Don’t Do the Math

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Eight years ago, in December 2005, I began warning of an impending economic crisis that would commence when the rate of growth of private debt started to fall. My warnings hit a popular chord: journalists throughout the world picked it up and publicised my views – as well as similar arguments from Nouriel RoubiniDean BakerAnn PettiforMichael HudsonWynne Godley, and a few others.

But our arguments were ignored by the economics profession because, according to mainstream economic theory, private debt should have no impact on aggregate demand. As Bernanke put it, lending simply transfers spending power from lender to borrower, and “pure redistributions should have no significant macro-economic effects” (Bernanke, Essays on the Great Depression, p. 24).

Yet the empirical evidence that change in debt does have “significant macro-economic effects” is compelling: the correlations of change in debt to the level of employment (Figure 1), and of acceleration in debt to changes in employment (Figure 2), are overwhelming.

Figure 1: Compelling visual evidence? Not to a mainstream economist
Graph for When economic theory fails the maths exam,

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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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3 Responses to Don’t Do the Math

  1. koonyeow says:

    Would like to recommend the book below to strengthen your argument, Steve.

  2. koonyeow says:

    Furthermore, I suppose ingroup/outgroup distinction is something inborn (something evolutionary to be more precise). Being an ingroup does have an evolutionary advantage, especially during our hunter-gatherer time. We of course no longer live in a hunter-gatherer society, but that ingroup/outgroup differentiation instinct is still there, and instinct usually trumps rationality. Those of us who know that neo-classical economics is unscientific is the outgroup (in the eyes of neo-classicals).

  3. GerryJ says:

    It seems that only critical life experiences can overcome strong opinions. Yet I wonder if the presentation of new thinking is simple yet subtle, that it can serve as a key that unlocks the way to change.
    For example, a distinction between, none, some and all, could precede a distinction betwen most and sufficient.
    Better to leave the intelligent conservative with a maze puzzle than a logical or numerate one. So, to convince economists of endogenous money, first ask is it impossible to create a loan when all accounts are in balance and the reserves limit has been reached, then take them along the path that confronts them with the reality of their wrong assumptopns.

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