Youtube comments of ProfSteveKeen (@ProfSteveKeen).
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@TheAdamAdy Bank money creation doesn't need a Central Bank. CBs facilitate interbank clearing, but banks create money by double-entry bookkeeping.
Bailouts are another story--I am a critic of how banks were rescued during the GFC and of how no bank executives went to prison for the Subprime Bubble, whereas many did because of the Savings and Loans bubble, and the Great Depression.
I show in the video that government bonds are irrelevant for money creation: all they do is enable the Treasury to avoid an overdraft at the Fed.
BTW in response to your comments and others, I've dissected the data on inflation, deflation and economic growth from 1800 till today. The highest rate of economic growth was under the much-maligned "Keynesian" period, from 1950 till 1973, when it averaged 4% p.a. Second highest is 1800-1939, when it averaged 3.3%. The lowest, by far, is since the Neoclassicals took over: growth between 1974 and 2023 averaged 1.7%.
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@heyheyhey33351 In reading these replies I am reminded of how little most people know about so-called advanced economic theories, or about the foundations of the paradigm.
I doubt that you realise, for example, that in order to derive a downward sloping market demand curve, Samuelson assumed that there was a--to quote the PhD textbook by Mas-Colell, “a benevolent central authority” which “redistributes wealth in order to maximize social welfare” (Mas-Colell et al. 1996, p. 117) before market trades occur!
See Samuelson, Paul A. 1956. 'Social Indifference Curves', The Quarterly Journal of Economics, 70: 1-22. and
Samuelson, Paul A. 1966. 'A Summing Up', Quarterly Journal of Economics, 80: 568-83.
Mas-Colell, A., M. D. Whinston, J. R. Green, and M. El-Hodiri. 1996. "Microeconomic Theory." In, 108-13. Wien: Springer-Verlag.
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@heyheyhey33351 That's a thoughtful reply, and I can understand why you assume that economics has progressed since those times. I'll do a reaction video to your comment, but in the meantime, here are some points for you to consider:
(1) The quote from Samuelson stated the dilemma he was attempting to solve; I didn't show his conclusion. Here is the bulk of it:
FINAL SUMMARY
1. It is shown that the various defenses which have been offered for the use of community indifference curves are all open to some serious questioning.
2. The Scitovsky community indifference contours are shown to be "minimum social requirements" contours of total goods needed to achieve a certain prescribed level of ordinal well-being for all...
3. By means of mathematical reasoning or by the demonstration of intersections of Scitovsky contours, a fundamental impossibility theorem is proved: Except where income elasticities are all unity and tastes are absolutely uniform for all, it is proved to be absolutely impossible to solve for unique market price ratios in function of market totals; hence, we must lack collective indifference curves capable of generating group demand...
5. Since most "individual" demand is really "family" demand, the argument can be made that such family demands have been shown to have none of the nice properties of modern consumption theory. However, if within the family there can be assumed to take place an optimal reallocation of income so as to keep each member's dollar expenditure of equal ethical worth, then there can be derived for the whole family a set of well-behaved indifference contours relating the totals of what it consumes: the family can be said to act as if
it maximizes such a group preference function.
6. The same argument will apply to all of society if optimal reallocations of income can be assumed to keep the ethical worth of each person's marginal dollar equal. By means of Hicks's composite commodity theorem and by other considerations, a rigorous proof is given that the newly defined social or community indifference contours have the regularity properties of ordinary individual preference contours (nonintersection, convexity to the origin, etc.)...
Our analysis gives a first justification to the Wald hypothesis that market totals satisfy the "weak axiom" of individual preference... (p. 21)
In other words, Samuelson thought he had solved the dilemma of the "absolutely impossible to solve" problem by assuming that "optimal reallocations of income can be assumed to keep the ethical worth of each person's marginal dollar equal", as would occur in a family which undertakes "an optimal reallocation of income so as to keep each member's dollar expenditure of equal ethical worth". In other words, as the Mas-Colell textbook states:
Let us now hypothesize that there is a process, a benevolent central authority perhaps, that, for any given prices p and aggregate wealth function w, redistributes wealth in order to maximize social welfare. (p. 117)
(2) Samuelson's conclusion is what I expect most of those citations have focused upon--not the ridiculous reasoning that was used to achieve it. I'll do a random sample of them to check.
(3) Mas-Colell remains the textbook of choice for Neoclassical microeconomic PhD courses because no-one has produced anything near as comprehensive. Check Trinity College Dublin for example: https://www.tcd.ie/Economics/postgraduate/research-degrees/module-outlines/.
(4) Sciences can get stuck in a false paradigm for inordinate periods of time. The original analysis as to why this happens was done by Thomas Kuhn in The Structure of Scientific Revolutions. I highly recommend reading it--not just for the points I make here, but for its wisdom about how sciences actually develop.
(5) Economics has gone backwards in the last four decades--according to the 2018 Economics Nobel Prize winner Paul Romer. See his paper Romer, P. (2016). "The Trouble with Macroeconomics." https://paulromer.net/trouble-with-macroeconomics-update/WP-Trouble.pdf
https://paulromer.net/trouble-with-macroeconomics-update/.
