Dedicated to the reform of economics
Steve Keen and the Great Recession*
The main constraint facing capitalist economies is not supply, but demand.
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Not surprisingly, the economist who drew the most direct line to the Great Financial Crisis was a disciple of Hyman Minsky. An Australian, Steve Keen originally trained in mathematics and came to the discipline of economics late, but with a background free from many of the distorting assumptions inculcated into students in a traditional economics curriculum, at least in the latter part of the 20th Century. He took on concepts as sacred as supply and demand curves and the “indifference curves” that underpin them. He pulled back the curtain on the 20-20 foresight assumed in the definition of “rational” in the models of the Rational Expectationist school. His training in mathematics had made him conversant with the major advances in that discipline after World War II.
Those advances had bypassed the insular world of econometrics, an idiosyncratic version of mathematics taught only in economics departments. Keen’s book Debunking Economics: The Naked Emperor of the Social Sciences examined each of the building blocks of the orthodoxy and exposed its flaws, many of which were fatal to the frameworks that had been built on them. (Keen, 2001, 2012)Keen also took advantage of the most advanced computerized dynamic modeling software and produced remarkably accurate predictions from assump-tions derived and developed from Minsky. The general equilibrium model of most forecasters, even after decades of development, produces little more than noise.
But it is his efforts in analyzing the actual workings of money and debt, and advancing accurate forecasts based on his insights, that earns him a place in this volume. In 2010, Keen won the Revere Prize, (a prize developed by The Real World Economics Review. Winners were selected by a vote of their colleagues) given to the economist who most accurately predicted the advent of the Great Financial Crisis. In winning, Keen polled well ahead of more well-known names like Nouriel Roubini, Dean Baker, Joseph Stiglitz, Robert Shiller, Paul Krugman, Michael Hudson, and George Soros. Aside from Krugman, no Neoclassical economist received significant sup-port in the contest, despite the dominance of this view in the field of economics.
There are reasons for this, according to Keen:
- Neoclassical economists — including those who run the nation’s central bank and Treasury — do not understand how money is created,
- Orthodox economics depends on equilibrium models when the economy is never in equilibrium, and
- Finance, banking and debt are invisible or ignored in the models used by the mainstream to predict outcomes in an economy dominated by finance, banking and debt.
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* Adapted from Demand Side Minds, 2012