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The Failure of Neoliberalism

The Failure of Neoliberalism

Backing Up Macro Alf, & Showcasing Ravel, in 11 plots and two averages

The macro commentator Alfonso Peccatiello, who writes as @MacroAlf on Twitter/X and publishes the Macro Compass newsletter, recently posted an excellent thread on private debt that cited my work:

Let me show you one of the most underrated and yet crucial long-term macro variables in the world. Debt. But not government debt: people should stop obsessing it! The government can print money in its own currency. Of course, this has limitations: capacity constraints, inflation, credibility…but there is much more vulnerable source of debt out there. Private sector debt levels and trends are by far a more important macro variable to follow.

Let me explain why. The private sector doesn’t have the luxury to print money: if you get indebted to your eyeballs and you lose your ability to generate income, the pain is real. This amazing chart from my friend @darioperkins proves the point quite eloquently…

Figure 1: Alf’s chart of private debt to GDP bubble for 4 key economies

This post follows up on Alf’s lead by producing a private debt-focused profile of all the major economies in the OECD whose debt levels are also recorded by the Bank of International Settlements. It combines data on inflation and unemployment rates from the OECD with private and government debt and house price data from the BIS.

The plots in this post run in reverse alphabetical order from the United States (see Figure 2) to Australia. Their message is the same that Alf made in his tweet stream (x-stream?): private debt matters, and the fact that conventional Neoclassical economics ignores it is a major reason why it has failed as a guide to economic theory and policy.

…click on the above link to read the rest…

The schizophrenic understanding of money in economics

The schizophrenic understanding of money in economics

One of the great ironies of economics is that, while the public regards economists as experts on money, the issue of how money is created is still not settled within economics.

In 2014, the Bank of England published a landmark paper explicitly rejecting the textbook model of money creation, stating that:

Money creation in practice differs from some popular misconceptions—banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits…

The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. In normal times, the central bank does not fix the amount of money in circulation, nor is central bank ‘multiplied up’ into more loans and deposits. (McLeay, Radia, and Thomas 2014, p. 14)

Several other Central Banks published related papers, notably the Bundesbank in 2017, which stated that:

It suffices to look at the creation of (book) money as a set of straightforward accounting entries to grasp that money and credit are created as the result of complex interactions between banks, non- banks and the central bank. And a bank’s ability to grant loans and create money has nothing to do with whether it already has excess reserves or deposits at its disposal (Deutsche Bundesbank 2017, p. 17)

And yet, just five years later, the Nobel Prize in Economics was awarded to Bernanke, Diamond and Dybvig for work which, as the “Scientific Background” to the Prize noted, claimed that banks function as “financial intermediaries” which “channel funds from savers to investors, receiving funds from some customers and using the funds to finance others”….

…click on the above link to read the rest…

The macroeconomics of bank-created money and a Modern Debt Jubilee as a way out of the private debt trap

The macroeconomics of bank-created money and a Modern Debt Jubilee as a way out of the private debt trap

My friend Dr. Sabri Oncu has established an innovative seminar program at Kadir Has University in Turkey. Called the “Kadir Has Lectures on Global Political Economy”, it has had lectures from a number of non-mainstream economists, including Ann Pettifor, Frances Coppola, Yanis Varoufakis, and Jan Kregel.

Forthcoming lecturers include Louis Philippe Rochon and  Matias Vernengo.  You can find the series here:  https://www.youtube.com/playlist?list=PLF796nZs0vOE-Rbrquqdfdrm0ck92lMjI

In my lecture, I explain how bank credit adds to aggregate demand and income, and therefore how capitalism’s great crises–the Great Depression, the Great Recession, the Panic of 1837, and so on–were caused by credit turning negative.

I also explain how we could remedy the economy via a “Modern Debt Jubilee”. Of course, since Neoclassical economists dominate economic policy, I know that this policy has no better than a snowflake’s chance in Hell of being implemented.

I’ve attached the PDF of my slides here as well (unfortunately Substack doesn’t support Powerpoint files: if you want to download them, please go to the Patreon page https://www.patreon.com/posts/75639086.

Building a New Economics is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

6.01MB ∙ PDF File


Economist Steve Keen says the planet cannot sustain 8 billion people | The Business | ABC News

Friede Gard Prize Lecture 05 Energy In Production Functions

Friede Gard Prize Lecture 05 Energy In Production Functions

Both Neoclassical and Post Keynesian economic models have been “energy blind”: postulating output from inputs of Technology, Labor and Capital, but ignoring energy (and matter, for that matter…).

In this lecture I show how tautological and wrong the Cobb Douglas Production Function is, and that incorporating energy into it does enormous damage to the Neoclassical paradigm. On the other hand, the empirically-based Leontief Production Function only needs to acknowledge that what has been called the “Capital-Output Ratio” is in fact the inverse of “the efficiency with which machinery turns energy into useful work”, and Post-Keynesian economic models are now energy-aware.