I'll cover these points in more detail in my reaction video.
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Thanks Brian. The recent data is maintained by the BIS: see https://www.bis.org/statistics/full_data_sets.htm. The pre-1946 data for the USA can be gleaned from Census publications "The bicentennial edition of Historical Statistics of the United States is the third in the series of volumes inaugurated in 1949. In both form and content, the bicentennial edition has drawn heavily from, and built upon, the two prior editions. Both the first volume, Historical Statistics of the United States, 1789 to 1945, issued in 1949, and the second volume, Historical
Statistics of the United States, Colonial Times to issued in 1960, were prepared by the Bureau of the Census with the cooperation of the Social Science Research Council". There are time series on debt and bank loans from 1834 till 1945 and 1916 till 1970, with vastly different levels but very similar rates of change. So I assembled the long term 1834 till now data series by splicing them at current levels.
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Bullshit. Every last empirical study has found that marginal costs for real business fall rather than rise with increased capacity utilisation. This is a quote from one such study--and there are about 70 in total, all of which found the same result:
"when manufacturing is conducted with facilities designed by modern engineering techniques, the least cost point of a plant is located either at or near capacity output...
when modern engineers are successful, the short-run marginal cost curve for a product always lies below the average cost curve at all levels of operation short of capacity. The result is that the marginal cost curve cannot intersect the marginal revenue curve (1) if the average revenue curve is horizontal, or (2) if the average revenue curve is high and relatively elastic."
The Shape of the Average Cost Curve
Author(s): Wilford J. Eiteman and Glenn E. Guthrie
Source: The American Economic Review, Vol. 42, No. 5 (Dec., 1952), pp. 832-838
You have been taught and believe an armchair theorising myth.
PS A manufacturer who responded to this survey had the following to say on the conventional theory:
"'The amazing thing is that any sane economist could consider No. 3, No. 4 and No. 5 curves as representing business thinking. It looks as if some economists, assuming as a premise that business is not progressive, are trying to prove the premise by suggesting curves like Nos. 3, 4, and 5." A manufacturer of road building equipment wrote, "Even with the low efficiency and premium pay of overtime work, our unit costs would still decline with increased production since the absorption of fixed expenses would more than offset the added direct expenses incurred."
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@zafar.2 Speaking as someone who reads both literatures, that is total bullshit. Climate scientists do their work very carefully. For an example, compare Nordhaus's rubbish "survey of experts" with that of Tim Lenton:
Lenton, T. M., H. Held, E. Kriegler, J. W. Hall, W. Lucht, S. Rahmstorf and H. J. Schellnhuber (2008). "Tipping elements in the Earth's climate system." Proceedings of the National Academy of Sciences 105(6): 1786-1793. https://www.pnas.org/content/pnas/105/6/1786.full.pdf
Nordhaus, W. (1994). "Expert Opinion on Climate Change." American Scientist 82(1): 45–51. https://stephenschneider.stanford.edu/Publications/PDF_Papers/NordhausSM.pdf
They're chalk and cheese--or more appropriately, fine wine and bad vinegar. If you can't tell the difference, you have a tasteless palette.
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I sympathise! The assumption is actually one of prophecy--when it's applied in macroeconomics and finance.
Here's two additional weapons for you anyway:
An attempt to prove utility maximization failed with just 8 commodities used: https://www.jstor.org/stable/2957744 (An Experiment on the Pure Theory of Consumer's Behaviour, Sippel,
The Economic Journal, 1997 Vol. 107 Issue 444 Pages 1431-1444. The reason is simple and is called the "curse of dimensionality" in computer science.
The number of choices grows as (the number of commodities) to the power of (the number of items chosen plus one). So if you have just two commodities to choose from, and you consider buying between 1 and 9 units of each, that 2 to the power of 10, which is 100 choices, which our brains can easily handle. But if you have just 8 commodities, that 8 to the power of 10, or 100 million combinations. A mini-market has at least 300 commodities in stock, and the decision whether to buy or not buy one item of each is 2 to the power of 300, or 10 followed by 90 zeros--when the number of atoms in the universe is estimated at 10^80.
In other words, there's no way the human brain can be "optimising" when we shop. Instead we're being guided by rules of thumb that cut that complexity down to something manageable.
Secondly, even if you allow its extreme assumptions, it's not possible to aggregate demand from different individuals into a market demand curve that behaves the way Neoclassicals want it to--ie, for the "Law of Demand" to apply. I explain that in detail here: https://profstevekeen.substack.com/p/the-anything-goes-market-demand-curve-015
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They didn't feed in anything except their own whiteboard delusions. There are even claims in the literature that imply workers can eat GDP directly--if food output falls by 40%, we'll make up the fall in GDP in a few years. See Nierenberg, W. A., L. Machta, W. Nordhaus, R. Revelle, T. C. Schelling, J. Smagorinsky, P. E. Waggoner and G. M. Woodwell (1983). Changing Climate: Report of the Carbon Dioxide Assessment Committee. Washington, National Academy Press, p. 475 https://archive.org/details/changingclimate018865mbp/mode/2up
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@FinLogan Yes, that's what the empirical record finds. The reason for it was best given by Eiteman in the 1950s:
"when manufacturing is conducted with facilities designed by modern engineering techniques, the least cost point of a plant is located either at or near capacity output. By capacity is meant the greatest physical output possible in some relatively short period of time, such as an hour or a normal work day. The argument continues that, when modern engineers are successful, the short-run marginal cost curve for a product always lies below the average cost curve at all levels of operation short of capacity. The result is that the
marginal cost curve cannot intersect the marginal revenue curve (1) if the average revenue curve is horizontal, or (2) if the average revenue curve is high and relatively elastic."
