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Why do we keep on taking advice from the clueless?

‘Neoclassical economists are not up to the task of steering the world economy’ (book review).

One of the great economic questions of our age is what caused the Great Depression and can we avoid a repeat?

Steve Keen, self-proclaimed ‘anti-economist’ professor of economics at Kingston University in London, has applied himself to the question for four decades and believes he has the answer. Debunking Economics (Zed Books, 2001; revised and updated 2011) is the product of that exploration. It is also a frontal assault on mainstream economics for lacking the rigour demanded of other scientific disciplines.

Whether a great depression can happen again – or indeed is already underway – is important because the last such period was accompanied by genocide and fascism. The stakes are high and the current prescription of bailing out failed banks, rather than over-indebted consumers, is merely prolonging the day of reckoning.

Keen is merciless in his attack on neoclassical economists. They are not up to the task of steering the world economy and their intellectual ministrations are not only misguided, they are fatal, he says. Our current economic system is held up by matchsticks that will likely lead to two outcomes: starvation or emigration. Either we reform the current economic system, including its money, or we risk ending up in a Hunger Games hell.

There is an element of apocalypse fatigue surrounding our economic trajectory with so many depressing books exploring aspects of the subject, but to turn away from the signals is criminally negligent. The markers of economic catastrophe are all around us: the debt-to-GDP levels hit 300% of GDP in 2008 when the world’s biggest banks ran to their respective governments looking for bailouts. That was 1.7 times the levels reached in the 1930s. The Great Depression was deepened by the massive deleveraging that took place in the 1930s, as people raced to pay down debt. The result was deflation, falling economic output and massive job losses. Followed by war.

Deficits create surpluses

Keen deviates from many of his peers by focusing on private rather than public debt. The two sources of money in an economy are banks and government. Banks create money each time a loan is given out. Governments create money by running budget deficits, which is a debt to the government itself. To conflate the two sends out false signals. Where neoclassical economists get it wrong is in assuming government debt is a liability. No, says Keen, it is an asset, since this deficit is what creates surpluses in the private sector. A liability on the government’s accounts is matched by a corresponding asset in the private sector. Those private surpluses are for the overall benefit of the country. Government’s role is to create the stock of money that fuels the private sector economy. This runs counter to the Austrian economic model of commodity-backed currencies (such as gold), and the neoclassical attachment to austerity.

Like Michael Hudson, author of J is for Junk Economics, Keen sees no problem with governments running deficits so long as there is surplus labour and resources, in which case inflation will be subdued. This argument carries some weight if you consider that the US government has run an average deficit of 2.4% for the last 120 years.

Read: Review: J is for Junk Economics by Michael Hudson

Keen also proves that there is a correlation between growth in credit and unemployment. The lower the credit extended by banks, the worse the unemployment rate. Most bank lending in the US and UK goes to private individuals for the purchase of houses, creating bubbles. Hence there is a tight relationship between credit growth and housing prices. The problem came in the 1980s when commercial banks muscled out the building societies and started financing house acquisitions. Building societies did not have banking licences so were restricted in the manner in which they could accept deposits and lend money. Banks, on the other hand, are able to gear up their lending through fractional reserve lending.

When banks slow down the credit spigots, housing prices collapse – as they did by 40% over 15 years in Japan and as they will do in Australia, South Korea and many other countries currently lofted by housing bubbles. 

Predicting crashes is simple

It is therefore simple to predict when crashes will occur: when the rate of private credit expansion slows down. Countries that borrowed their way through the last financial crisis will become zombie economies, including China, Canada, South Korea, Australia and Belgium. These economies avoided a crash through heavy borrowing, but they cannot escape the guillotine for much longer.

There is another category of countries in even worse shape. Keen calls them the “walking dead of debt”. These include the UK, US, Japan, Spain, Portugal and Greece, which have already been through a crisis, but remain so highly indebted they will veer between negative and slightly possible growth.

When the world’s biggest banks faced collapse in 2008 and ran to the authorities for bailouts, this was neoclassic economics at its most insane. Banks were the recipients of more than $1.5 trillion (with a ‘t’) of freshly minted money from the Federal Reserve, and the hope was that this would trickle down to the man and woman on the street. This is how the money multiplier is supposed to work: deposit R100 in a bank account and the bank lends this out multiple times, eventually creating R1 000 in credit from a R100 deposit. That’s the beauty of having a banking licence. Only the trickle-down didn’t happen. In other words, banks took the bailout money but stopped lending. If an economic reboot was the goal of the bailouts, then handing the money straight over to over-indebted consumers would have worked far better. They bailed out the wrong people. We can thank the neoclassical economists for their bum advice.

Austerity versus prosperity

The neoclassical love of austerity, rather than returning countries to prosperity, actually destroys economies. Keen argues that government deficits are necessary to increase the money supply on which economic growth feeds. Austerity does the opposite.

“If we leave the development of economics to economists themselves, then it is highly likely that the intellectual revolution that economics desperately needs will never occur – after all, they resisted change so successfully after the Great Depression that the version of neoclassical economics that reigns today is far more extreme than that which Keynes [British economist John Maynard Keynes, 1883-1946] railed against seven decades ago. I concluded the first edition with the observation that economics is too important to leave to the economists. That remains the case today,” says Keen.

If change is going to come, it will be from the young, who have not yet been indoctrinated into a neoclassical way of thinking, and from those from other professions like physics, engineering and biology, who will be emboldened by the crisis to step onto the turf of economics and take the field over from the economists.

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I tried hard to understand this article, but failed.

