This is Chapter 13 from my forthcoming book Rebuilding Economics from the Top Down, which will be published by the Budapest Centre for Long-Term Sustainability and the Pallas Athéné Domus Meriti Foundation. I am serialising the book chapters here. A watermarked PDF of the manuscript is available to supporters.

Like so many other aspects of our blindness to the true nature of our society, the failure to comprehend the vital role that energy plays in enabling human civilisation to exist can be traced back to economists. But for once, the culprit is not a Neoclassical economist, but the person that most economists of all persuasions acknowledge as “the father of economics”, Adam Smith.

Smith’s mistake occurred in the very first sentence of The Wealth of Nations:

THE annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes… (Smith 1776, p. 10)

The error is obvious when you compare this opening to the remarkably similar—in all but one respect—opening sentence to Richard Cantillon’s An Essay on Economic Theory, which was published 21 years before Smith’s second magnum opus:

Land is the source or matter from which all wealth is drawn; man’s labor provides the form for its production, and wealth in itself is nothing but the food, conveniences, and pleasures of life. (Cantillon 1755, p. 21)

The critical difference between the two is Smith’s substitution of the word “labour” for “land”. By seeing labour, rather than land, as the source of the material wealth of civilisation, Smith set economics on a course that put it in conflict with the fundamental laws that govern the Universe: the “Laws of Thermodynamics”.

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

Why you can’t win an argument with a Neoclassical

May 19, 2024

Why you can’t win an argument with a Neoclassical

I’ve been arguing with Neoclassical economists for over fifty years, without ever getting a concession from them that I was right, even when there was overwhelming logical or empirical evidence on my side.

Recently, I’ve realised why. It’s because they don’t read—really read—critical literature. Instead, they skim it, looking for anything they can use to dismiss your argument. Once they find something that satisfies them, that’s the end of the matter: they turn off completely because, from their point of view, they’ve already won the argument. They’re not engaging with you: they’re looking for some excuse, no matter how trivial, to dismiss you.

This particular lightbulb clicked on for me in a Twitter exchange with the CATO Institute economist George Selgin. It’s a superb example of this general rule, because there are no matters of contentious economics involved. I don’t need to persuade anyone of some economic proposition, which is contrary to accepted wisdom, to expose how they behave in an argument. All you have to be able to do is comprehend English.

The back story is that George wrote a critique of the empirically realistic theory that banks are not primarily intermediaries in lending, but instead they are primarily money creators:

Banks Are Intermediaries of Loanable Funds

I read his paper very carefully, and wrote a detailed reply (with an admittedly cheeky title):

Selgin’s Hot Air on Bank Money Creation (on Patreon; on Substack)

George then wrote a tweet thread in response to my criticisms, in which he said that:

First, Steve says that I “ignore[] banks borrowing from non-banks, and then on-lending these funds to other non-bank borrowers,” as if I claimed that banks fund their lending only by borrowing from other banks. (https://x.com/GeorgeSelgin/status/1788655373840248925)

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

What About Prices?

April 16, 2024

What About Prices?

Chapter 8 from my forthcoming book Rebuilding Economics from the Top Down

Inflation, having been quiescent for decades, became a serious issue once more with the bout of inflation that occurred after the peak of the government reaction to the Covid crisis. Though it did not reach the 12-15% levels of the mid-1970s to mid-1980s, and it has fallen sharply from its peak of 8.9% p.a. in June of 2022 to 3.2% in October 2023, it was still a serious break from the low inflation period from the mid-1980s until the beginning of the 2020s—see the top chart in Figure 19.

This is Chapter 8 from my forthcoming book Rebuilding Economics from the Top Down, which will be published by the Budapest Centre for Long-Term Sustainability and the Pallas Athéné Domus Meriti Foundation. I am serialising the book chapters here. A watermarked PDF of the manuscript is available to supporters.

The original Neoclassical (and Austrian) explanation for inflation is that it is caused by “too much money chasing too few goods”, with government money creation being the culprit, and with “long and variable lags” between government deficits and actual inflation:

The lag between the creation of a government deficit and its effects on the behavior of consumers and producers could conceivably be so long and variable that the stimulating effects of the deficit were often operative only after other factors had already brought about a recovery rather than when the initial decline was in progress. Despite intuitive feelings to the contrary, I do not believe we know enough to rule out completely this possibility. If it were realized, the proposed framework could intensify rather than mitigate cyclical fluctuations; that is, long and variable lags could convert the fluctuations in the government contribution to the income stream into the equivalent of an additional random disturbance. (Friedman 1948, p. 254. Emphasis added).

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

The Failure of Neoliberalism

September 3, 2023

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

April 3, 2023

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

December 8, 2022

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.

Keen2022macrobomdandmoderndebtjubilee

6.01MB ∙ PDF File

Download

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

November 15, 2022

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

Friede Gard Prize Lecture 05 Energy In Production Functions

November 14, 2022

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!

November 7, 2022

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”

August 8, 2022

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

03:30 – Frank Stilwell

03:50 – Theory of the Second Best

05:17 – Paul Samuelson and paper (1966)

07:30 – Neoclassical economics

07:40 – Alfred Marshall

09:45 – Basic assumptions of economics

09:30 – Contemporary macroeconomics is applied microeconomics

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

11:40 – Theory of supply (rising marginal costs)

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

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

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

18:44 – Computable general equilibrium models

19:02 – Rational Expectation Revolution

19:20 – Intertemporal equilibrium models

19:21 – Cobb-Douglas Function

19:24 – Constant elasticity of production function

20:26 – When 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

23:10 – CO2 at 420 ppm

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

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

25:59 – Adam Smith

26:03 – Physiocrats

26:59 – Evolution of Labor Theory of Value

28:40 – Robert Solow

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

30:12 – Bob Ayres

31:10 – James Watt – Steam Engine

31:00 – Energy 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

February 16, 2022

The Mineral Supply Crisis That’s Rarely Talked About

The Coming Financial Crisis of 2021

October 19, 2020

The Coming Financial Crisis of 2021

Economist Steve Keen issues new warning

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

September 11, 2020

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.

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

January 2, 2019

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…

Tag Archives: steve keen

Content

Post categories

Economic Links

Energy/Resource Links

Environmental Links

Geopolitical Links

Liberty Links

News Links

Other Links

Survival Skills

Post Archives by Category

July 8, 2024 Readings

About Steve Keen:

Show Notes & Links to Learn More

Post navigation

Latest Posts