He was ignored--in fact, that was the main motivation for Friedman's "assumptions don't matter" paper that defended unrealistic assumptions. Friedman literally said don't read papers reporting the results of surveys of manufacturers which contradict the assumption of rising marginal cost:
"The lengthy discussion on marginal analysis in the American Economic Review some years ago is an even clearer, though much less important, example. The articles on both sides of the controversy largely neglect what seems to me clearly the main issue—the conformity to experience of the implications of the marginal analysis—and concentrate on the largely irrelevant question whether businessmen do or do not in fact reach their decisions by consulting schedules, or curves, or multivariable functions showing marginal cost and marginal revenue" (Friedman)
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@robertjenkins6132 "What you say could only be true if the government of the nation that runs the trade deficit employs sub-optimal economic policy"...
Gee, really? So we can assume that all governments are running optimal policies right now, can we? Does that include Reeves in the UK and Musk in the USA, and everyone operating under the Maastricht Treaty in Europe? Asking for a friend...
I will unfortunately never cease to be amazed by the extent to which people perform mental gymnastics to hang onto a stupid idea from the founder of a paradigm.
There are approximately zero countries currently running "optimal economic policy" from an MMT point of view--and China may be the only one that is, as well as running a trade surplus. So it's turbocharging the creation of money for the Chinese economy and employing that money at least some of the time in infrastructure and research projects that increase the country's rate of economic growth and technological development. I'm sure the Chinese government will send thank you notes to all the countries that have helped finance its development by running trade deficits with it.
My approach has always been to assess the logic of a proposition, and the argument that we can effectively ignore the trade balance--or even champion a deficit--is easily contradicted by the foundational logic of MMT.
"What Warren says about imports being a benefit and exports being a cost is definitely true where money is not involved." Yes, it's a great argument for people who think capitalism is a barter system--like Neoclassical economists. Fortunately, the importance of money as part of a well functioning capitalist system is a pivotal contribution of ... MMT! But let's come up with a contradictory proposition when analysing international finance.
Robert, I don't doubt your sincerity, but I find your inability to see that these two aspects of MMT are contradictory depressing. It has an accurate description of the role of fiat money in enabling economic activity, and a barter-based argument about international finance. You would be much better off jettisoning the latter and developing a monetary analysis of international trade which is consistent with MMT's domestic money analysis.
This slavish manner in which people raise the ideas of founders of a paradigm to the status of uncontradictably dogma is one of the core problems with economics in general. Marxists, Neoclassicals and now MMTers are all guilty of it.
In truth, Warren had one brilliant idea for which he deserves ongoing recognition--that governments don't tax to spend, but spend to tax. He also had one stupid idea. I'm trying to improve MMT by getting rid of the stupid one.
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Honestly Robert, this reply is an unintentionally brilliant exposition of the emotional reaction that devotees of a paradigm have to having it being challenged--and especially when the criticism is of an idea from the founder himself (Warren Mosler in this case). I will mine your reply for my arguments against this stupid idea.
To whit, this other gem: "You are assuming a monetary system and you are assuming that the government is incompetent." Why yes, I am! In fact, MMTs main contribution is to strengthen the Post-Keynesian insistence that you can't ignore money when analysing capitalism, and so far as I am aware, capitalism is a monetary system, so yes, I plead guilty to "assuming a monetary system".
And assuming that the government is incompetent! How stupid of me! How could I make such a mistake.
For gawd's sake, look around kid. They're all incompetent. They're all trying to run government surpluses (except, possibly, the Chinese government). MMT legitimately criticises them all for that incompetence. So yes, I'm going to assume "that the government is incompetent", And one way individual firms can make up for the incompetence of their governments is by attempting to secure money from export sales. Who'd a thought, eh?
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Any company that let itself get into that situation would soon lose market share to others that planned more successfully for rising output. The outcome of every last survey ever conducted is that successful companies never experience rising marginal cost.
The whole idea too that you can apply varying amounts of labour to fixed amounts of capital ignores the fact that machines are designed with specific labour inputs in mind, and adding additional labour will just get in the way--in other words, except for very peculiar situations, the marginal product of an additional worker above and beyond the designed labour:machine ratio of a specific machine will be negative.
Consider even fertilizer as a variable input and land as the fixed, where a variable ratio of variable to fixed inputs is at least conceivable. Let's say you have 100 hectares of land, and the ideal ratio of fertilizer to land is one tonne per hectare. If you have only 50 tonnes of fertilizer, do you apply it evenly to the whole 100 hectares? Not necessarily! That can give you a lower yield than if you apply the 50 tonnes to 50 hectares and grow on the remaining 50 hectares without fertilizer.
