this say­ing is not in your cul­ture pat­tern. There is a say­ing, “If you buy that, I have a bridge for sale, you might like to buy.”

  • Bhaskara II

    Dale Pierce:

    What kind of assets are the MMT blog­gers leav­ing out? 

    I’m ask­ing you this ques­tion rather than telling you the answer, because, in you last com­ment it seems that you have a much larger grasp on account­ing that most peo­ple or econ­o­mists. It seems you have been expertly work­ing some of this stuff out with T accounts rather than being the pas­sive infor­ma­tion con­sumer.

    Hint: The very basics of dou­ble entry book­keep­ing apply here.

  • Bhaskara II

    Dale Pierce:

    Fur­ther hint on the basics of book­keep­ing that apply to the ques­tion,
    “What are the MMT blog­gers leav­ing out of their pur­ported account­ing? OR, stated an other way, what accounts should be included for a com­plete account­ing?”

    If you want to attempt to fig­ure it out with­out these hints skip the fol­low­ing.

    Applic­a­ble basics of dou­ble entry book­keep­ing that lead to the answer of the above ques­tion:

    1. The entity con­cept.
    2. The chart of accounts.
    3. What are per­sonal accounts and real accounts?
    (Accounts of an entity are clas­si­fied into three types of accounts; per­sonal accounts, real accounts, and nom­i­nal accounts.)

  • Steve Hum­mel

    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
    3) Cost accounting’s con­ven­tions will always be in effect when­ever a dol­lar etc. enters or re-enters the econ­omy.

    1 and 2 tell us that thus the rate of flow of total prices will always tend to exceed the rate of flow of total incomes. 3) tells us that thus the veloc­ity of money will never effec­tively com­pen­sate for, or equate the effects of the scarcity of incomes com­pared to prices with the result­ing loss of value of indi­vid­ual pur­chas­ing power and the build up of debt.

    Now you can have rent seek­ing, deriv­a­tive mon­strosi­ties etc. etc. etc. occur­ring through­out this process, but these are just symp­toms and reac­tions to the above effects caused by cost accounting’s con­ven­tions. How can I say this? Because cost accounting’s effects are the only one of the neg­a­tive things men­tioned above THAT ARE A CONSTANT COMMERCIAL REALITY.…AND ARE A PART OF THE SYSTEM ITSELF INSTEAD OF JUST REACTIONS AND ECONOMIC VICES. Far be it from me to exclude someone’s symp­tom or “cause”, but if the sys­tem itself has a flaw that is in con­stant effect in its nor­mal oper­a­tion then it will con­tinue even after all other symp­toms or “causes” cease.

  • mahaish

    Most MMT blog­gers only “account” for ONLY FINANCIAL ASSETS. That account­ing is incom­plete, thus flawed, and wrong. The parts they leave out are where the losses would occur and who would bear those losses”

    sure they dont talk about the vari­a­tion in val­ues of the col­la­toral back­ing those finan­cial assetts, essen­tially non finan­cial assetts.

    but thats not what they are on about,

    thay are try­ing to describe how the mon­e­tary sys­tem oper­ates at the ver­ti­cal and hor­i­zon­tal level, and i think there account­ing is pretty bul­let proof when it comes to that.

  • mahaish

    1. The entity con­cept.
    2. The chart of accounts.
    3. What are per­sonal accounts and real accounts?
    (Accounts of an entity are clas­si­fied into three types of accounts; per­sonal accounts, real accounts, and nom­i­nal accounts.)”

    im not sure why any of this is rel­e­vant in any cri­tique of mmt.

    the mmt frame­work at the macro level has three enti­ties,

    trea­sury, the cen­tral bank , and the com­mer­cial bank­ing sys­tem.

    there ar also a series of inter lock­ing bal­ance sheets between these enti­ties, which have a bear­ing on macro pol­icy, and mmt plays a vital role help­ing us under­stand these rela­tion­ships.

    espe­cially given the pol­icy grid lock that is hap­pen­ing in the US and europe, in regards to pub­lic debt dri­ven by neo con econ­o­mists who either dis­tort or sim­ply do not under­stand these bal­ance sheet rela­tion­ships.

