Tran­scend­ing the Lucas Cri­tique & sim­ple dynamic mod­el­ling with Min­sky

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The Lucas Cri­tique has ruled eco­nom­ics for the last 40 years, and led it into a dead-end as well. In this talk to the Eco­nom­ics for Every­one con­fer­ence run by the Post Crash Eco­nom­ics Soci­ety in Man­ches­ter, I argue that micro-founded mod­els fail because of the emer­gent prop­er­ties that char­ac­terise com­plex sys­tems. An alter­na­tive approach that tran­scends Lucas’s well-founded objec­tion to ad-hoc model-build­ing is to build mod­els from strictly true macro­eco­nomic iden­ti­ties. I show that three sim­ple identities–the employ­ment rate, the wages share of income, and the pri­vate-debt-to-GDP ratio–are suf­fi­cient to build a sim­ple dynamic model that gen­er­ates the pos­si­bil­ity of a finan­cial cri­sis. I also give a high-speed but I think com­pre­hen­si­ble tuto­r­ial on using Min­sky, the Open Source mon­e­tary mod­el­ling pro­gram.


The Presentation
Powerpoint Slides

Minsky Files (right click & choose “Save As” to download)

Files build during this talk

Demo file 1: Good­win

Demo file 2: Good­win

Demo file 3: Min­sky

Files embedded in the presentation

Reduced form

Flow­chart

Flow­chart includ­ing God­ley Table

 

 

 

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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  • jbra­gin

    Steve,

    Thanks for post­ing the ppt slides and espe­cially for post­ing the mky files, as well, as on my Mac I am unable to down­load embed­ded files in a ppt pre­sen­ta­tion.

    I think this is your best stand-alone talk on your approach to macro­eco­nomic mod­el­ing.

    John

  • Tim Ward

    The micro view and the derived larger idea of the mar­ket of many buy­ers and many sell­ers, miss the point about mar­ket power, monop­o­lies, car­tels, etc. And so try­ing to found macro mod­el­ling on micro con­cepts that exclude real mar­ket activity/participants is a hypoth­e­sis con­trary to fact. 

    Also, demand can be con­di­tioned. Adver­tis­ing works. It is con­trary to the ratio­nal agent farce. So it isn’t any won­der that macro mod­el­ling of sup­ply demand rela­tion­ships, based on micro, is unre­al­is­tic.

  • James Bradley
  • Bhaskara II

    Inter­est­ing Arti­cle and a great com­ment\.

    Study: Women Even Less Will­ing to Put Up With Crappy Pay Than Men”

    Also inter­est­ing is, “Four out of the five top rea­sons thirty some­thing women and men leave orga­ni­za­tions over­lap,” which sug­gests that your firm is repelling gen­ders equally. That’s…something? Adjust your plans (read: payscale) accord­ingly.’

    http://goingconcern.com/post/study-women-even-less-willing-put-crappy-pay-men

  • twowith­inthree­thati­sone

    @Tim
    Most econ­o­mists, not being accoun­tants,. miss the under­ly­ing micro fac­tor that makes infla­tion inher­ent ‚which is the empir­i­cal fact that the rate of flow of total costs always tends to exceed the rate of flow of total indi­vid­ual incomes. Most accoun­tants, not being busi­ness­men, miss this fact as well. This is not mar­gin­al­ism which indeed is invalid, but rather a flaw in cost account­ing con­ven­tions which appro­pri­ately enables busi­ness to bet­ter han­dle depre­ci­a­tion costs, but which does not credit the indi­vid­ual with cap­i­tal appre­ci­a­tion so that the macro-econ­omy actu­ally can be equi­li­brated.

    As for adver­tis­ing, all busi­ness­men need to do is stay attuned to present time and present sta­tis­tics and adjust pro­duc­tion accord­ingly. Due dili­gence is nec­es­sary for the savvy busi­ness­man, and most under­stand this or go out of busi­ness. How­ever, if the indi­vid­ual is not cred­ited with a sup­ple­men­tary income over and above what he/she makes from work for pay then the econ­omy will never be sta­bi­lized, espe­cially as inno­va­tion and AI dis­rup­tively reduce aggre­gate demand.

