Time for a Coper­ni­can rev­o­lu­tion in eco­nom­ics

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The global finan­cial cri­sis took the vast major­ity of the eco­nom­ics pro­fes­sion by sur­prise. Though there were indi­vid­ual main­stream econ­o­mists — such as Robert Shiller and Joseph Stiglitz — who claim to have warned of the cri­sis, no main­stream eco­nomic model fore­saw any­thing like what even­tu­ated in 2007. In fact, main­stream model pre­dic­tions led to politi­cians being advised to expect tran­quil eco­nomic con­di­tions ahead. The OECD’s advice in its June 2007 Eco­nomic Out­look was typ­i­cal:

Indeed, the cur­rent eco­nomic sit­u­a­tion is in many ways bet­ter than what we have expe­ri­enced in years. Against that back­ground, we have stuck to the rebal­anc­ing sce­nario.Our cen­tral fore­cast remains indeed quite benign: a soft land­ing in the United States, a strong and sus­tained recov­ery in Europe, a solid tra­jec­tory in Japan and buoy­ant activ­ity in China and India. In line with recent trends, sus­tained growth in OECD economies would be under­pinned by strong job cre­ation and falling unem­ploy­ment.” (OECD fore­casts gen­tle turn for global econ­omy”)

After being so dis­as­trously wrong, one might expect that this mod­el­ing approach would now be sub­ject to seri­ous revi­sion. But while New Key­ne­sian DSGE model-builders are start­ing to add “finan­cial fric­tions” to their reper­toire of fac­tors that pre­vent the econ­omy from almost instantly attain­ing a com­pet­i­tive equi­lib­rium (as in New Clas­si­cal mod­els), the core par­a­digm — of an econ­omy which, left to its own devices, will ulti­mately reach equi­lib­rium, and in which money and finan­cial insti­tu­tions gen­er­ally play non-essen­tial roles — has not been chal­lenged.

Instead, the chal­lenge that is occur­ring in aca­d­e­mic insti­tu­tions is the sur­vival of the hand­ful of pro­po­nents of an alter­na­tive par­a­digm — one that sees cap­i­tal­ism as fun­da­men­tally both unsta­ble and mon­e­tary. Before the cri­sis, econ­o­mists who fol­lowed that broad tra­di­tion — includ­ing myself — were largely ignored by the main­stream. After the cri­sis, the main­stream could have accepted that this per­spec­tive has merit, and made more room for it in the aca­d­e­mic cur­ricu­lum. But instead, what lit­tle space was devoted to alter­na­tive approaches to eco­nom­ics has been reduced.

Click here to read the rest of this post.

(PS This post was writ­ten before an ami­ca­ble exchange with Tony Yates on Twit­ter over the week­end, in which we exchanged ref­er­ences on our dif­fer­ent approaches to macro­eco­nom­ics)

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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  • Steve Hum­mel

    Of course, by the time Halley’s Comet reap­peared, Ptole­maic astron­omy was largely dead: despite the Catholic Church’s per­se­cu­tion of Galileo, younger astronomers took to the new Coper­ni­can-Kep­ler­ian model because it was sim­pler and more ele­gant.”

    What is more ele­gant and sim­ple than the way to make an unsta­ble endoge­nous money sys­tem stable.…which is a + to indi­vid­ual incomes and a — to prices char­ac­ter­ized by a uni­ver­sal Div­i­dend dis­trib­uted directly to the indi­vid­ual and a Dis­count to retail prices to avoid /eliminate infla­tion?

  • TruthIs­ThereIs­NoTruth

    Big dif­fer­ence is that Coper­ni­cus was prov­ably cor­rect. The pre­dic­tions made by Steve are firstly not from his dynamic model directly and sec­ondly on the most part pretty badly incor­rect. I think a closer anal­ogy is some sort of reli­gious rev­o­lu­tion, from some naïve belief to a “believe me there will be doom fore­told by the next comet” belief.

    Coper­ni­cus pre­dic­tions were pre­cise, model derived and ver­i­fied by obser­va­tion. Coper­ni­cus did not pre­tend his guesses were pre­dic­tions, he did not shout every time he got some­thing right and he did not make excuses when he got things wrong. The comet pre­dic­tion was pre­cise, not “maybe in the next 3–7 years” based on a rule of thumb! A rule of thumb is not a model!