Energy’s role in economic production is severely underestimated!

Energy’s role in economic production is severely underestimated!

Another brilliant exposition by Prof Steve Keen. The wording below is from a LinkedIn post I made tonight, targeted to Megan Woods (NZ Energy Minister) and Tina Schirr (BEC Lead)

I posted the following to LinkedIn tonight, here’s the link to the OP: https://www.linkedin.com/posts/nathansurendran_friede-gard-prize-lecture-05-energy-in-production-activity-6994962828289851392-oU7s

Friede Gard Prize Lecture 05 Energy In Production Functions – Both Neoclassical and Post Keynesian economic models have been “energy blind”, as Dr. Steve Keen outlines in this 23 minute talk: https://lnkd.in/gmCn6hzA

(- I’ll update this post with an embed of this video, once it’s available on YouTube.)

Megan Woods – MBIE’s modelling fails to take this reality into account, and you are getting erroneous assurances (the magnitude of risk is massively underestimated, potentially by a factor of 20 or more) on the magnitude of energy supply fluctuation risks, from the SADEM and GEM economic modelling.

Tina Schirr – this line of thinking is fundamental to getting the scenarios in your BEC Energy Scenarios to properly reveal the relative risk to business of energy supply challenges. This is of critical importance, as the current tightening global diesel supply is a huge risk to BAU and the proposed transition scenarios, which your current modelling is failing to identify.

The fundamental risk that this points to is a cascading failure of the financial system, as FEASTA analysed in this report: bit.ly/trdoff. This could easily be triggered by energy supply disruptions, as explored in this article: https://lnkd.in/gtbPP8im

#energy #business #energytransition #biophysicaleconomics

Steve Keen: “Mythonomics”

On this episode, we meet with Economist, Author, and Research Fellow at the Institute for Strategy, Resilience, and Security at University College in London, Steve Keen.

Keen discusses how mainstream economics misses the centrality of energy to our economy and to our futures, the naive treatment to the risks of money and debt creation, and the disconnect economic theory has to climate change risks.

About Steve Keen:

Steve Keen is an economist, author of Debunking Economics and The New Economics: A Manifesto, a Research Fellow at the Institute for Strategy, Resilience, and Security at University College in London.

Show Notes & Links to Learn More

PDF Transcript

00:40 – Steve Info + Works

03:30Frank Stilwell

03:50 Theory of the Second Best

05:17Paul Samuelson and paper (1966)

07:30 Neoclassical economics

07:40 Alfred Marshall

09:45Basic assumptions of economics

09:30 Contemporary macroeconomics is applied microeconomics

11:12We are deeply social creatures, and this isn’t accounted for in economics

11:40Theory of supply (rising marginal costs)

12:15In reality, supply has a falling marginal cost (pg 102)

12:35 Alan Blinder + survey on marginal falling costs (pg 22) and vs his textbook

18:30Energy is not included as an input (factor of production)

18:44Computable general equilibrium models

19:02 Rational Expectation Revolution

19:20 Intertemporal equilibrium models

19:21Cobb-Douglas Function

19:24Constant elasticity of production function

20:26When energy is included it is to a very minimized extent

20:41 Working paper by Rudy Backmann looking at energy fall implications in Germany

21:57 – Change in energy and change in GDP is 1:1 (or .99)

22:11 Reiner Kümmel and paper factoring energy into CD Production Function

23:10CO2 at 420 ppm

23:48 Energy consumption/output in roman slaves (pg 558)

24:44A barrel of oil is equivalent to 5 years of human labor (Section 4.3)

25:59Adam Smith

26:03 Physiocrats

26:59Evolution of Labor Theory of Value

28:40Robert Solow

29:30 The assumption is that technology is responsible for our massive growth

30:12Bob Ayres

31:10James Watt – Steam Engine

31:00Energy is the true driver of growth, not technology

…click on the above link to read the rest of the article…

The Mineral Supply Crisis That’s Rarely Talked About

The Mineral Supply Crisis That’s Rarely Talked About


The Coming Financial Crisis of 2021

Economist Steve Keen predicts that even if the covid-19 health crisis subsides next year, a brewing financial crisis on par with the 2008 Great Recession is in the making.

He sees the pandemic as having delivered an “unprecedented shock” to the global economy, and the response from authorities as nothing less than a “catastrophe”.

With tens of millions of households having lost their income this year, personal savings becoming exhausted, government support programs on their way to drying up, and lots more company layoffs/bankruptcies/closures ahead — Steve expects a punishing recession to arrive in full force in 2021.