In fact, the standard theory assumes that firms are operating at above their ideal variable to fixed factor ratio. But in the real world, when you design a factory, it will necessarily operate at below that ratio. This is because all firms plan for growth, and if a factory is operating at 100% capacity on day one, then you built too small a factory. In the real world, factories start at 50-70% of capacity initially (depending on the normal rate of growth of demand), and the engineers who design them do so with the objective of them hitting maximum efficiency at 100% of capacity--so variable costs per unit will normally fall over the life of the factory. A sensibly managed firm will plan to expand output by adding an additional factory well before it reaches the 100% capacity mark.
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@MengerMania I'm afraid I do understand Austrian methodology--including praxeology--and I reject it. The short version of why is that, while Austrian methodology is superior to Neoclassical for understanding that the strengths of capitalism lie in its behaviour in disequilibrium, it shares too many features with the Neoclassical school which has been shown to fail on both logical and empirical grounds--though Neoclassicals themselves have ignored their anomalies.
Specifically:
(1) both are based on a subjective theory of value, which makes aggregation--deriving even market behaviour from individual, let alone macroeconomic behaviour--impossible. The technical proofs of this were first done by Gorman [Gorman, W. M. (1953). "Community Preference Fields." Econometrica 21(1): 63-80] and Samuelson [Samuelson, P. A. (1956). "Social Indifference Curves." The Quarterly Journal Of Economics 70(1): 1-22.], though rather than accepting them and coming up with disequilibrium pricing theories, they made absurd assumptions to persist with equilibrium pricing theory. Austrians partially avoid this with some understanding of disequilibrium phenomena, but they still rely on supply and demand analysis, and that is invalidated by what is today known as the Sonnenschein-Mantel-Debreu theorem. The bottom line of that theorem is that the market demand curve, derived by logical derivation from the individual demand curve, can have any polynomial shape at all. Goodbye the demand curve.
(2) Both accept that diminishing marginal productivity applies to production, which is the basis of the upward sloping supply curve. Empirical research has shown this is a fallacy. There are over 70 surveys, all of which have found that factories are subject to constant or rising marginal productivity. See Eiteman, W. J. and G. E. Guthrie (1952). "The Shape of the Average Cost Curve." The American Economic Review 42(5): 832-838 for a good explanation as to why. Goodbye the supply curve.
(3) Austrians talk in terms of "roundaboutness" to describe the role of capital in production, and a rise in the rate of interest causing a decline in roundaboutness, etc. This analysis is subject to the same weaknesses that Sraffa pointed out in the Capital Controversies, that the quantity of capital as measured is a nonlinear function of the rate of profit and interest. There is no meaningful way to ground a marginal productivity theory of income distribution as a result, and yet Austrians and Neoclassicals persist with this.
(4) Both subscribe to versions of the Loanable Funds theory of banking. Banks are debt and money creators, and both have profound impacts on aggregate demand and income.
I could go on. Austrians are generally superior to Neoclassicals, though even more subject to armchair theorising. Einstein, a reasonably smart guy, developed the theory of relativity partially in response to the failure of the Michelson-Morley experiment. There is a feedback between empirical observation and theoretical development that both Austrians and Neoclassicals disparage. For that reason, they remain pre-scientific dogmas.
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I don't think that your lack of formal education in economics has done you any harm! Yes, if the government cuts its money creation by $600 billion per year then the only ways to make that up are an expansion of private credit, or a turnaround in the trade deficit (which Trump is trying to cause via tariffs). In the past, when the government has done this, the private sector has responded by borrowing from private banks instead, leading to asset price bubbles as that borrowed money was used primarily to finance speculation, rather than to cause actual physical investment.
I doubt that this will happen this time, because private debt is still very high after the Global Financial Crisis--partly because mainstream economists, ignorant of the issues I raise here, thought increasing private debt after the crisis would stimulate the economy, when that's what caused the crisis in the first place.
Instead, we're likely to have a fall in government money creation with no offsetting increase in credit money creation, thus leading to stagnation.
Mind you, I expect Trump to push through "billionaire tax relief", so that the deficit might still expand despite Musk's cuts.
And yes, since the importer pays the tariff to the government, it functions as a tax does and removes money from the economy.
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Yeah, that's the motivation of most students today--so they turn off their critical faculties because that's a pre-requisite to passing exams and getting that certificate.
Curiously, when I studied it in the early 1970s, the unemployment rate in Australia was so low that students expected to get a job, almost regardless of their academic results. Then students at my university (Sydney University) fought against what they were taught, leading to a student strike, a "Day of Protest" where students took over the economics building and gave alternative lectures, and ultimately the formation of a separate Department of Political Economy.
A few years later, unemployment increased fourfold---from 1.5% to 6%--and those rebellious days ended (though I carried the rebellion on). Ironically, the empirical failure of economics--if you see it as a way to control the economy and avoid bad outcomes--played a pivotal role in its theoretical success. Now students obediently learn the mantra to get that employability certificate, and their critical misgivings are suppressed.