    The worst thing is that this self grat­i­fy­ing anal­ogy will give young stu­dents the false belief that if they go and learn this model they can actu­ally pre­dict some­thing. It’s a shame because this ver­sion of eco­nom­ics is cer­tainly worth learn­ing and is inter­est­ing, but why pro­mote it under false pre­tenses?

  • Steve Hum­mel

    Huh?

    Look at the empir­i­cal cost account­ing data on the books of every enter­prise that is still a going con­cern. It will show that labor costs, i.e. indi­vid­ual incomes, includ­ing those of man­agers and own­ers, will never be total costs. Real­ize that accord­ing to cost account­ing con­ven­tion ALL costs must go into prices. Hence, in the untouched, unreg­u­lated econ­omy the rate of flow of total costs/prices will always tend to exceed the rate of flow of total indi­vid­ual incomes.

    This is the most basic dis­e­qui­lib­rium of eco­nom­ics.

    Under­stand that any and all money those enter­prises earn is busi­ness rev­enue which must be expensed via the same cost account­ing dis­ci­pline and so any money re-cir­cu­lat­ing or turn­ing over in the econ­omy can­not but re-ini­ti­ate and add to this dis­e­qui­lib­rium. Thus the veloc­ity of money is an irrel­e­vant met­ric and false if it declares that it has added INDIVIDUAL pur­chas­ing power which can only be actu­ally mea­sured in terms of indi­vid­ual incomes and prices to be liq­ui­dated.

    Under­stand that the only way addi­tional indi­vid­ual income is added to the econ­omy is through addi­tional bor­row­ing, but of course that money injected into the economy/commerce always incurs more costs than it cre­ates indi­vid­ual incomes with which to liq­ui­date such costs.

    The only way to cre­ate a vir­tual equi­lib­rium of indi­vid­ual incomes and costs…without incur­ring more costs than indi­vid­ual incomes.…is to GIVE THE INDIVIDUAL a gift/supplement to their incomes or lack thereof.

    Pro­duc­tion cre­ates more costs/prices than it simul­ta­ne­ously cre­ates indi­vid­ual incomes. 

    P = C/P > Ind I and A + B A will not pay for A + B

    They are the e= mc 2 of eco­nom­ics.

  • Bhaskara II

    ~8-9th Cen­tury BC The idea that the Earth is in motion around the Sun is pro­posed in San­skrit texts in ancient India. It is the first recorded evi­dence of helio­cen­trism.

    http://www.astronomyfactbook.com/timelines/heliocentrism.htm

    Inter­est­ingly enough, the Sun was widely believed to be the cen­ter of the uni­verse, an idea which pre-dates west­ern sci­ence (with the excep­tion of a few Greek believ­ers) by about 1100 years. How­ever, this idea may be much older: vague ref­er­ences to the sun being in the cen­ter of the uni­verse exist in Vedic writ­ings from as early as 3000 B.C.

    http://www.starteachastronomy.com/indian.html

    http://www.hindupedia.com/en/Heliocenteric_Theory_Of_Gravitation

    http://www.hindupedia.com/en/Heliocenteric_Theory_Of_Gravitation

    Some con­tem­po­rary schol­ars sug­gest that the ancient Indo-Euro­pean peo­ples who com­posed the Vedic Scrip­tures pos­sessed an advanced knowl­edge of astron­omy (prior to c. ninth cen­tury BCE).

    The ear­li­est traces of helio­cen­trism are found in sev­eral San­skrit texts writ­ten in ancient India.
    Yaj­navalkya, the 9th–8th cen­tury BCE author of the Shata­patha Brah­manarec­og­nized that the Earth is spher­i­cal and expounded a helio­cen­tric con­cept.

    He wrote, “The sun strings these worlds — the earth, the plan­ets, the atmos­phere — to him­self on a thread.”
    —Shata­patha Brah­mana, 8.7.3.10

    Yajanavalkya also accu­rately mea­sured the dis­tances between the Sun and the Earth and the Earth and the Moon.
    The Aitareya Brah­mana, writ­ten dur­ing the same period (c. 9th–8th cen­tury BCE) states: 

    The Sun never sets nor rises. When peo­ple think the sun is set­ting, it is not so; they are mis­taken. It only changes about after reach­ing the end of the day and makes night below and day to what is on the other side.”

