Steve Keen's Debtwatch

This is the sec­ond part in a two-part series. To read the first part, click here.

In my arti­cle yes­ter­day I showed how Paul Krug­man had used the views of a young James Tobin to dis­miss the rel­e­vance of banks to macro­eco­nom­ics – even though those views were lat­er dras­ti­cal­ly revised by James Tobin him­self. The con­trast between the the­o­ries advanced by the young James Tobin and Tobin the Elder were stark, and a salu­tary les­son in the ben­e­fits of always remain­ing open-mind­ed to new infor­ma­tion. But the ques­tion remains, which Tobin should you believe?

Read­ers with long mem­o­ries will recall Paul Krug­man describ­ing inter­est in the his­to­ry of eco­nom­ic thought as “Tal­mu­dic schol­ar­ship” (see fig­ure 1), and dis­miss­ing it with an emphat­ic “I Don’t Care”.

“So, first of all, my basic reac­tion to dis­cus­sions about What Min­sky Real­ly Meant – and, sim­i­lar­ly, to dis­cus­sions about What Keynes Real­ly Meant – is, I Don’t Care,” Krug­man said in 2012. “I mean, intel­lec­tu­al his­to­ry is a fine endeav­or. But for work­ing econ­o­mists the rea­son to read old books is for insight, not author­i­ty; if some­thing Keynes or Min­sky said helps crys­tallise an idea in your mind – and there’s a lot of that in both mens’ writ­ing – that’s real­ly good, but if where you take the idea is very dif­fer­ent from what the great man said some­where else in his book, so what? This is eco­nom­ics, not Tal­mu­dic schol­ar­ship.”

The speed with which a few use­ful mod­i­fi­ca­tions can be done to a a mod­el in Min­sky reminds me of the old “don’t try this at home” say­ing. I’d love to race some­one adding the same con­cepts in a pro­gram like Ven­sim, Stel­la or even Vis­sim!

One of the defin­ing fea­tures of neo­clas­si­cal eco­nom­ics is the belief that macro­eco­nom­ic analy­sis has to be not mere­ly com­pat­i­ble with, but deriv­able from, micro­eco­nom­ic analy­sis. The devel­op­ment of eco­nom­ic the­o­ry has been dri­ven far more by this belief than by the desire to make the the­o­ry com­pat­i­ble with the observed behav­iour of the econ­o­my.

This ‘reduc­tion­ist’ aspect of eco­nom­ics – the attempt to reduce the high­er lev­el top­ic of macro­eco­nom­ics to an applied ver­sion of the low­er lev­el top­ic of micro­eco­nom­ics – is at odds with the last 50 years of gen­uine sci­ences, where com­plex­i­ty has ruled the roost, for rea­sons that were elo­quent­ly put by Physics Nobel Lau­re­ate Philip Ander­son in a high­ly read­able paper enti­tled “More Is Dif­fer­ent”.

One of the advan­tages of being over­seas right now is that it takes less effort to avoid lis­ten­ing to the insipid dis­course that pass­es for polit­i­cal debate dur­ing this Aus­tralian elec­tion. As Kevin Rudd and Tony Abbott com­pete over who can be more obnox­ious to refugees, I find myself pin­ing for the days of sen­si­ble and humane poli­cies under Mal­colm Fras­er. As politi­cians make them­selves the butt of their own unin­ten­tion­al sup­pos­i­to­ry jokes, I pine for some­one who could deliv­er a killer line against his oppo­nent, rather than against him­self: Paul Keat­ing.

I was delight­ed to see, in Paul Krugman’s post – ‘What Janet Yellen – And Every­one Else – Got Wrong’ – that he now iden­ti­fies ‘the debt over­hang’ as the rea­son this eco­nom­ic down­turn has per­sist­ed for so long.

The best expla­na­tion, I think, lies in the debt over­hang. For the most part, even those who cor­rect­ly diag­nosed a hous­ing bub­ble failed to notice or at least to acknowl­edge the impor­tance of the sharp rise in house­hold debt that accom­pa­nied the bub­ble. And I would argue that this debt over­hang has held back spend­ing even though finan­cial mar­kets are oper­at­ing more or less nor­mal­ly again. In short, get­ting the bub­ble right, while no small thing, wasn’t enough; Yellen (and many oth­er peo­ple, myself includ­ed) under­es­ti­mat­ed the fragili­ty of the finan­cial sys­tem, but also the impor­tance of house­hold debt.

The lat­est “Pet­ty” ver­sion of Min­sky final­ly qual­i­fies as a 1.0 release: there are enough sys­tem dynam­ic and user-inter­face fea­tures in it to declare it a sta­ble release. We’ll mod­i­fy it to remove any bugs that are identified–and I just spot­ted one inter­mit­tent one involv­ing wiring (see https://sourceforge.net/p/minsky/tickets/324/)–but oth­er­wise this will remain a sta­ble release, with no new fea­tures to be added.

From now on, new fea­tures will be added in the “Mun” devel­op­ment fork.

You can down­load the PC ver­sion from here:

https://sourceforge.net/projects/minsky/files/latest/download

The Mac ver­sion is avail­able here:

https://sourceforge.net/projects/minsky/files/Mac%20Binaries/

Anoth­er elec­tion is on in Aus­tralia, and the top­ic du jour – the polit­i­cal top­ic du cen­tu­ry it seems – is that, hor­ror of hor­rors, the government’s bud­get next year will be in deficit to the tune of $30 bil­lion! It’s a scan­dal! Our debt is bal­loon­ing! And it’s all Labor’s fault! Why, all you have to do is look at the respon­si­ble Howard peri­od – falling debt – and com­pare it to the irre­spon­si­ble Labor peri­od – ris­ing debt – and you know who to vote for, don’t you?

Fig­ure 1: From the respon­si­ble Howard to the irre­spon­si­ble Rudd?

Well there’s a rose in the fist­ed glove
And eagle flies with the dove
And if you can’t be with the one you love hon­ey
Love the one you’re with
(Stephen Stills 1970)

As I not­ed in the pre­vi­ous post, I’m work­ing with the Governor’s Woods Foun­da­tion to pro­duce a com­pre­hen­sive data set on pri­vate debt for its Debt-Eco­nom­ics project (see www.debt-economics.org). As part of that, last week I real­ized that the Flow of Funds data on finan­cial sec­tor debt wasn’t what I had hoped it was, and I had to revise down my esti­mates of the US pri­vate debt to GDP ratio from 1952 till today. That revi­sion implied that today’s “Peak Debt” lev­el was low­er than that of the Great Depres­sion.