What Is Neo­clas­si­cal Eco­nom­ics & an Alter­na­tive Mon­e­tary Macro­eco­nom­ics

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This is a talk I gave in Tel Aviv, Israel at the invi­ta­tion of the Rethink­ing Eco­nom­ics Stu­dent Forum there (which is a mem­ber of the Inter­na­tional Stu­dent Ini­tia­tive for Plu­ral­ism in Eco­nom­ics), and at the Pales­tine Eco­nomic Pol­icy Research Insti­tute in Ramal­lah, Pales­tine. I cover the defin­ing fea­tures of Neo­clas­si­cal Eco­nom­ics, con­trast these with Post Key­ne­sian Eco­nom­ics, and sim­u­late a debt defla­tion using the Open Source mod­el­ling pro­gram Min­sky.

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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  • Lau­ry­nas

    Can you please share that model you use in pre­sen­ta­tion some­where in the web? Or maybe you could do that in your blog? Would be very help­ful to analyse all the mov­ing parts. Thanks.

  • Will do. Like a lot of things, my capac­ity to do this has been stuffed up by the ISP has­sles I had with the site a cou­ple of years ago. I haven’t been able to get Filezilla to work on the site so I have to go through a few com­pli­cated web pages to upload files.

  • Lau­ry­nas

    Got it! Just re-checked that you have that idea in your mind. Going to wait patiently now.

  • Bhaskara II
  • Bhaskara II

    Oh, please be nice to peo­ple.

  • Bhaskara II

    Oh, I want to dis­cour­age buy­ing Greek bonds based to the his­tory of 2012 Greek bonds. Due to risk of loss of prin­ci­ple.

    A Wall Street Jour­nal writer called it the largest default in his­tory in 2012 and men­tioned that the forced bond con­ver­sion (default) was for pri­vate cred­i­tors but not pub­lic lenders, such as the other euro-zone coun­tries.

  • Tim Ward

    Pro­fes­sor Keen has hit the bull’s eye with the inverse cor­re­la­tion between changes in debt lev­els and changes in unem­ploy­ment, it seems to me. There are real causal links for that, I believe.

    Builders will build as long as they can get financ­ing.” I heard that a long time ago. The financ­ing pays/employs con­struc­tion work­ers, sub­con­trac­tors, buys mate­ri­als, &c. And for every worker in con­struc­tion, an addi­tional ~8 work­ers are employed in feeder indus­tries and ser­vices: wood, cement, glass, steel, alu­minum prod­ucts, fas­ten­ers, tools, elec­tri­cal, plumb­ing, appli­ances, ser­vices, &c. So all these types of employ­ment are sen­si­tive to increases in con­struc­tion project financ­ing (debt). And this is a big sec­tor of the econ­omy. This financ­ing is simul­ta­ne­ous, or leads the employ­ment. Com­mer­cial paper finances employ­ment in feeder indus­tries, depend­ing on order flow. On project com­ple­tion, take out financing/mortgage financ­ing clears the project financ­ing, and the builders move on. (Some sales are prospec­tive, at the front end, but project financ­ing is the norm.)

    Autos is another sec­tor were ‘financ­ing is employ­ment’ but this as at final sales rather than at pro­duc­tion. (Auto pro­duc­tion does involve com­mer­cial paper, and debt financ­ing from bonds, in addi­tion to retained earn­ings.) Autos can have large vol­ume sales only with financ­ing, few peo­ple can buy with cash. And so employ­ment in autos, feeder indus­tries, parts, mechanic ser­vices &c depends on finance. Another causal link.

    All the big ticket items require financ­ing and so it is directly sup­port­ing employ­ment.

    Credit freeze => unem­ploy­ment increases. Decreas­ing demand => unem­ploy­ment increases.

    From there, one could go on to other speculative/prospective sec­tors, like shale oil and oth­ers. Junk bonds finance the prospects, and the employ­ment, equip­ment and ser­vices required. Sales of the final prod­uct ser­vice the debt. 

    And so ‘Financ­ing is employ­ment’.

    E&OE !

  • Bhaskara II

    Fin­gers crossed! Eurogroup chair­man Jeroen Dijs­sel­bloem as he talks to the Greek Finance Min­is­ter”

    The man in the back­ground indi­cates that at least one of the pho­tos was com­posed.


    Pho­tos from:
    1. http://www.express.co.uk/finance/city/576516/Debt-crisis-Greece-temporarily-averts-default-disaster
    2. http://www.bloomberg.com/news/articles/2015–05-11/greece-seeks-bailout-progress-with-ecb-funding-at-risk

  • Bhaskara II

    Account­ing Joke:

    Two accoun­tants are in a bar when armed rob­bers burst in. The rob­bers line the cus­tomers up against a wall and pro­ceed to take their wal­lets, watches, etc. The first accoun­tant slips some­thing in the sec­ond accountant’s hand and whis­pers, ‘Here’s that 50 bill I owe you.’

  • Bhaskara II
  • Bhaskara II

    Above link in answer to fol­low­ing ques­tion:

    Why is it, that because peo­ple are hav­ing a hard time bor­row­ing money,
    our entire econ­omy is falling apart?

