Author Archives: Steve Keen

This is the third arti­cle in a three-part series on the self-destruc­tion of neo­clas­si­cal eco­nom­ic the­o­ry. See part one here and part two here.

To say that the long self-destruc­tion of the aca­d­e­m­ic eco­nom­ic tra­di­tion was giv­en a final push towards the cliff by the glob­al finan­cial cri­sis paints a pret­ty bleak pic­ture of the future of the dis­mal sci­ence. But I can also see some rays of sun­shine.

The first is to look out­side the Acad­e­my, to for­mal eco­nom­ic bod­ies – to cen­tral banks and Trea­suries in par­tic­u­lar. In the past, these bod­ies uncrit­i­cal­ly repro­duced what­ev­er was the lat­est fad in aca­d­e­m­ic eco­nom­ics (wit­ness the rapid shift from IS-LM and AS-AD mod­els to DSGE mod­els when aca­d­e­m­ic econ­o­mists pro­claimed that the for­mer fell vic­tim to the Lucas Cri­tique).

Floyd Nor­ris, the chief finan­cial cor­re­spon­dent of the New York Times, has writ­ten an arti­cle enti­tled “The Time Bernanke Got It Wrong” on Bernanke’s sup­port of “poli­cies that allowed the dan­ger­ous imbal­ances to grow and bring on the cri­sis” in which he cites Hyman Min­sky and my work mod­el­ling Min­sky’s Finan­cial Insta­bil­i­ty Hypoth­e­sis.

If, after read­ing this post, you’d like to read some Min­sky, or see the paper of mine that Floyd cit­ed, please fol­low those links.

If you’d like to con­tact me, please go to the “About” page of this blog.

This is the sec­ond arti­cle in a three-part series on the self-destruc­tion of neo­clas­si­cal eco­nom­ic the­o­ry. See part one here.

As the neo­clas­si­cal eco­nom­ics tra­di­tion grad­u­al­ly gave up its cen­tral posi­tion in uni­ver­si­ties over the last forty years, it remained tri­umphant in the real world. But the glob­al finan­cial cri­sis brought a sud­den, shock­ing end to this exhuberism.

The fail­ure of neo­clas­si­cal mod­els to antic­i­pate it (and the suc­cess of many non-ortho­dox the­o­rists to do so – includ­ing me, but also Wynne God­ley and his col­lab­o­ra­tors using a sec­toral bal­ances approach, Ann Pet­ti­for, Michael Hud­son, Nouriel Roubi­ni, Dean Bak­er, and numer­ous Aus­tri­an-informed com­men­ta­tors) sud­den­ly called into ques­tion the role of the tra­di­tion.

Forty years ago, any stu­dent who enrolled in an under­grad­u­ate degree at the Fac­ul­ty of Eco­nom­ics at Syd­ney Uni­ver­si­ty in 1971 had to com­plete four year-long cours­es in eco­nom­ics, out of a total of ten such cours­es: Micro­eco­nom­ics and Quan­ti­ta­tive Meth­ods in the first year, Macro­eco­nom­ics in the sec­ond, and Inter­na­tion­al Eco­nom­ics in the third.

INET has just released an inter­view with my reseach col­league and now good friend Pro­fes­sor Matheus Gras­sel­li, the Deputy Direc­tor of the Fields Insti­tute, one of the world’s lead­ing insti­tutes for applied math­e­mat­i­cal research. He presents a lead­ing math­e­mati­cian’s per­spec­tive on math­e­mat­ics as used and abused in eco­nom­ics, and what promise there is for a bet­ter eco­nom­ics in future, based on more mod­ern math­e­mat­ics than is used in Neo­clas­si­cal DSGE mod­els. A high­ly rec­om­mend­ed video:

This is the keynote speech that I gave to the Aus­tralian Teach­ing Eco­nom­ics Con­fer­ence, the paper for which will be the sub­ject of my next two posts: the decline of Eco­nom­ics from up to 40% of any busi­ness degree to about 4% today. In it I sug­gest that het­ero­dox econ­o­mists should com­plete the march to zero by jump­ing ship and join­ing Account­ing depart­ments. There they could devel­op a “Mon­e­tary Eco­nom­ics for Accoun­tants” unit that would replace the stan­dard Intro­duc­to­ry Eco­nom­ics sub­ject required for accred­i­ta­tion as an accoun­tant.

I spoke at the BEM-KEDGE Busi­ness School Finance and Soci­ety con­fer­ence in Bor­deaux on Wednes­day. The pre­sen­ta­tion is below, and the MKY files used in it are below the video.

The Min­sky files are linked below. RIGHT-CLICK and choose “Save as” to save them to your PC, oth­er­wise your screen will fill with XML gib­ber­ish.

• Loan­able Fund mod­el
• Endoge­nous Mon­ey mod­el 
• Debt-defla­tion mod­el

Use the lat­est ver­sion of the pro­gram to run these: it’s pret­ty bug-free now and will prob­a­bly be the sta­ble “Pet­ty” iter­a­tion of Min­sky while we move on the “Mun” ver­sion, which will focus on improv­ing the visu­als and speed­ing up sim­u­la­tions.

A sud­den erup­tion, and the sur­prise of real­is­ing that the world he under­stands is not the one he actu­al­ly inhab­its. – Pao­lo Baci­galupi, The Windup Girl

This time real­ly is dif­fer­ent.

Stock mar­kets are crash­ing after a run­away boom. Again. And the finan­cial sec­tor is ped­dling com­plex deriv­a­tive prod­ucts. Again. (Check out the US satir­i­cal rag The Onion’s bril­liant take on this: “Finan­cial Sec­tor Thinks It’s About Ready To Ruin World Again”)

One of the hand­ful of jour­nal­ists to ful­ly grasp the enor­mi­ty of the eco­nom­ic cri­sis that was to com­mence in late 2007 has died, long before the cri­sis itself will end. In his col­umn Plan­et Wall Street, David Hirst’s poet­ic prose warned his read­ers of the com­ing eco­nom­ic tsuna­mi, at the same time as the offi­cials who should have pre­vent­ed it con­tin­ued to laud the very instru­ments of finan­cial deceit that made it pos­si­ble.

Though the Fourth Estate’s high­er pur­pose is to keep the oth­er three in check, the human fear of being an out­cast keeps most jour­nal­ists with­in the bounds of con­ven­tion­al wis­dom. David had no prob­lem step­ping out­side it, as he stepped out­side the con­ven­tions of so much else in life.

Paul Krug­man recent­ly post­ed on pre­dic­tions of the cri­sis before it hap­pened, in a piece enti­tled “Non-prophet Eco­nom­ics”. It had a set of propo­si­tions about how one should eval­u­ate such claims with which I com­plete­ly and utter­ly agree. I’ll quote it in its entire­ty, because it’s an emi­nent­ly suit­able start­ing point for eval­u­at­ing whether a pre­dic­tion was in fact made:

“So as I see it, we should first of all be eval­u­at­ing mod­els, not indi­vid­u­als; obvi­ous­ly we need peo­ple to inter­pret those entrails mod­els, but we’re look­ing for the right eco­nom­ic frame­work, not the dis­mal Nos­tradamus.

Read more: http://www.businessspectator.com.au/article/2013/6/11/economy/more-forecasting-neoclassicals-and-nostradamus#ixzz2VszIBLQ2