    http://www.keplersdiscovery.com/Ancients.html

  • TruthIs­ThereIs­NoTruth

    The ele­gance of the solar sys­tem model is a reflec­tion of the ele­gance of the solar sys­tem. It is mind bog­gling to think that some­one like Steve Keen with the breadth of his knowl­edge thinks that a sim­i­larly ele­gant dynamic sys­tem applies to the econ­omy. It is equally mind bog­gling that the sci­en­tific notion of ver­i­fi­ca­tion by obser­va­tion would be refenced to prove his point, given years of bla­tantly incor­rect “pre­dic­tions” well pub­li­cised by the media. Espe­cially that the pre­dic­tions are not even com­ing directly from any model. The anal­ogy in this post is truly mind bog­gling.

    But think­ing about apply­ing this ver­i­fi­ca­tion by obser­va­tion makes me realise some­thing. Unfor­tu­nately the analy­sis of econ­o­mists who are recog­nised for con­sis­tently accu­rate fore­cast is for priv­i­leged eyes only. I’ve been closely fol­low­ing the works of these econ­o­mists in par­al­lel to Steve Keen’s for the best part of the last decade. My insight is that the best anal­ogy for the econ­omy is that it is like a puz­zle. Com­par­ing Steve’s approach to the pro­fes­sion­als it is like com­par­ing a 10,000 piece puz­zle to a 20 piece puz­zle. — just hit edi­tor limit tbc

  • TruthIs­ThereIs­NoTruth

    It is an unfair game, Steve is one man with teach­ing and media com­mit­ments. These guys work in teams and spend 50–60 hours a week ded­i­cated to gath­er­ing and putting the pieces together, one man with no infra­struc­ture could never do this. 

    The most impor­tant dif­fer­ence is that the work of the pro­fes­sional econ­o­mists is not based on any the­ory. At the level of detail they work at, the­ory only gets in the way. The­ory can only be use­ful to proxy what might hap­pen when you lack the details of what is actu­ally hap­pen­ing, but as Steve Keen has proven, when it comes to pre­dic­tive abil­ity this approach is no bet­ter than ran­dom chance.

    The puz­zle pieces con­sist of all the fine details. The com­mod­ity spe­cial­ist knows the out­put of every sin­gle mine in the coun­try. He knows all the ongo­ing and planned project details. He under­stands ship­ping costs and who is buy­ing. He under­stands how the com­mod­ity is used.

    I remem­ber really well the pre-GFC and post-GFC views. Pre GFC the view was that the US econ­omy is fuelled by pri­vate debt

  • TruthIs­ThereIs­NoTruth

    I remem­ber well the pre-gfc view of these econ­o­mists. US econ­omy is dri­ven by con­sumers who are load­ing up on debt. 70% of US econ­omy was reliant on con­sumer spend­ing. The risk to the US econ­omy once the debt cycle was over was high­lighted — no time­line were given it was and always is a case of what the risks are and what to look out for. 

    In con­trast the Aus­tralian econ­omy was dri­ven by a min­ing invest­ment boom. China was trans­form­ing from an exter­nally to an inter­nally dri­ven econ­omy with a large pro­por­tion of Aus­tralian com­modi­ties used for the mas­sive Chi­nese urban­i­sa­tion. That made both China and hence Aus­tralia resilient to exter­nal shocks. There is no the­ory here. This view was con­sis­tent pre and post GFC and was reflected in my com­ments on this web­site back then in response to Steve Keen’s pre­dic­tions of a depres­sion, bank busts, dou­ble digit unem­ploy­ment, etc…

    Steve Keen — take stock of your incor­rect pre­dic­tions and at the least stop giv­ing stu­dents false hope that learn­ing your model will give them some sort of pre­dic­tive insight. There is value in your model but pre­dic­tive abil­ity is not it.

  • Bhaskara II

    @TNT

    I remem­ber really well the pre-GFC and post-GFC views. Pre GFC the view was that the US econ­omy is fuelled by pri­vate debt.” –TNT

    Did they mean the US econ­omy was not fueled by an econ­omy but “finance”? Not fueled with real earn­ings, cash, goods, and asset flows?

    Did those econ­o­mists pub­li­cize effec­tively?

    Ques­tion: Do the pro­fes­sional econ­o­mists that you are famil­iar with under­stand account­ing?

  • Bhaskara II

    Epicy­cle and Helio­cen­tric model can pro­duce same results.

