Steve Keen's Debtwatch

It had to hap­pen: neo­clas­si­cal econ­o­mists are now advis­ing that the antic­i­pat­ed reces­sion will be much milder if only work­ers would accept wage cuts.

When I saw this cri­sis was immi­nent in Decem­ber 2005, one major fac­tor that moti­vat­ed me to go pub­lic with my analy­sis was the cer­tain­ty that, when the cri­sis hit, neo­clas­si­cal econ­o­mists would either blame it on wages being too high (”the abo­li­tion of Work Choic­es caused the Depres­sion!”), or would sug­gest that wages should be cut to reduce the imbal­ance between the sup­ply of and demand for labour.

This is get­ting a bit like Star Wars, but I promise–this will be the last post in this series. In the pre­vi­ous two, I con­struct­ed a mod­el of a pure cred­it econ­o­my in which the mon­ey sup­ply and eco­nom­ic activ­i­ty can expand smooth­ly of time.

Of course, that’s not the real world. As we know from the bit­ter expe­ri­ence of the finan­cial cri­sis that is this blog’s rai­son d’e­tre, finance char­ac­ter­is­ti­cal­ly desta­bilis­es an oth­er­wise healthy econ­o­my. Part of the rea­son for that is the exis­tence of Ponzi Financing–something that the recent Bernie Mad­off scan­dal has thrown into $50 bil­lion high relief.

Uni­ver­si­ty of Texas Eco­nom­ics Pro­fes­sor James Gal­braith is a son of the great US Insti­tu­tion­al econ­o­mist John Ken­neth Gal­braith, and a lead­ing non-ortho­dox econ­o­mist in his own right. He has devel­oped high­ly inno­v­a­tive meth­ods to mea­sure eco­nom­ic inequal­i­ty that are well doc­u­ment­ed here; he is a stri­dent crit­ic of con­ven­tion­al eco­nom­ics; and he has been as active in the USA as an ana­lyst of and com­men­ta­tor on this finan­cial cri­sis as I have in Aus­tralia. His many inter­views on the top­ic are linked from this site.

Ross Git­tins final­ly comes aboard the debt-defla­tion train, with an arti­cle in today’s (Decem­ber 8 2008) Syd­ney Morn­ing Her­ald enti­tled “It’s not infla­tion that did us in, it’s the bor­row­ing”. For non-Aus­tralian read­ers, Ross has been a reg­u­lar eco­nom­ic com­men­ta­tor for Syd­ney’s lead­ing news­pa­per for about forty years.

His eco­nom­ic posi­tion in the past could be described as pre­dom­i­nant­ly neo­clas­si­cal, with occa­sion­al dash­es of Key­ne­sian­ism, the odd infre­quent jibe at the unre­al­is­tic assump­tions under neo­clas­si­cal eco­nom­ics, and a social­ly con­cerned ori­en­ta­tion that was crit­i­cal of both income inequal­i­ty and exces­sive con­sumerism.