Guest post by Geoff Davies*
Readers of this blog will have encountered the idea that near-equilibrium neoclassical economic theory is irrelevant to dynamic, far-from-equilibrium, real modern economies, and that the body of theory built around the neoclassical assumptions is full of inconsistencies. You will also be familiar with the idea that money and debt play central, dynamic roles in modern economies.
I was invited to give a speech on that topic to the Second Meeting of Ministers of Finance of the CELAC in Quito, Ecuador today (November 29 2013). In it I outlined Keynes’s Bancor proposal from Bretton Woods, explained why White’s plan was adopted instead, supported the proposal by Zhou Xiaochuan, the Governor of the Central Bank of China, to institute Keynes’s scheme, and proposed that Latin America could try a regional version of the same via the Bank of the South.
Recently Krugman has been defending textbook economics, arguing that if policy makers had simply followed their advice, the crisis would have been far less severe.
It is deeply unfair to blame textbook economics either for the crisis or for the poor response to the crisis. (Krugman, The Trouble with Economics is Economists)
I don’t dispute that austerity has made the crisis far worse, and that conventional IS-LM analysis argues for government stimulus, not austerity, in a severe recession. But the extrapolation that therefore mainstream economics textbooks are fonts of wisdom is nonsense. They are instead enormous exercises in often unintentional mendacity–omitting huge swathes of economic research or empirical data when that research or data contradict mainstream beliefs.
The “Mun” iteration of Minsky, the Open Source system dynamics program with special features to handle monetary modeling, is now available at SourceForge:
The Minsky Home Page at SourceForge
The program now supports the basic features needed for system dynamics in general, and has the added capability of modeling financial flows using “Godley Tables”, which are based on the double-entry bookkeeping standards of accountants and make it easy to generate dynamic (ordinary differential) equations of financial flows.
The Finance News Network’s Lelde Smits interviewed me just before I left Australia last week: Link to the Interview.
I’ll also be giving a number of talks in Europe in the next few weeks. Follow the links below for more details:
Thursday December 5th, 5pm the Oxford PPE Society
Friday December 6th, 5pm, the Post Crash Economics society in Manchester University (Roscoe Building — Lecture Theatre A). See this Facebook page for more details.
Tuesday December 10th, 8pm: “Why the Crisis is not over”, the University of Groningen
Friday December 13th, 3.15pm: “Why the Crisis is not over”, Duisenberg school of finance in Amsterdam
Larry Summers’ speech at the IMF has provoked a flurry of responses from New Keynesian economists that imply that Summers has located the “Holy Grail of Macroeconomics” – and that it was a poisoned chalice.
“Secular stagnation”, Summers suggested, was the real explanation for the continuing slump, and it had been with us for long before this crisis began. Its visibility was obscured by the subprime bubble, but once that burst, it was evident.
So the crisis itself was a sideshow. The real story is about inadequate private sector demand, which may have existed for decades. Generating adequate demand in the future may require a permanent stimulus from the government – meaning both the Congress and the Fed.
Compare the following two statements, and see if you can guess who the speakers are, when they made these speeches, and what they announced in them:
“[We are] concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy. Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future. This is particularly the case in a market that is already widely considered to be over-valued.” (Speaker One).
When the hot air finally leaves this new housing bubble, its deflation will be too slow to result in a 40 per cent fall from June 2010 to June 2025…
Right up until the early 20th century, taking an innocent stroll on the foreshores of the US West Coast was hazardous for your health: you might suddenly fall unconscious, and wake up to find yourself an unfree seaman aboard a US clipper bound for China. That’s where the term “Shanghaiing” originated: not because the crime happened in Shanghai, but because Shanghai was normally the victim’s first port of call as a shipping slave.
Paul Krugman posted on a familiar topic yesterday—the failure of most inflation hawks to admit that they were wrong—and included praise for one such hawk who has indeed changed his mind and said so:
There’s an interesting contrast with one of the real intellectual heroes here, Narayana Kocherlakota of the Minneapolis Fed, who has actually reconsidered his views in the light of overwhelming evidence. In our political culture, this kind of switch is all too often made into an occasion for gotchas: you used to say that, now you say this. But learning from experience is a good thing, not a sign of weakness. (“A Tale of Two Fed Presidents”)
This article is the third in a series on Australia’s housing market. Read the first article here and second article here.
In the last two articles in this series, I argued that Australia’s house prices “walk like a duck” – using BIS data, Australia is one of only four countries where prices are twice as high in real terms as they were in 1985. And they “quack like a duck” – accelerating household debt is a major driver of rising house prices, as in the other present and past house price bubble economies (the US, Spain, Japan, Norway, the UK and Denmark). So having concluded they’re a duck, what species of duck are they?