It is a difficult article to understand but one thing I agree on is when he says “Either we reform the current economic system, including its money, or we risk ending up in a Hunger Games hell.”

Very interesting but jaundiced view. ‘Debunking Economics’ is actually an entertaining read, and Steve Keene’s theories obviously deeply pondered,although the book is dated.

All academic views by economists with no real world experience.

Garbage. Rehashed pseudo Keynesian junk. The article is based on one major flaw. “Governments create money by running budget deficits, which is a debt to the government itself”. This is simply not true. Governments do not create money by running deficit. In order to run a deficit, i.e. spend more money than it takes in tax, the regime issues bonds (debt). In the US these are sold in auctions. If the public or another country buys the debt there is no new money created. If the Fed buys the debt, then there is money created (monetization of debt). The Fed is a private entity owned by a secret consortium of banks. At no stage does the government create money.

The problem is the use of debt as currency. The debt backing the currency compounds exponentially until it all comes crashing down. Encouraging deficit spending only exacerbates this. The state drives out the private sector in terms of borrowing making capital more expensive, hobbling the economy.

FAIL

There’s a lot going on here, but the line “The lower the credit extended by banks, the worse the unemployment rate” is surely flawed, there is a correlation agreed, but what is the true cause of the correlation? Unemployment will happen first, if banks lent the same in high unemployment times it would compound the problem (or move it from the unemployed to the bank). The decrease in lending is because of inability to repay, the act of not lending does not cause unemployment (in my simple mind at least). Freakonomics is a really good read by a similar sounding guy

In this fairy tale economic system that is too good to be true, nobody wants to know the real reason why the Great Depression happened. The truth will pop their bubble. It is more comfortable to live under the illusion that money can be created out of thin air, by the stroke of a pen, by a decree of government. The current monetary system puts unprecedented power in the hands of officials and politicians. They use (abuse) this power to entrench their own position of power, by stealthily taking from voters their purchasing power, and then handing them back a fraction of that stolen purchasing power through government programs.

The modern monetary system allows governments to bribe unsuspecting and credulous voters with their own money because nobody cares. It is similar to the owner of the house who gives a generous raise to his domestic worker, because she buys him a bottle of whiskey every week,…….. with the money she stole out of his purse.

The only economic theory that explains the Great Depression and predicts every depression that was to follow, is the Austrian Theory. Very few people realize that the market crash(in real terms) during the Great Stagflation of the 70’s was worse than the Great Depression. Very few people realize that the crash from the year 2000 to 2009 in real terms were of the exact same size as during the Great Depression. Everybody prefers the illusion that the politicians with their socialist, central planning economic system are in control. Well, they are not. They use fancy-sounding and confusing economic models to pull the wool over our eyes with a debt-inflated fractional reserve banking system.

But, if you can’t beat them, then join them….

I note that “the Great Depression” is mentioned a few times in this article, and ponders the question when it may return, etc?

As one of my fellow MW commentators (Sensei) recently mentioned: (and I checked with Wikipedia)

(i) during the 1930’s Great Depression the average unemployment rate in the USA was moving between 10% – 18% (between the yrs 1929 – 1939), and peaking at 25% in 1933.

(ii) Fast “forward” to 2018 in our beloved Mzanzi….our official unemployment rate at 27% (and has been hovering around 25% since 2009).

Conclusion: for many South Africans, a great depression is part of daily life, for at least a decade by now! It’s slowly becoming culture…

What I have learned in basic economics is that there is still no such thing as a free lunch. Debt MUST be covered some way or the other and printing more obviously doesn’t work and so we are left with actual physical productivity to balance the books.

I guess Mr Keen is too young to remember the 1970s when government spending failed to create jobs, only inflation.

I agree with the line : “Economics is too important to leave to Economists.”

Anybody who thinks the “right” economic theory is the “magic” answer to a nation’s economic problems, is worshipping at the wrong alter.

Take SA for example.

Neither Socialism nor Capitalism is the magic bullet.

The solution lies a cultural self-discipline of taking only as much from one’s surroundings as that environment will sustain.

And ruthlessly forcing that discipline on those that break this rule.

There are tribes in SA who practice this. And they prosper. And tribes who actively deny this principle. And they appear on the side of the road in poverty.

“Economists”, with their narrow world view, have not got an all-encompassing enough vision for their subject to provide a unified solution to this problem.

It is much more than just describing how, and why, money moves around.

The solution comes down to cultural leadership, and a population, that embraces this.

What’s the truth? Everyone, consumer, government must produce a surplus, a profit. If anyone makes a deficit, it is not selling enough to the world economy. At the end of the day it is PROFIT that counts, not losses or loans or deficits.

The ‘clueless’ run the country and there is very little if anything that can be done about it so maybe that applies to financial advice as well! Would you take advice from Bathabile Dlamini on anything? My point exactly.

It is perhaps unfair to judge a book by a review, but
“The two sources of money in an economy are banks and government.”
Ummm, what about savings and credit providers (from chains like Edgars or Lewis to pharmacies and boutiques)? They can leverage exactly the same as banks. Right now part of SA’s slump is due to corporate cash piles; it is doubtful if any financial actions by government or banks will overcome the political barriers to expansion and investment.

Economics is like tectonics: forces build up, the events are predictable but take ages. One cannot deny tsunamis and earthquakes.

Ditto, like weather forecasting (and climate change) there are so many variables the become impossible to measure or calculate (hence “chaos theory” arose in weather forecasting).

With all its faults (and neo-classical economics is like Churchills comment about democracy — a bad system whose only saving grace is that it is better than anything else that has been tried) has lifted more people out of poverty than any other system.

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