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@utsavsinha5157 Firstly read Graziani, A. (1989). "The Theory of the Monetary Circuit." Thames Papers in Political Economy Spring: 1-26: http://www.gre.ac.uk/__data/assets/pdf_file/0009/1147581/TP_PPE_89_1.pdf. Ignore his mathematics, which is inappropriate, and just follow his verbal logic, which is excellent.
From that foundation, Neoclassical and Austrian theories of money are fallacious: they treat it as if it's a commodity, which is is not.
Then read Minsky, H. P. (1982). Can "it" happen again? : essays on instability and finance. Armonk, N.Y., M.E. Sharpe.
Finally get my book Keen, S. (2021). The New Economics: A Manifesto. Cambridge, UK, Polity Press.
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Thanks Roger. It was too brief to go into everything in my analysis, and the book itself is for non-technical readers--though it's still quite demanding.
I cover those issues in a technical supplement that is unfinished, but the current draft is available at http://www.profstevekeen.com/minsky/. That's probably more your thing, though of course I wouldn't object if you bought Manifesto as well. ;)
Quickly though, the Leontief production function is provably superior--in terms of energy modelling both statistically and, more significantly, logically as well. In a nutshell, output in terms of "widgets/year" (standard single dimensional GDP) is output in energy terms (gigajoules/year), divided by the energy consumption of a representative machine per year; and what we've called the accelerator (or capital:output ratio) is the inverse of the efficiency with which energy is turned into useful work.
Agreed re the two forms of energy--not work I've had time to do, but it's on the agenda. My colleagues at the French Development Agency (Devrim Yilmaz and Antoine Godin) have done outstanding work there, in multi-sectoral models (with input-output dynamics).
Frankly, I think the failure to implement carbon pricing or taxes was the objective of the fuel lobby, which economists have (unwittingly or otherwise) assisted via the idea of a carbon tax or price: the fossil fuel lobby knew that such systems wouldn't be implemented--or would be abandoned if tried--because the impact on the poor would be too great and lead to political revolt. That's what happened with the Gilet Jaunes in France after all.
There's an excellent paper by Ben Franta detailing how economic consultants weaponised economic theory to undermine policies on climate change (Franta, B. (2021). "Weaponizing economics: Big Oil, economic consultants, and climate policy delay." Environmental Politics: 1-21.); and you may have missed it, but a pair of investigative journalists convinced two fossil fuel lobbyists in Washington that they wanted to hire them for some project, and to sell their wares, the two consultants explained that they supported carbon taxes because they knew it would never get through Congress. It's all captured on film and is quite a remarkable watch.
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Your last point is the only substantive one. Neoclassical theory assumes all inputs are of equal quality, so though your first points are realistic, they don't rescue the theory itself. But even with those taken into account, most manufacturers surveyed said the lower per unit fixed costs from a higher level of output more than compensated for having to pay workers higher wages, or to pay more for inputs. Fixed costs are huge for real-world firms, whereas they're shown as trivial in Neoclassical drawings--like the one I highlight from Mankiw at the 1.59 mark: fixed costs of $3 for a lemonade stall--really? How about the fixed costs for a Tesla factory, which are more likely in the $10 billion and above range (and certainly more than a billion dollars on an annualised basis, as we should use for realistic modelling.
I take it you haven't noticed this feature of Neoclassical toy models yet?: all the numbers are trivially small.
As a learning exercise, try doing a model in Excel where fixed costs are $1 billion per year, the midpoint of average total costs occurs at 250,000 units per year--a realistic level for a car factory--and per-unit variable costs start at, say, $10,000 per car--again, a realistic level for a car. Then try setting marginal cost so that the equilibrium output level is 300,000 cars, with say a "perfectly competitive" price of $20,000 to $30,000 a car.
Does that look anything like the standard drawing?
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No Roger, money is created in two ways in this model: when banks lend more than they get back in deposits, and when the government spends more than it taxes back in taxes (and also when sales of bonds by banks to the public--or overseas, as you noted in a previous comment). We live in a mixed fiat-credit world, and what I'm doing here is modelling the combined system.
Have you downloaded and installed Minsky yet? You can check out the models yourself then on your own PC (we've just, as in this morning, released a version that overcomes some bugs on Macs, in case you're a Mac user).
In my new book (The New Economics: A Manifesto) I use Minsky to model the 1920s, when Coolidge was running a 1% of GDP surplus and, at the same time, the private non-bank sector was borrowing on average the equivalent of 5% of GDP every year from the banking sector. I use it to roughly replicate the 1920s and 1930s experiences, and then try a number of counterfactuals: Coolidge's surplus with no private sector borrowing; Coolidge running a balanced budget with private sector borrowing; and Coolidge running a deficit that generates the same GDP outcome (roughly) with no private sector borrowing.
You can download the MKY files from http://www.profstevekeen.com/minsky/
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I I can understand this reaction: "it appears you overestimate your understanding of modern
economics·.
In fact, I find most Neoclassical economists do that: they take for granted that what they learn in
graduate school-and from reading contemporary applications of that training-are based on solid
foundations. In fact, they are not. The derivation of market demand from individual demand, for
example, results in market demand curves that can have any polynomial shape at all. These are the
key paper in this literature:
Gorman, W. M. (1953). ·community Preference Fields." Econometrica 21 (1 ): 63-80.