    By the way I did a 3D graph study of plan­e­tary orbits. (I might have using cir­cu­lar orbits for sim­plic­ity). I com­pared the visual angles against the star back­ground in both the heil­io­cen­tric and the the epicy­cle mod­els.

    Guess what? The results were the same. Apper­ent planet ret­ro­grade was the same.

    Pro­fes­sor Keen‘s dynamic dis­ag­gre­gated account­ing model can pro­duce results that no aggre­gated equi­lib­rium model can.

  • TruthIs­ThereIs­NoTruth

    Bhaskara,

    Don’t know how to answer your first 2 ques­tion, they come across a bit rhetor­i­cal. The point is that the build of pri­vate debt was not some­thing that pri­vate sec­tor econ­o­mists were ignor­ing as may have been claimed by Steve Keen. At the time I was mak­ing com­ments to that effect.

    There is no incen­tive for pri­vate sec­tor econ­o­mists to pub­li­cise, their work is not a pub­lic ser­vice. The clos­est you might come is some­thing like the wall street jour­nal or fin review in Aus­tralia. It would be inter­est­ing to review the arti­cles in those pub­li­ca­tions pre and post GFC.

    Your last ques­tion — sorry know what you’re get­ting at, detect­ing some rhetorical/sarcasm so going to ignore.

  • Steve Hum­mel

    Bhaskara,

    The intu­itive insights of the Vedas does not sur­prise me at all. It is the wis­dom tra­di­tion from which Bud­dhism, Judaism and Chris­tian­ity all were derived. Wis­dom is wis­dom, that is it is the inte­gra­tive process itself, includ­ing the inte­gra­tion of both the scientific/objective mode of think­ing and the intuitive/subjective mode. That inte­gra­tion will include the insights of BOTH sci­ence AND intuition/wisdom tra­di­tions. That is why eco­nom­ics is in such a state of flux…because it does nei­ther. It ignores/denies/invalidates with ortho­doxy the ever present empir­i­cal mon­e­tary real­i­ties enforced by com­merce via the dis­ci­pline of cost account­ing, and it attempts the align­ment of its goals of equi­lib­rium, bal­ance and free flow­ing­ness (words which describe aspects and def­i­n­i­tions of the word grace).…without includ­ing mon­e­tary grace as a nec­es­sary bal­anc­ing, equi­li­brat­ing and free­ing par­a­digm for con­sumer finance to oppose debt and work for pay (the lat­ter of which with AI in profit mak­ing sys­tems will inevitably lower effec­tive demand). 

    Wis­dom, not con­ven­tional eco­nomic wis­dom, not even uncon­ven­tional eco­nomic wis­dom, can and will inte­grate eco­nom­ics. We just need enough of both Sci­ence and Faith (in Wis­dom) to see the empir­i­cal real­i­ties and inte­grate the align­ing ideas.

  • james­g11

    Steve,
    I think you’ll get a lot out of Andrew Warwick’s “Mas­ters of The­ory: Cam­bridge and the Rise of Math­e­mat­i­cal Physics” (2003) — espe­cially the final sec­tions on the rea­sons for the fail­ure of Cam­bridge & its Math­e­mat­i­cal Tri­pos cul­ture to embrace Einstein’s The­o­ries of Rel­a­tiv­ity & shed its ‘detailed’ adher­ence to elec­tro-mag & the aether.
    Right up your alley … plenty of maths & the­ory & uni­ver­sity insti­tu­tional cul­ture in a devel­op­ing his­tor­i­cal con­text! And, an add-on exam­ple to the Coper­ni­can par­a­digm.

  • Steve Hum­mel

    Like human con­scious­ness, com­merce itself and its nec­es­sary dis­ci­pline for deter­min­ing prof­itabil­ity, cost account­ing, are so ever present and subtle.…that almost no one is con­sciously aware of them.

    Accoun­tants don’t think in terms of the eco­nomic effects of the datums they deal with on a daily basis, and most econ­o­mists, hav­ing never run an actual busi­ness, are com­pletely igno­rant of account­ing and even less aware of its sub­set cost account­ing.

    I chal­lenge any econ­o­mist and any accoun­tants here to read the fol­low­ing arti­cle and dis­pute it here.

    http://en.wikipedia.org/wiki/Social_credit

  • Bhaskara II

    @TNT

    Your last ques­tion — sorry know what you’re get­ting at, detect­ing some rhetorical/sarcasm so going to ignore.