  • gmc­kee

    A very good pre­sen­ta­tion of impor­tant ideas and results. I have a few nits to men­tion:

    - The “Lucas Cri­tique” actu­ally can be taken far beyond what Lucas him­self appar­ently under­stood it to mean. When I first heard about it, I read it to mean that the response to crises is that gov­ern­ments change the rules, e.g. by aban­don­ing the gold stan­dard and cre­at­ing cen­tral banks. Lucas seems not to have intended that, but some­thing much sim­pler, namely that crises expose non­lin­ear­i­ties and irra­tional responses in indi­vid­ual micro­foun­da­tional behav­iors. Your dis­cus­sion seems to con­flate the cri­tique itself (impor­tant, pro­found) with the method­olog­i­cal response to the cri­tique (inad­e­quate, even wrong).

    - Philip Anderson’s cri­tique of reductionism/“constructionism” is over­stated. The great achieve­ment of Boltz­mann, Maxwell and Gibbs was to show that the con­struc­tion­ist approach can suc­ceed in the limit of large num­bers of ele­ments, i.e. using sta­tis­ti­cal mechan­ics. In eco­nom­ics, sta­tis­ti­cal mechan­ics would cor­re­spond to agent based mod­els, while ther­mo­dy­nam­ics would cor­re­spond to the dynam­i­cal mod­els in Min­sky. It’s impor­tant to bridge these approaches, but that may be work for a future gen­er­a­tion of researchers.

    - I down­loaded the slides hop­ing to find a link to the online book about Chaos, but that slide is miss­ing from the ppt file.

  • abelian

    Hi Steve,

    Sorry to hijack this thread, but where are the fig­ures for Debunk­ing Eco­nom­ics (2nd ed)? I have the Kin­dle ver­sion and am read­ing through chap­ter 3, where you state “The rel­e­vant com­mod­ity is placed on the hor­i­zon­tal axis, all other com­modi­ties on the ver­ti­cal, and the bud­get con­straint is ‘moved out’ (see Fig­ure 14). Where is Fig­ure 14 (the one that is rel­e­vant to your state­ment?

  • At http://www.zedbooks.co.uk/debunking_economics

    The pub­lish­ers insisted on putting most of the dia­grams in a free online sup­ple­ment, on the argu­ment that too many fig­ures would have the book rel­e­gated to the text­book sec­tion by book­sellers.

  • Did I for­get to include that? It’s:

    http://chaosbook.org/

  • abelian

    Thanks Steve. I tried the web­site before you posted it (and again when you did). It says “Web­site Com­ing Soon”. And noth­ing else.

  • abelian

    Hi Steve,

    I’m read­ing the next chap­ter but I must say it’s very dif­fi­cult to keep up when the graphs are just being described using words with­out pic­tures. What does it mean for the curve to be “neg­a­tive”, since there are two types of curves with non-increas­ing gra­di­ent? How do the curves behave when the vari­ables are changed? Etc. I’m not expect­ing you to answer these ques­tions here, but as a new­bie to eco­nom­ics try­ing to use your book as an intro­duc­tion it is very hard to fol­low along with­out an illus­tra­tion of what the ter­mi­nol­ogy means.

    I’m not so sure your pub­lisher gave you the right advice to put the pic­tures in a sep­a­rate sup­ple­ment. For your book to *not* read like a text­book, it (or at least the chap­ters at the begin­ning) *needs* the graphs. 

    And as I posted ear­lier, Zed­Books does not have the sup­ple­ment on its web­site. You might like to ask them about this.

  • Thanks for point­ing that out–looks like they’re doing a large scale redesign of their web­site.

    I’ll put a link up on the blog instead. In the mean­time, use this:

    Sup­ple­ment

  • abelian

    Got it. Thanks Steve. I hap­pened to come across your webi­nar with Castalia. Look for­ward to hear­ing what you have to say.