Samuelson, P.A. (1956). ·social Indifference Curves." The Quarterly Journal of Economics 70(1 ): 1-
22.
Shafer, W. and H. Sonnenschein (1993). Market demand and excess demand functions. Handbook
of Mathematical Economics. K. J. Arrow and M. D. lntriligator, Elsevier. 2: 671-693.
Gorman and Samuelson were willing to make ludicrous assumptions to sidestep this logical
conundrum:
Gorman: "COMMUNITY ind ifference and utility possibility loci are amo Thng the most useful
concepts of welfare economics. Their great disadvantage is that they may intersect ... we will show
that there is just one community indifference locus through each point if, and only if, the Engel
curves for different individuals at the same prices are parallel straight lines ... The
necessary and sufficient condition quoted above is intuitively reasonable. It says, in effect, that an
extra unit of purchasing power should be spent in the same way no matter to whom it is given .. :
Samuelson: "it is the essence of its contribution that such defined community curves can and i11
many circumstances must intersect and cross each other ... if within the family there can be
assumed to an optimal reallocation of income so as to keep each member's dollar expenditure of
equal ethical worth, then there can be derived for the whole family a set of well-behaved indifference
contours of what it consumes: the family can be said to act as if it maximizes such a group
preference function ... The same argument will apply to all of society optimal reallocations of income
can be assumed to keep the ethical worth of each person's marginal dollar equal."
On such rocky-insane-foundations were DSGE representative agent macroeconomics models built.
HANK have been built on the failures of those models to anticipate the GFC.
And I promote system dynamics because it is easy to start with none of the Neoclassical apparatus
whatsoever and derive realistic dynamic nonequilibrium models from it. The fetish for imposing
equilibrium solutions on dynamic systems-which is the rule for DSGE modelling, given its saddle
node equilibrium-ruins any Neoclassical attempt at dynamics.
I've also given up on trying to persuade Neoclassical economists of the import of problems like this.
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I wish you were right Carmen, but you're not. Here's a test you can undertake yourself, if you're a student with access to a university library. First, find Blinder, A. S. (1998). Asking about prices: a new approach to understanding price stickiness. New York, Russell Sage Foundation. It's a Project Muse online book: my URL for it from UCL is https://muse-jhu-edu.libproxy.ucl.ac.uk/book/14986
Then read what he says on pages 101-102. Far from his empirical research being consistent with economic theory, he points out that it contradicts it.
Next, see if you can find a copy of Blinder's Microeconomics textbook Baumol, W. J. and A. S. Blinder (2015). Microeconomics: Principles and policy, Nelson Education.
See if he makes any mention of his own research on this topic.
It may be hard to grasp, but your economics education is mendacious.
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I can understand your inclination here, but in fact there are enormous logical and empirical problems with the equilibrium theories which mainstream pedagogy completely ignores. For example, check their attempts to derive a market demand curve--which is a staple of the paradigm--from individual demand curves. They failed, in fact generating a proof by contradiction that, while individual "Hicksian compensated" demand curves can be proved to slope downwards in price, a market demand curve derived from the same principles can have any polynomial shape at all.
Their reaction to this discovery was delusional. Rather than recognising the proof by contradiction, they made crazy assumptions like:
"The necessary and sufficient condition quoted above is intuitively reasonable. It says, in effect, that an extra unit of purchasing power should be spent in the same way no matter to whom it is given"; Gorman, W. M. (1953). "Community Preference Fields." Econometrica 21(1): 63-80. http://www.jstor.org/stable/1906943
"If within the family there can be assumed to an optimal reallocation of income so as to keep each member's dollar expenditure of equal ethical worth, then there can be derived
for the whole family a set of well-behaved indifference contours... The same argument will apply to all of society if optimal reallocations of income can be assumed to keep the ethical worth of each person's marginal dollar equal..." Samuelson, P. A. (1956). "Social Indifference Curves." The Quarterly Journal Of Economics 70(1): 1-22. http://www.jstor.org/stable/1884510
So while your analogy with physics is feasible, a better analogy would be Pythagorean mathematicians finding that not all numbers are the ratios of two integers, and instead assuming the non-existence of irrational numbers. If mathematicians had behaved the same way that economists have, you'd still be writing your theses on papyrus.
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This is a complex criticism and it deserves more of a response than I can give in a mere reply, so I'll cover some basics here, and then some time in the next few weeks, I'll produce a video in response. I'll start with the points where we agree.
Firstly the economy is a complex system--and that is precisely the perspective that is NOT taught by conventional economics. Instead it is still locked into an equilibrium mindset, and that removes complexity from the picture. Most complex systems have unstable equilibria for realistic parameter ranges, as--from what you have written--you are aware. Therefore imposing equilibrium on your models--which DSGE models do--rules out complexity.
Unsurprisingly, DSGE models therefore completely failed to anticipate, let alone predict the GFC. And yet, even after the GFC occurred, Neoclassical economists remained wedded to the equilibrium approach. Check this paper by Olivier Blanchard: https://www.piie.com/blogs/realtime-economic-issues-watch/further-thoughts-dsge-models. Even after consulting me, he commences with "I believe that there is wide agreement on the following three propositions; let us not discuss them further, and move on: 1. Macroeconomics is about general equilibrium..."
