Steve Keen’s Macroeconomics

Even before the Covid-19 crisis began, the global economy was not in good shape, and nor was economic theory. The biggest economic crisis since the Great Depression began late in first decade of the 21st century. Called the “Global Financial Crisis” (GFC) in most of the world and the “Great Recession” in the USA, it saw unemployment explode from 4.6% of the US workforce in early 2007 to 10% in late 2009. Inflation turn into deflation— inflation of 5.6% in mid-2008 fell to minus 2% per year in mid-2009—and the stock market collapsed, with the S&P500 Index falling from 1500 in mid-2007 to under 750 in early 2009. The economy recovered very slowly after then, under the influence of an unprecedented range of government interventions, from the “cash for clunkers” scheme that encouraged consumers to dump old cars and buy new ones, to “Quantitative Easing”, where the Federal Reserve purchased a trillion-dollars-worth of bonds from the financial sector every year, in an attempt to stimulate the economy by making the wealthy wealthier.

This crisis surprised both the policy economists who advise governments on economic policy, and the academic who develop the theories and write the textbooks that train the vast majority of new economists. They had expected a continuation of the boom conditions that had preceded the crisis, and they in fact believed that crises could not occur. In his Presidential Address to the American Economic Association in January 2003, Nobel Prize winner Robert Lucas declared that crises like the Great Depression could never occur again because “Macroeconomics … has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades. (Lucas 2003 , p. 1 ; emphasis added).

That’s not quite so much of a gotcha as some might think. Because of course we didn’t have a rerun of the Great Depression. Largely because policy makers like Ben Bernanke understood what Milton Friedman had been saying (in A Monetary History of the United States) about what caused the Great Depression – bad monetary policy.

Do note what the Lucas claim was – not that we have banished recessions, not that we’ll never have economic slowdowns or economic bad times. But that we’ll not have economic collapses like the Great Depression. Which we didn’t have, even though we could have done, and largely we didn’t because macroeconomics had advanced in understanding why depressions occur and what is necessary to avoid them doing so.

12 thoughts on “Steve Keen’s Macroeconomics”

  1. No instead we’ll have decades of low or zero growth, ever rising debt, interest rates at near zero encouraging people to save in ever more risky manners (who will then lose their money as periodic slumps collapse whatever house of cards they invested in). All the while this monetary largesse is eroding the public faith in market economics, because although it isn’t free market economics, not one bit, its still painted as such, thus driving us closer and closer to some sort of socialist revolution, out of public frustration with the never ending greyness of their lives, caused by the lack of economy growth. Eventually the authorities will think they really have invented ‘new economics’ and print their currencies into a hyperinflationary death spiral.

    All to avoid a recession lasting a few years.

  2. Try convincing Italy that there is no depression. Last time I looked, unemployment was massive and GDP was still below 2008 levels

  3. You only have to look at Japan to see what trying to play monetary games with the economy does, 30 years and counting of low growth, with frequent mini-slumps. When an economy gets out of whack, it has to take its medicine, purge the bad debts out, wash away the mal-investment. If politicians try to ‘improve’ things, they’ll just make it worse in the long run.

    Which incidentally is exactly what they are doing with covid. Stringing the whole thing out into decades of pain when it could have been done and dusted inside a year or two.

  4. Bloke in North Dorset

    Agree with Jim. Furthermore, they’re training politicians to believe that their bad decisions will be bailed out and they can kick any difficult decisions further down the road, making the inevitable crash even worse.

  5. If all the world’s macroeconomists were taken behind the barn & shot would it be a worse place? I doubt it.

  6. @Diogenes

    In a sense Italy is the exception that proves the rule, no? Place that can’t set its own monetary policy, and is suffering for it. We all joke about the Italian economy but if you look at WW2 to joining the euro, despite its ups and downs, it never got set into anything resembling America’s Great Depression.

    Think you’re all being a bit harsh on Timmy’s point tbh. He’s not saying that monetary policy is always being done well or that it’s optimal or whatever. He’s saying even the daftest of central banks now wouldn’t repeat the mistakes that led to the Great Depression, which is both true and a very low bar – the Great Depression was singularly bad.

  7. MBE but it looks as if the West is simply repeating what Japan has been doing since the 90s and no commentator I am aware of, even William Keegan, suggests that Japan is an exemplar to follow. We are following blindly

  8. “He’s saying even the daftest of central banks now wouldn’t repeat the mistakes that led to the Great Depression, ”
    Doesn’t mean they don’t make different mistakes. The question is, would we be better off without central banks in the first place?

  9. Part of Japan’s problem is their population. A kid born today might expect the Japanese population to halve within their lifetime.

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