    Why must our farm­ers bor­row money every spring in order to have any hope
    of har­vest­ing in the fall? Why can’t Amer­i­can small busi­ness do
    some­thing as sim­ple as make pay­roll with­out bor­row­ing money?

    I have been told that if peo­ple don’t spend more than they have, our
    entire eco­nomic sys­tem would fall apart, and here it is hap­pen­ing, but
    why is that?

  • Tim Ward

    Hi, Bhaskara II: here are some thoughts on this.

    The pri­vate sec­tor is not homoge­nous. In the part con­tain­ing the large cor­po­ra­tions (with gov­ern­ment pro­cure­ment con­tracts) and large finance, there are infla­tion­ary pres­sures. In the part con­tain­ing small busi­nesses, fam­i­lies and indi­vid­u­als, there are defla­tion­ary pres­sures.

    Hyman Min­sky described how Big Gov­ern­ment in the US has pre­vented recur­rence of a great depres­sion. But Big Gov spending/demand is infla­tion­ary. Also in the US, there are large trans­fer pay­ments flows (infla­tion­ary). And there is the mil­i­tary bud­get, the largest in the world (infla­tion­ary). So the gov­ern­ment has imple­mented poli­cies to counter-act those infla­tion­ary pres­sures.

    What are those coun­ter­act­ing poli­cies? They have to be defla­tion­ary. This is to avoid the large infla­tions expe­ri­enced in the ‘70s and ‘80s. One of them is a flood of cheap con­sumer goods. Another is a large for­eign deficit. And another, outsourcing/off shoring of labour. Those jobs are not com­ing back, and the wages-that-are-con­sump­tion from them is gone. We have a low labour par­tic­i­pa­tion rate now. This is occur­ring at the same time as very large debt lev­els that pre­vent new lend­ing. Banks don’t want to lend into the defla­tion­ary sit­u­a­tion.

    So the com­bi­na­tion of trade poli­cies (demand shifted to for­eign pro­duc­tion, ~$50 billion/month trade deficit) outsourcing/off shoring (job losses) and high debt lev­els acts as aus­ter­ity, for one part of the pri­vate sec­tor, labour, fam­i­lies and small busi­ness.

    This is occur­ring at the same time as we have the largest junk bond bub­ble in his­tory, get­ting close to ~$2 tril­lion dol­lars, financ­ing stock buy backs lift­ing stock indexes to all time highs. Finance has oper­ated as Min­sky said, and has sought out and found oppor­tu­ni­ties for financ­ing. (QE money is almost all sit­ting at the Fed, as excess reserves, col­lect­ing 0.25% inter­est. QE is not respon­si­ble, the financ­ing activ­i­ties of the large com­mer­cial banks are respon­si­ble for the finance sec­tor infla­tion.) So we have infla­tion in the large cor­po­rate and finance sec­tors of the pri­vate sec­tor (essen­tially from Big Gov and the Fed guar­an­tee­ing prof­itabil­ity and low upstream inter­est rates), while the small busi­nesses and fam­i­lies are expe­ri­enc­ing aus­ter­ity.


  • Bhaskara II

    First two bailout mem­o­ran­dums invalid under [Greek] Con­sti­tu­tion, expert tells Par­lia­ment inquiry”

    ANAMPA — The first two mem­o­ran­dum agree­ments accom­pa­ny­ing the Greek bailouts are invalid under the Con­sti­tu­tion since they were not rat­i­fied by a two thirds major­ity in Par­lia­ment, Athens Uni­ver­sity Law School Pro­fes­sor Geor­gios Kasi­ma­tis of the Athens Uni­ver­sity Law School, an expert in the Con­sti­tu­tion, informed law­mak­ers on Wednes­day. ”


  • Bhaskara II

    In Ethnos.gr,

    You are the first to speak trea­son. Com­mits Mr. Tsipras the offense of high trea­son request­ing money? “Com­mented Mr. Lover­dos.

    Trans­lated by google.


  • Bill K.

    For the peo­ple hurt­ing maybe we need to test this sooner. I doubt if we can get a nation to go in big in one shot. How about a lot­tery jubilee. We have lot­ter­ies that make peo­ple, who often have no idea what to do with it all, instead mil­lion­aires. We all know money fol­lows money .… the rich get richer … That is a result of Steve’s model. Our grand­par­ents told us that. What about lot­ter­ies that gave folks stakes in busi­nesses? They could only live off the pro­ceeds and after x yrs. they had to return their busi­ness stake to the lot­tery or buy in.

  • petery

    My ques­tion again that I have asked many times — does gov­ern­ment inter­ven­tion that sta­bi­lizes the econ­omy nec­es­sar­ily involve credit cre­ation? Werner says it must. Do you agree? How have you mod­eled gov­ern­ment? Would greatly appre­ci­ate answer. Oth­er­wise great pre­sen­ta­tion. Hope you can write a short new essay on Sraffa. The chap­ter in your book still leaves for me a lot of ques­tions and con­fu­sion.

  • James Charles


    That is a very good ques­tion!

    The essence of R. Werner’s ideas can be found here?