Before the crisis…

Before the crisis…

• Before the crisis…

• The state of macro is good…” (Oliver Blanchard: founding editor, AER: Macro)

• After the crisis…

• It is important to start by stating the obvious, namely, that the baby should not be thrown out with the bathwater…” (Blanchard Dell'Ariccia et al. 2010; emphasis added)

• Reality

• Neoclassical macroeconomics is a baby that should never have been conceived

Neoclassical theory wrong from first principles:

• Neoclassical theory wrong from first principles:

• Treats complex monetary exchange as barter
• Assumes macroeconomy is stable
• Ignores social class
• Treats entire economy a single agent
• Obliterates uncertainty
• “Rational” as capacity to foresee the future;
• Uses empirically falsified “money multiplier” model of money creation; and
• Ignores credit and debt.

A new macroeconomics must do the exact opposite:

• A new macroeconomics must do the exact opposite:

• Economy as inherently monetary;
• Model the economy dynamically;
• Social classes rather than isolated agents;
• Rational but not prophetic behavior;
• Endogenous creation of money by banking sector; and
• Credit and Debt have pivotal roles

• Two instances

• Monetary Minsky Great Moderation/Recession model
• Dynamic Monetary Multisectoral model

• Base models:

• Monetary Circuit Theory (Graziani 1989; Keen 2008)
• Goodwin Growth Cycle (Goodwin 1967)

Basic process of endogenous money creation

• Basic process of endogenous money creation

• Entrepreneur approaches bank for loan

Input financial relations in matrix:

• Input financial relations in matrix:

Symbolic substitutions generate model

• Symbolic substitutions generate model

Inherently cyclical growth (Goodwin 1967, Blatt 1983)

• Inherently cyclical growth (Goodwin 1967, Blatt 1983)

Coupled with Goodwin model to yield final system

• Coupled with Goodwin model to yield final system

Single sector model (not yet calibrated to data) can generate “Great Moderation and Great Recession”

• Single sector model (not yet calibrated to data) can generate “Great Moderation and Great Recession”

Stylized version of monetary flows table:

• Stylized version of monetary flows table:

Profit now net of intersectoral input purchases:

• Profit now net of intersectoral input purchases:

“Conjecture: The repeated development of an unstable state of the economy is … an unavoidable consequence of, the local instability of the state of balanced growth.” (Blatt 1983, p. 161)

• “Conjecture: The repeated development of an unstable state of the economy is … an unavoidable consequence of, the local instability of the state of balanced growth.” (Blatt 1983, p. 161)

“The usual image of the business cycle was of a wavelike movement, and the waves of the sea were the accepted metaphor… The reality in the nineteenth and early twentieth centuries was, in fact, much closer to the teeth of a ripsaw which go up on a gradual plane on one side and drop precipitately on the other…” (Galbraith 1975, p. 104)

• “The usual image of the business cycle was of a wavelike movement, and the waves of the sea were the accepted metaphor… The reality in the nineteenth and early twentieth centuries was, in fact, much closer to the teeth of a ripsaw which go up on a gradual plane on one side and drop precipitately on the other…” (Galbraith 1975, p. 104)

Model fundamentally monetary: physical cycles cause and caused by cycles in finance

• Model fundamentally monetary: physical cycles cause and caused by cycles in finance

Making real dynamics sexy & accessible

• Making real dynamics sexy & accessible

• Free prototype QED “Quesnay Economic Dynamics”

• Inspired by Godley SAM approach

• Extended to continuous time

• Ideally suited to financial flows

Freely available at www.debtdeflation.com/blogs/qed

• Freely available at www.debtdeflation.com/blogs/qed

According to … modern followers [of past economists], static economics is a direct stepping stone to the dynamic system…

• According to … modern followers [of past economists], static economics is a direct stepping stone to the dynamic system…

• According to other economists, the body of economic theory must be cardinally rebuilt, if dynamic problems are to be discussed efficiently…

• … as long as static economics will remain a strictly unified system based upon the concept of equilibrium, … its analytic part will remain of little use to any system of dynamic economics…

• the static scheme in its entirety, in the essence of its approach, is neither a basis, nor a stepping stone towards a proper discussion of dynamic problems. Kuznets, S. (1930, pp. 422-428, 435-436; emphasis added)

Bezemer, D. J. (2009). ““No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models.” Groningen, The Netherlands, Faculty of Economics University of Groningen.

• Bezemer, D. J. (2009). ““No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models.” Groningen, The Netherlands, Faculty of Economics University of Groningen.

• Blatt, J. M. (1983). Dynamic economic systems : a post-Keynesian approach. Armonk, N.Y, M.E. Sharpe.

• Bezemer, D. J. (2010). "Understanding financial crisis through accounting models." Accounting, Organizations and Society 35(7): 676-688.

• Biggs, M., T. Mayer, et al. (2010). "Credit and Economic Recovery: Demystifying Phoenix Miracles." SSRN eLibrary.

• Blanchard, O., G. Dell'Ariccia, et al. (2010). "Rethinking Macroeconomic Policy." Journal of Money, Credit, and Banking 42: 199-215.

• Goodwin, R. (1967). A growth cycle. Socialism, Capitalism and Economic Growth. C. H. Feinstein. Cambridge, Cambridge University Press: 54-58.

• Graziani, A. (1989). "The Theory of the Monetary Circuit." Thames Papers in Political Economy Spring: 1-26.

• Holmes, A. R. (1969). Operational Constraints on the Stabilization of Money Supply Growth. Controlling Monetary Aggregates. F. E. Morris. Nantucket Island, The Federal Reserve Bank of Boston: 65-77.

Keen, S. (1995). "Finance and Economic Breakdown: Modeling Minsky's 'Financial Instability Hypothesis.'." Journal of Post Keynesian Economics 17(4): 607-635.

• Keen, S. (1995). "Finance and Economic Breakdown: Modeling Minsky's 'Financial Instability Hypothesis.'." Journal of Post Keynesian Economics 17(4): 607-635.

• Keen, S. (2008). Keynes’s ‘revolving fund of finance’ and transactions in the circuit. Keynes and Macroeconomics after 70 Years. R. Wray and M. Forstater. Cheltenham, Edward Elgar: 259-278.

• Kuznets, S. (1930). "Static and Dynamic Economics." The American Economic Review 20(3): 426-441.

• Kydland, F. E. and E. C. Prescott (1990). "Business Cycles: Real Facts and a Monetary Myth." Federal Reserve Bank of Minneapolis Quarterly Review 14(2): 3-18.

• Minsky, H. P. (1982). Can "it" happen again? : essays on instability and finance. Armonk, N.Y., M.E. Sharpe.

• Schumpeter, J. A. (1934). The theory of economic development : an inquiry into profits, capital, credit, interest and the business cycle. Cambridge, Massachusetts, Harvard University Press.

• Solow, R. M. (2001) “From Neoclassical Growth Theory to New Classical Macroeconomics”, in J. H. Drèze (ed.), Advances in Macroeconomic Theory. New York, Palgrave

• Solow, R. (2008). "The State of Macroeconomics." The Journal of Economic Perspectives 22(1): 243-246.