  • Steve Hum­mel

    The­o­ries are abstrac­tions from real­ity and thus are at least once removed from it. Thus they often miss and/or mis­in­ter­pret data. Neo-clas­si­cal eco­nom­ics as we all here agree is a strik­ing exam­ple of this. Com­mer­cial real­i­ties, espe­cially 24/7, 365 real­i­ties as deeply embed­ded as account­ing and its sub­set cost accounting.….…are just that, real­i­ties, and thus do not have that prob­lem.

    Can any­one here answer this ques­tion? When is a unit of money that is actu­ally in the econ­omy, ever not sub­ject to cost accounting’s con­ven­tions?

  • Steve Hum­mel

    A debt jubilee of course is an excel­lent, excel­lent idea
    My newest big Dividend/little Jubilee proposal.…because if you don’t insti­tu­tion­al­ize a div­i­dend before a gen­eral jubilee Finance will find a way to pre­vent it from ever hap­pen­ing. (And by the way I have been sug­gest­ing a jubilee over on Mish Shedlock’s par­tic­u­lar brand of mon­e­tary and eco­nomic delu­sion for over 5 years…so I’m way ahead of the curve)

    Give every­one over the age of 18, $3000/mo. and require that they pay off at least $1000 worth of debt with that spe­cific $3000, and of course pay off more of it with any income from work also.

    Maybe we could even make it $4000–5000/mo. and require $2000–3000 to be paid toward debt retire­ment. Then when the debt is almost gone, just keep the $2000/mo. in per­pe­tu­ity. Rapid con­trolled reset of a jubilee and con­tin­u­ous suf­fi­cient effec­tive demand all wrapped up into one. 

    Shout it from the rooftops! 🙂 .….seri­ously.

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  • Dear Steve,
    Thank you for your reply, I really respect your opin­ion and I see your point.
    May I ask how you think is the USA and other indebted coun­tries are going to deal with the over­whelm­ing debt they are car­ry­ing with­out infla­tion or default? Surely its eas­ier to repay debt with worth­less pieces of paper?
    Also at some stage the banks will bor­row, at a very low rate to lend out, this is the busi­ness there in, they have noth­ing to lose “too big to fail” and inter­est rates are likely to be super low so it must entice peo­ple to bor­row also with­out any gov­er­nance.
    In any case if defla­tion is really set in for years, the gov­ern­ment will just send checks to peo­ple for many thou­sands of dol­lars just to kick start the econ­omy. They have done this before, surely they will do the same with large amounts in the future, per­haps a $100,000 per per­son or more, it cost the gov­ern­ment noth­ing to make the FIAT money and it will buy votes. More peo­ple will be happy at the begin­ning and less peo­ple will lose the value of their sav­ings since they have none.
    Can I con­clude from your the­ory that Gold and Sil­ver are a mis­placed invest­ment now, since high infla­tion is not likely to break out in the near-term?
    Kind regards, Kalman Rad­vanyi

  • mahaish

    May I ask how you think is the USA and other indebted coun­tries are going to deal with the over­whelm­ing debt they are car­ry­ing with­out infla­tion or default?” 

    well japan with one the high­est debt to gdp ratio of over 500% when you fac­tor in all the sec­tors,

    has had over 20 years of defla­tion and a carry trade on its cur­rency as banks under­take cur­rency swaps to exploit the inter­est rate dif­fer­en­tial, which have been vir­tu­aly at zirp(zero inter­est rate pol­icy.

    we have pre­ci­cely the oppo­site of what the right wing eco­nomic fra­ter­nity have been sug­gest­ing.

    there has been no cur­rency deval­u­a­tion lead­ing to hyper infla­tion, there has been no default on the pub­lic debt.

    inter­est rates have been at record lows,

    and in the case of the yanks, their short term debt is at neg­a­tive yields.

    thats right neg­a­tive yields, we have to pay the fed for the priv­iledge of own­ign their gov­ern­ment debt

    all this makes a mock­ery of the notion that we are fac­ing some sort of hyper infla­tion­ary abyse.