And on a larger scale, he sees modern neoclassical economics — which ignores the importance of natural resources and the health of our ecosystems — as completely unsuited for the reality in which we live today. He warns that if we don’t adapt a more informed approach to managing the global economy, we will only continue to make the mess we’re in worse:

Nobel prize-winning economics of climate change is misleading and dangerous – here’s why

Nobel prize-winning economics of climate change is misleading and dangerous – here’s why

While climate scientists warn that climate change could be catastrophic, economists such as 2018 Nobel prize winner William Nordhaus assert that it will be nowhere near as damaging. In a 2018 paper published after he was awarded the prize, Nordhaus claimed that 3°C of warming would reduce global GDP by just 2.1%, compared to what it would be in the total absence of climate change. Even a 6°C increase in global temperature, he claimed, would reduce GDP by just 8.5%.

If you find reassurance in those mild estimates of damage, be warned. In a newly published paper, I have demonstrated that the data on which these estimates are based relies upon seriously flawed assumptions.

If you find reassurance in those mild estimates of damage, be warned. In a newly published paper, I have demonstrated that the data on which these estimates are based relies upon seriously flawed assumptions.

Nordhaus’s celebrated work, which, according to the Nobel committee, has “brought us considerably closer to answering the question of how we can achieve sustained and sustainable global economic growth”, gives governments a reason to give climate change a low priority.

His estimates imply that the costs of addressing climate change exceed the benefits until global warming reaches 4°C, and that a mild carbon tax will be sufficient to stabilise temperatures at this level at an overall cost of less than 4% of GDP in 120 year’s time. Unfortunately, these numbers are based on empirical estimates that are not merely wrong, but irrelevant.

Nordhaus (and about 20 like-minded economists) used two main methods to derive sanguine estimates of the economic consequences of climate change: the “enumerative method” and the “statistical method”. But my research shows neither stand up to scrutiny.

The ‘enumerative method’

…click on the above link to read the rest of the article…

The Delusional Leaders of the Eurozone

 I was looking forward to chilling with family and friends in Sydney this New Years Day, but Phil Dobbieruined it for me with this tweet:

I had forgotten that this was the 20th anniversary of the start of the Euro. But the Eurocrats in Brussels hadn’t. Some hours before the New Year commenced, Juncker and friends put out a press release extoling the virtues of the Euro. Virtues such as “unity, sovereignty, and stability … prosperity”.

Well so much for New Year cheer. With this one tweet, the EU put 2019 on track to be even worse than 2018. Using anyof those words to describe the Euro—apart perhaps from “unity”, since the same currency is used across most of continental Europe now—is a travesty of fact that even Donald Trump might baulk at.

Sovereignty? Tell that to the Greeks, Italians or French, who have had their national economic policies overridden by Brussels. Stability? Economic growth has been far more unstable under the Euro than before it, and Europe today is riven with political instability which can be directly traced to the straitjacket the Euro and the Maastricht Treaty imposed. Prosperity? Let’s bring some facts into Juncker’s fact-free guff.

I’ll start with Phil’s point about Greece. Greece’s GDP has fallen at Great Depression rates since the Eurozone imposed its austerity policies on it, and nominal GDP today is more than 25% below its peak.

Figure 1: Greek GDP and economic growth rate

Now of course that could be blamed on the Greeks themselves, so let’s look compare economic growth in the entire Eurozone to the USA (minus Ireland and Luxembourg, since in the former case their data is massively distorted by data revisions, and the latter has highly volatile data as well, and is so small—under 600,000 people—that it can safely be ignored).

Figure 2: Real economic growth rates

…click on the above link to read the rest of the article…

Steve Keen: “Why Did It Take So Long For This Crash To Happen?”

As originally written at RT, outspoken Aussie economist Steve Keen points out that everyone who’s asking “why did the stock market crash Monday?” is asking the wrong question; the real question, Keen exclaims, is “why did it take so long for this crash to happen?

The crash itself was significant – Donald Trump’s favorite index, the Dow Jones Industrial (DJIA) fell 4.6 percent in one day. This is about four times the standard range of the index – and so according to conventional economics, it should almost never happen.

Of course, mainstream economists are wildly wrong about this, as they have been about almost everything else for some time now. In fact, a four percent fall in the market is unusual, but far from rare: there are well over 100 days in the last century that the Dow Jones tumbled by this much.

Crashes this big tend to happen when the market is massively overvalued, and on that front this crash is no different.

It’s like a long-overdue earthquake. Though everyone from Donald Trump down (or should that be “up”?) had regarded Monday’s level and the previous day’s tranquillity as normal, these were in fact the truly unprecedented events. In particular, the ratio of stock prices to corporate earnings is almost higher than it has ever been.

More To Come?

