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 a professional economist 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 debts accumulated in Australia, 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.

    http://www.amazon.com/Mistakes-Were-Made-But-Not/dp/0156033909/

  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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