  • Dear mahaish,
    Do you think Gold and Sil­ver will go up in price? Why have they gone up so far, is that not a symp­tom of hedg­ing against infla­tion? Is there another rea­son the price is going up? Thank you for your advice and the­o­ries. Regards, Kalman.

  • Bhaskara II

    Here is the flaw of most MMT blog­gers’ mod­els I have seen on the web. They leave out the real world effects by leav­ing out real assets and or tan­gi­ble assets, in their incom­plete account­ing. And the con­clu­sions are not sup­ported by full account­ing logic. The bal­ance sheets are incom­plete or there are off bal­ance sheet items.

    The rest explains the hints:

    Mahaish:

    You are on top of it! You men­tioned what has been left out of most of what MMT blog­gers “account­ing”. They have left out prac­ti­cally all non finan­cial assets or real and tan­gi­ble assets. So, in those mod­els that they are sell­ing as founded on account­ing, ignores the whole of real world effects. 

    “ “1. The entity con­cept.
    2. The chart of accounts.
    3. What are per­sonal accounts and real accounts?
    (Accounts of an entity are clas­si­fied into three types of accounts; per­sonal accounts, real accounts, and nom­i­nal accounts.)”

    I’m not sure why any of this is rel­e­vant in any cri­tique of MMT.”

    The three account­ing con­cepts were a hint of what account­ing prin­ci­ples would show the flaws in the MMT model edi­fice dec­o­rated with account­ing terms in MMT blogs I have seen. I gave those three account­ing con­cepts that would lead to the view that real assets are not counted in those MMT mod­els and should be counted. Maybe the hints were a lit­tle abstract. I was hop­ing to show the way with­out giv­ing away the answer to the ques­tion.

    1. The entity con­cept is that each entity keeps their own books from their point of view, sep­a­rate from other enti­ties. Each entity has a full set of accounts, that include both real assets and finan­cial assets. The MMT blogs mostly cover finan­cial asset accounts but not the rest. Their MMT enti­ties have only a par­tial set of accounts. 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. These MMT blog­gers never show the real assets being removed from their pre­vi­ous own­ers.

    2. The chart of accounts of an account­ing entity shows all the accounts that the entity uses or might use. Look­ing at almost any chart of accounts one would see the accounts that belong to the real account cat­e­gory are miss­ing from those MMT blog­gers mod­els. Some of those blog­gers stated they were ignor­ing real assets or only count­ing finan­cial assets. That makes their MMT “account­ing” incom­plete.

    3. Real assets are a big part of the real accounts cat­e­gory as apposed to paper assets like finan­cial assets, which are in the con­trast­ing, per­sonal accounts cat­e­gory. Real assets are those that the entity still has con­trol of or in pos­ses­sion of, such as, prop­erty plant and equip­ment, pro­duc­tive machin­ery, land, inven­to­ries, cash in hand, etc. Per­sonal accounts are accounts with per­sons or other enti­ties out­side the account­ing entity. Most finan­cial assets are in those per­sonal accounts cat­e­gory. The finan­cial lia­bil­i­ties to other enti­ties are also put into accounts clas­si­fied as per­sonal accounts. This fol­lows what would be in account­ing text­books.

    Account­ing is value based. It includes records of the real parts of trans­ac­tions. The value given to real things was the amount of money paid. So, account­ing counts real stuff in addi­tion to finan­cial (paper) assets. One could account for quan­ti­ties of items in addi­tion to the costs the way inven­to­ries are accounted for.

    Account­ing is not needed for a cri­tique of MMT:
    Many peo­ple can see the prob­lem of many of the argu­ments. But, proper account­ing shows the many of the MMT blog­gers’ logic to be defi­cient account­ing. There­fore the fol­low­ing con­clu­sions are unsup­ported by proper account­ing argu­ments.

    They would do bet­ter to start with a full chart of accounts for each entity includ­ing the pri­vate sector(s).