    I was hop­ing to get some infor­ma­tion. You said you know other econ­o­mists but I know very few. 

    I tried to get a feel­ing if any account­ing courses are required for most eco­nom­ics degrees. I looked at about 5 uni­ver­si­ties require­ments and did not see it required. At the time I thought googling might not be a good sam­pling method. Also, econ­o­mists might pick it up later.

    I sus­pect that I am not good with rhetoric.

  • Bhaskara II

    Here is a sim­ple way any ancient and obser­vant peo­ples could deduce “helio­cen­trism.” This chart gives evi­dence of “helio­cen­trism”. It could be derived from obser­va­tion or an other chart from ober­va­tions.

    https://www.assa.org.au/media/42542/plelong-2014.png
    http://en.wikipedia.org/wiki/Elongation_(astronomy)

    In this chart the outer plan­ets do not ret­ro­grade and the inner plan­ets oscil­late around the sun.

    It can be also be gen­er­ated by direct obser­va­tion or from the “Zodiac Time Line Chart, which can also be made by direct obser­va­tion.

    http://www.davidchandler.com/pltrack.htm

    If one takes the angle (or hours) between the plan­ets and the sun in the Zodiac Time Line chart, the Elon­ga­tion chart can be derived. But, the elon­ga­tion chart could also be directly mea­sured. So ther are at least two ways to get to the elon­ga­tion chart. (Both these charts could also be done in polar coor­di­nates.)

    Other things to notice in the Elon­ga­tion Chart, the slow­est outer planet angle rate of changes are 180 degrees from the sun, when the sun and planet are in oppo­si­tion for each indi­vid­ual outer planet at dif­fer­ent times as a sys­tem. These are the same times that the appar­ent ret­ro­grade motions in the Zodiac time line chart, and sky.

    In the zodiac time line chart the the dates of the mid­dle of ret­ro­grade and high­est rates of ret­ro­grade are also shown when the plan­ets are each indi­vid­u­ally in oppo­si­tion with the sun with the earth. This when the plan­ets cross the dashed yel­low line 12 hours or 180 degrees from the sun´s yel­low solid line.

    But, if one actu­ally was unfor­tu­nate to have an epicy­cle model first, this data leads to it´s aban­don­ment. This is would indi­cate, in an epicy­cle model of the sys­tem, that each of the outer plan­ets, the epicy­cle angle are in sync with the sun and earth posi­tions. For each outer planet such synced epicy­cles, the angle of the epicy­cle of each outer planet would be near­est the earth and going the oppo­site way at max­i­mum ret­ro­grade rate when the each of the outer plan­ets can be directly observed to be in oppo­si­tion with the sun from the earth! The next ques­tion is what is this reoc­cur­ring oppo­si­tion for each outer planet when the epicy­cle posi­tion is clos­est to the earth in the model?

  • Bhaskara II

    I came up with the above but some but am not famil­iar with the litu­ra­ture except my school books.

  • March 2009 was a major nadir event for global equity asset val­u­a­tions. For the US It was a 152 year non­lin­ear event.

    http://www.economicfractalist.com/

    There­after, the world Cen­tral Banks have demon­strated that bad debt could be mon­e­tized and mon­e­tized very eas­ily with CB net­worked com­put­ers’ one’s and zero’s under­writ­ing over­val­ued assets and sup­port­ing loans to credit unwor­thy con­sumers owing too expen­sive of mort­gages rel­a­tive to their income and refi­nanc­ing at lower and lower trend­ing inter­est rates which were nat­u­rally occur­ring because of lack of demand.

    Going for­ward enti­tle­ment debt, sov­er­eign pen­sion debt, i.e., in the US Social Secu­rity oblig­a­tions to 60 mil­lion baby boomers, sov­er­eign bond debt, defense spend­ing, et. al., can be and will be mon­e­tized going for­ward — because there is no other sociopo­lit­i­cal option.

    2009 marked the begin­ning the US hegemony’s third equity frac­tal. The next 120 years for the US will be high­lighted by a trend­ing and one’s and zero’s debt driven(with debt also an asset)inflationary asset val­u­a­tion expan­sion — so much eas­ier and more effi­cient than adding base met­als to the ear­lier pure sil­ver coins of the sim­i­lar evo­lu­tion­ary econ­omy of ancient Rome.

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