There is only one time that it’s been higher: during the DotCom Bubble, when Robert Shiller’s “cyclically adjusted price to earnings” ratio hit the all-time record of 44 to one. That means that the average price of a share on the S&P500 was 44 times the average earnings per share over the previous 10 years (Shiller uses this long time-lag to minimize the effect of Ponzi Scheme firms like Enron).

…click on the above link to read the rest of the article…

How I sold out to the Putin-Soros-Murdoch conspiracy to destroy Western civilization

How I sold out to the Putin-Soros-Murdoch conspiracy to destroy Western civilization

Steve Keen is an Australian economist and author. He’s professor and Head of the School of Economics, History and Politics at Kingston University in London. You can support his attempts to build a new economics https://www.patreon.com/ProfSteveKeen.
How I sold out to the Putin-Soros-Murdoch conspiracy to destroy Western civilization
I was delighted to find myself in the Top Ten (alright; top 15) of the European Values list of 2,326 “Useful Idiots” appearing regularly on RT shows, and thus legitimizing Vladimir Putin’s attempt to destroy Western civilization as we know it.

Why delighted? Because it completes the set of conspiracies to which I can now be accused of belonging. They include:

• The Putin Conspiracy, since I am regularly interviewed on Russia Today (and even worse, I now get paid to write for RT!);

• The Soros Conspiracy, since my research, has been funded by the Institute for New Economic Thinking (INET) which he established;

• The Murdoch Conspiracy, since I appear every week on Sky News Australia with Carson Scott, and I used to get paid by News Ltd to write a weekly column; and

• The Alt-Right Conspiracy, since I’ve signed a book contract with Vox Day’s publishing firm Castalia House.

So not only am I a “useful idiot,” I’m a useful idiot for four contradictory conspiracies. Does that make me a double-double agent?

…click on the above link to read the rest of the article…

There Is No Excuse For Janet Yellen’s Complacency

There Is No Excuse For Janet Yellen’s Complacency

Janet Yellen has been reported by Reuters as saying in London yesterday that “she does not believe that there will be a run on the banking system at least as long as she lives”:

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” Yellen said at an event in London. “Fed’s Yellen: Not another financial crisis in ‘our lifetimes’

The only word I can use to describe this belief is “delusional.”

NEW YORK, NY – JUNE 14: Traders work as a television monitor displays Federal Reserve Chair Janet Yellen announcing the Fed’s decision to raise interest rates on the floor of the New York Stock Exchange (NYSE) June 14, 2017 in New York City. The Federal Reserved raised interest rates today .25 percent for a new target range of 1 percent to 1.25 percent. (Photo by Drew Angerer/Getty Images)

The only way in which her belief could be justified would be in financial crises were truly random events, caused by something outside the economy—or just by a very bad throw of the economic dice.

This is indeed the perspective of mainstream “Neoclassical” economic theory, in which Yellen was trained, and because of which she was deemed eligible—and indeed eminently suitable—to Chair the Federal Reserve.

This is the theory that led the OECD to proclaim, two months before the crisis began in August 2007, that “the current economic situation is in many ways better than what we have experienced in years”, and that they expected that “sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.” (OECD, June 2007, “Achieving Further Re-balancing”).

…click on the above link to read the rest of the article…

CERN Discovers New Particle Called The FERIR

CERN Discovers New Particle Called The FERIR

This is an article by our friend Steve Keen, which was yanked by Forbes yesterday after just a few hours due to, according to Steve, their ‘parody policy’. I did some research and it turns out the Automatic Earth has no such policy. So I offered Steve to repost it here.

Steve Keen: CERN has just announced the discovery of a new particle, called the “FERIR”.

This is not a fundamental particle of matter like the Higgs Boson, but an invention of economists. CERN in this instance stands not for the famous particle accelerator straddling the French and Swiss borders, but for an economic research lab at MIT—whose initials are coincidentally the same as those of its far more famous cousin.

Despite its relative anonymity, MIT’s CERN is far more important than its physical namesake. The latter merely informs us about the fundamental nature of the universe. MIT’s CERN, on the other hand, shapes our lives today, because the discoveries it makes dramatically affect economic policy.

CERN, which in this case stands for “Crazy Economic Rationalizations for aNomalies”, has discovered many important sub-economic particles in the past, with its most famous discovery to date being the NAIRU, or “Non-Accelerating Inflation Rate of Unemployment”. Today’s newly discovered particle, the FERIR, or “Full Employment Real Interest Rate”, is the anti-particle of the NAIRU.

Its existence was first mooted some 30 months ago by Professor Larry Summers at the 2013 IMF Research Conference. The existence of the FERIR was confirmed just this week by CERN’s particle equilibrator, the DSGEin.

Asked why the discovery had occurred now, Professor Krugman explained that ever since the GFC (“Global Financial Crisis”), economists had been attempting to understand not only how the GFC happened, but also why its aftermath has been what Professor Summers characterized as “Secular Stagnation”.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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