Neoclassical economists are incapable of even contemplating, let alone modelling, the economy as a complex system. Given that, and your appreciation that it is a complex system, there must be something(s) wrong in the underlying belief system of Neoclassical economics: something must be wrong with "the basic knowledge" that you found "to be unquestionably necessary and beneficial". I cover that is my book Debunking Economics (https://www.bloomsbury.com/us/debunking-economics-digital-edition--revised-expanded-and-integrated-9781780322193/) and in the course that this video markets.
The 7-week thing is something the firm marketing the courses insists upon; internally, it's used to encourage students to pass exams (AI generated) to continue progressing. The actual program is much longer. If you'd like to get an idea of the content then read https://profstevekeen.substack.com/p/manuscript-of-rebuilding-economics. I have literally just made this book post open access.
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@rogertonkin3544 You are a bit Roger ;). But this is a useful discussion, and I appreciate your queries here.
Minsky runs in continuous time: differential equations rather than difference equations. I'm a staunch critic of difference equations in economics, regardless of whether they're used by Neoclassicals or Post Keynesians. I explain why in my Modelling with Minsky book: https://www.patreon.com/posts/first-version-of-56929057, on pages 45-49.
Technically, Minsky generates a system of coupled Ordinary Differential Equations which are then simulated using the Runge-Kutta algorithm. If you download Minsky from https://sourceforge.net/projects/minsky/ you'll see an Equations tab, where the ODEs are generated as you build a model. Minsky can export these to LaTeX for documentation.
The conventional approach to money that you describe is one that Post Keynesians have been criticizing since Basil Moore's "The Endogenous Money Supply" (https://www.tandfonline.com/doi/abs/10.1080/01603477.1988.11489687?journalCode=mpke20); and you can find criticisms of it even earlier, in Schumpeter, Fisher, Wicksell, and even Pigou (Industrial Fluctuations: https://www.routledge.com/Industrial-Fluctuations/Pigou/p/book/9781138217263). In Post Keynesian economics, the money supply is an endogenous variable, determined by bank lending, government deficits, and international trade surpluses.
The endogenous money approach was ignored by the mainstream until 2014, when the Bank of England came out strongly in favour of the endogenous money perspective: see https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy. The Bundesbank also chimed in: see https://www.bundesbank.de/resource/blob/654284/df66c4444d065a7f519e2ab0c476df58/mL/2017-04-money-creation-process-data.pdf
Yes, the external sector does have monetary impacts: a trade surplus increases the money supply while a deficit reduces it. I haven't modelled that in Minsky yet because it requires modelling multiple currencies, exchange rates, etc.; we have the core mechanisms for this (Godley Tables can be denominated in different currencies) but not the full superstructure needed to make it easy to do this. However a student of mine has developed a large-scale model of the Portuguese economy using Minsky with an external sector.
BTW on this point I diverge from MMT: they have this one-liner that "exports are a cost and imports are a benefit", which I think leads them into a perspective on the monetary effects of trade that conflict with their domestic analysis.
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@rogertonkin3544 As I keep saying, I can start the model with a positive balance in the Treasury account, and have no borrowing from the RBA in it. The RBA functions as a monetary conduit in my model, not as a subsidiary of the Treasury. At no point do I have the RBA funding governnment deficits--I had a shorthand at one point about the payment of interest on Treasury bonds, but I can replace that with 2 transactions rather than one and that objection disappears too,
I also find it galling to be lectured on what the monetary structure of the economy is, when Neoclassical economists have modelled private bank lending as being the Reserve Ratio times Reserves, which has never been the case. The Bank of England came out as a critic of in 2014, yet Neoclassical economists continue using that same invalid model. You noted that's how you've modelled private money creation in past models, and that is categorically wrong. Minsky enables this process to be modelled correctly.
If you're going to criticise MMT, accept that the mainstream deserves even more criticism.
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@harrisonwekesa5406 They do: the conclusions are so appealing that they forget the constraints imposed by logic to make the conclusions inevitable. I quoted Schumpeter on this point in this week's lecture in my online course:
“a famous Ricardian theory is that profits ‘depend upon’ the price of wheat.
And under his implicit assumptions and in the particular sense in which the terms of the proposition are to be understood, this is not only true, but undeniably, in fact trivially, so.
Profits could not possibly depend upon anything else, since everything else is ‘given,’ that is, frozen.
It is an excellent theory that can never be refuted and lacks nothing save sense.
The habit of applying results of this character to the solution of practical problems we shall call the Ricardian Vice.” (Schumpeter 1954, History of economic analysis, p. 473)
“the Ricardian Vice…
the habit of establishing simple relations between aggregates
that then acquire a spurious halo of causal importance,
whereas all the really important (and, unfortunately, complicated) things are being bundled away in or behind these aggregates.” (p. 668)
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Well either you're talking about rising marginal productivity at low output levels, leading ultimately to diminishing marginal productivity at normal (for the textbook) levels of output--which I agree many textbooks show--or you're bullshitting. Every textbook asserts firms produce where marginal cost is rising, otherwise they couldn't get marginal cost to intersect with marginal revenue to set output levels. That applies all the way from Mankiw to Mas-Colell.
