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Steve Keen: Why He Saw "It" Coming, and Others Did Not

Fri, 02 Dec 2011 11:24:15 GMT

The two intersecting lines of supply and demand penetrate economics textbooks like Einstein's mass-energy equivalence penetrates physics textbooks. The theory behind the two lines is inherently flawed, says Steve Keen.

It is not possible logically to derive from individuals and their preferences the aggregate demand and supply curves presented in economic textbooks -- unless one is willing to make a host of unrealistic assumptions, such as that all people are alike. That is why the theory is flawed, according to Steve Keen, Professor of Economics at University of Western Sydney in Australia.

The Naked Emperor Dethroned

In part 1 of the INET interview, he talks about the flaws in economic theory, and explains why the second edition of his book, Debunking Economics, carries the subtitle The Naked Emperor Dethroned.

How He Saw "It" Coming

In part 2 of the interview, he talks about how in his search for a realistic framework of capitalism he ended up with the work of Hyman Minsky. Unlike standard theory, Keen says, Minsky emphasizes the role of money and debt in the economy. What firms do is they borrow money to invest during a boom, and then they have to repay part of that debt during a slump. Keen was able to put this simple idea into a mathematical model, in a paper he published in 1995.

The model helped him to predict the financial crisis. Keen is the recipient of the Revere Award, an award given to the economist who first and most cogently warned the world of the coming financial collapse. In this video clip, Keen tells us how being an expert witness in a court case in Perth, Australia, helped him see "it" coming.

Credit Created Out of Thin Air

The neoclassical vision of saving and lending -- the standard model being taught in universities -- causes economists to be blindsided by the dynamics of debt in the economy, according to Steve Keen. In part 3 of the INET interview, Keen talks about the role of private debt in the economy.

It is true that one person's debt is another person's asset, but it is equally true that banks create money when they lend. This kind of endogenous expansion of debt, Keen says, drives economic activity, and most economists are completely oblivious to it.

Predicting a Crash Makes You Lonesome

In part 4 of the INET interview, Steve Keen tells us why he prefers to speak of the credit accelerator, rather than the credit impulse. "An impulse implies it comes and it goes; acceleration is always with you."

Keen also talks about how tough it was to contend that Australia was doomed. He had, early on, and in a minority of one, publicly warned of the coming crash in the housing market -- the mortgage industry was not amused. "It's personally difficult to continue doing that, but I simply couldn't see how I was wrong on all this."

We Must Cancel the Debt

In part 5 of the INET interview, Steve Keen talks about the world economic outlook. "We're in a depression", he says. We can avoid one or two decades of near stagnation, Keen warns, but only if we abolish the mountain of debt that is dragging down the major economies. Debt that the financial sector dishonorably extended should not be honored, he says.

On Europe, China, and Brazil

In part 6 of the INET interview, Steve Keen shares his views on Europe, China, and Brazil.

Urging Economists to Put Money into Their Models

In a monetary economy, all transactions are three-sided: There is a buyer, a seller, and a bank that records the transfer of money between the two parties. A realistic model of capitalism should have money in it, says Steve Keen in part 7 of the INET interview.

Keen and his collaborators are using the INET grant to adapt existing software, traditionally employed by engineers, to the needs of economists. The goal is to develop software with which students can model a monetary economy.