In the real world, this doesn't happen. Firms have constant to very slowly falling marginal cost. This paper gives the best rendition of this empirical fact: The Shape of the Average Cost Curve
W. J. Eiteman and G. E. Guthrie
The American Economic Review 1952 Vol. 42 Issue 5 Pages 832-838
http://www.jstor.org/stable/1812530.
Furthermore, firms have set list prices that also don't change with output. This combo--constant or declining marginal cost and constant list prices for differentiated products--is the rule for the vast majority of manufacturing firms, and yet economic theory is based on an unrealistic vision of firms working past ideal capacity selling homogeneous products, which is a fantasy.
When you do the math on this, as I've done here (https://profstevekeen.substack.com/p/profit-maximization-in-the-real-world), the rate of change of profit is always positive. This totally undermines the standard textbook micro. You haven't escaped the fantasy yet--and probably never will. But if you're actually serious rather than trolling, here's a serious reference for you on research into the actual cost structure of firms: Lee, F. S. (1998). Post Keynesian Price Theory. Cambridge, Cambridge University Press (https://www.amazon.com/Keynesian-Theory-Modern-Cambridge-Economics/dp/0521030218)
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@nimrod06 What do you want in 17 minutes? I address that in my book Debunking Economics https://www.bloomsbury.com/uk/debunking-economics-9781848139947/. And there are numerous areas in which economics assumptions have been proven wrong by data when they were obviously wrong from the assumptions.
For example, I expect you've been taught the "Efficient Markets Hypothesis"? Did you know that to derive it, Sharpe assumed "homogeneity of investor expectations: investors are assumed to agree on the prospects of various investments – the expected values, standard deviations and correlation coefficients described in Part II. Needless to say, these are highly restrictive and undoubtedly unrealistic assumptions. However, since the proper test of a theory is not the realism of its assumptions but the acceptability of its implications, and since these assumptions imply equilibrium conditions which form a major part of classical financial doctrine, it is far from clear that this formulation should be rejected – especially in view of the dearth of alternative models leading to similar results." (Sharpe 1964 [1991]; emphasis added)"
That is obviously a significantly false assumption. No wonder then that 40 years later, Fama and French reported that the thesis failed: see Fama, E. F. and K. R. French (2004). "The Capital Asset Pricing Model: Theory and Evidence." The Journal of Economic Perspectives 18(3): 25-46.
I'm sorry, but you have been conned. Assumptions do matter.
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Firstly Sabine, thank you for the sincerity, passion and honesty in this video--which I'm very glad you did post.
Secondly, as an ex-academic myself, and as contrarian in my own discipline (Economics) as you are in yours, I can relate to every last aspect of your saga except the sexism, and then only because I'm an old white male.
Thirdly, I'd encourage you to continue this theme into a semi-autobiographical book. It's extremely important for people to know how badly Universities have been corrupted by the Neoliberal fantasy--which for us academics became a nightmare--of turning them into profit centres.
I actually embarked on the same--a semi-autobiographical book, intended to make an intellectual point--but have never had time to finish it. Its title is "Being Economical With the Truth" and I posted a draft here in case you're interested https://www.patreon.com/posts/being-economical-61145140.
I'm writing this very personally because that's the way you made this video, and I have immense respect for you as a result.
Best regards, Professor Steve Keen
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@justinjefferson5831 Yes I know you are. And I'm calling you out as a victim of bullshit, because you're taking seriously what spouted y economics textbooks.
Here's an example for you to contemplate. When Alan Blinder did the research I discuss in this video, he stated the following (in 1998):
"Another very common assumption of economic theory is that marginal cost is rising. This notion is enshrined in every textbook and employed in most economic models. Otis the foundation of the upward-sloping supply curve...The overwhelmingly bad news here (for economic theory) is that, apparently, only 11 percent of GDP is produced under conditions of rising marginal cost...
Firms report having very high fixed costs-roughly 40 percent of total costs on average. And many more companies state that they have falling, rather than rising, marginal cost curves. While there are reasons to wonder whether respondents interpreted these questions
about costs correctly, their answers paint an image of the cost structure of the typical firm that is very different from the one immortalized in textbooks." (Blinder, A. S. (1998). Asking about prices: a new approach to understanding price stickiness. New York, Russell Sage Foundation. https://www.jstor.org/stable/10.7758/9781610440684)
When he published his 2010 edition of his economics textbook (Baumol and Blinder), he did not even mention his own research, and contradicted what he said here with the standard assumptions of Neoclassical economics that generate diminishing marginal productivity and a rising marginal cost curve:
"The “law” of diminishing marginal returns, which has played a key role in economics for two centuries, states that an increase in the amount of any one input, holding the amounts of all others constant, ultimately leads to lower marginal returns to the expanding input...Many real-world cases seem to follow the law of variable input proportions..."
His drawings of the cost structure of the "typical" firm directly contradicted his empirical research. So " unverifiable and unfalsifiable assertions, appeals to authority"? That's what textbooks do. I'm basing my work on empirical research, which Neoclassicals ignore, even when they do that research themselves!
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