George Monbiot Seminar

from Steve Keen

This http://www.youtube.com/watch?v=YoaUTpr2SNo&feature=player_embedded is the link to video of the seminar I gave in Oxford earlier this month that The Guardian‘s George Monbiot attended. George then wrote the feature “It’s in all our interests to understand how to stop another Great Depression“, which briefly propelled the new edition of Debunking Economics to No. 89 on Amazon UK‘s Bestseller list. 

Given that my audience included academic economists–from PhD students to Professors of some note–I went into more depth on the modelling I have done of Minsky’s Financial Instability Hypothesis than I normally do in public talks. The discussion I had afterwards is also recorded, which is why the video is so lengthy.

One part of the discussion that I found quite notable was that, even after showing empirical evidence on the impact that rising and then falling private debt had on the economy both now and during the Great Depression, I couldn’t convince several of the academics in the audience of the importance of private debt: they kept coming back to “one person’s debt is another person’s asset, therefore the level of debt doesn’t matter”. They therefore argued vehemently that the distribution of debt was important, but its aggregate level was irrelevant.

I tried to point out that since the rate of change of debt contributes to aggregate demand (for both newly produced goods & services, and existing assets), then the change in debt matters, but I made no headway at all with the argument.

As I noted at the end, maybe I’d better come back for a longer seminar then. The point I would make, in much more detail, is that even if one accepted that the level of debt can be anything at all without having macroeconomic consequences on its own (which I don’t accept–at some level of debt, debts can’t be repaid and both creditor and debtor fail in a chain reaction of bankruptcies), the rate of change of debt and its acceleration do matter. This in turn gives the level of debt an imputed relevance, since at a low level of debt the rate of acceleration of debt can be both positive and quite high, while at higher levels of debt it will generally be low and can be substantially negative–just as a car’s acceleration can be very high and positive when the car is moving slowly, but will be low and potentially very negative when the car is travelling at a high speed.

I hope that argument would get through, but there’s a lesson to be learnt in the failure of my argument on the day to get past economic a-prioris–even amongst economists who were quite sympathetic to my overall critical attitude to neoclassical economics. This is that a static mindset is so much a part of economic thinking that the “slice of time” consideration that “one person’s debt now is another person’s asset now” completely dominated how they thought about the macroeconomic impact of debt.

I would have left that seminar somewhat deflated if George hadn’t been in the audience. But of course his presence there, and his subsequent column, made it all worthwhile–and helped the first print run run out in a couple of weeks. If you’re not a regular reader of Monbiot, you’re missing some real gems of both commentary and journalism. Being an Australian, I have almost no idea of who Christopher Booker is, but George’s hatchet job on him in The superhuman cock-ups of Christopher Booker in his blog today is a gem of a piece.

  1. Bruce E. Woych
    October 27, 2011 at 12:37 pm

    ” “one person’s debt is another person’s asset, therefore the level of debt doesn’t matter”. They therefore argued vehemently that the distribution of debt was important, but its aggregate level was irrelevant.”

    The monetary market mentality that obliterates people on a grid is not just an atrocity of virtue but a vice of arrogance writ large. The fallacy and flaw in this “precept and presuppositions” (of the above statement) is that it distorts reality into an axiom of product deduction; and reduces product to monetary gain as a purely fiat economy(which in itself is only an asset as an exchange medium and not a real product). The only other explanation is that it hides an indentured servitude philosophy one generation removed by an exchange medium that has captured peoples obligatory debt under (not wage slavery, but…) debt slavery.

    The rhetoric of ideas in economist’s historical entourage of classical premises are not just self serving but are deceptive ploys. One major question is the definition and truthful depiction of terms. If the market is a matrix of contract potentials; what types of contracts are available when the debt load becomes perverted?

    Precisely what are “assets” when they are equivocated by the term “debt?”

    When assets become weapons they are no longer economic in nature; they are an exploitation spectrum of domination and those who are dominating this system will never agree to a language that depicts the imbalances as monopoly capital and economic cold war against indiscriminate victims.

    “…one person’s debt is another person’s asset…” legitimates the abuse of power and makes a monster appear virtuous and a monetary bondage game appear ethical. It is a distortion based upon equivocating ambiguity and is a con game of semantic deception, in a process of domestic extortion when it grows to the current proportion. As it is currently emerging we have people (especially the upcoming generation) born into debt burdens for the rest of their lives…and that can’t possibly be called an ECONOMY of any true civil society. Contract slavery? Debt servitude? JUST AN ASSET to the owner of the paper!

    • Merijn Knibbe
      October 27, 2011 at 1:04 pm

      But you will have to admit…the liabilities of Greece are the assets of the French banks!

      • Dave Taylor
        October 27, 2011 at 2:13 pm

        In other words, zero! Made out of and therefore constituting nothing. Not worth the paper wasted by writing them down.

  2. October 27, 2011 at 1:49 pm

    “one person’s debt is another person’s asset, therefore the level of debt doesn’t matter”

    Would this help?:

    The assumption under which this is true is that there are no transaction costs and property rights are clearly defined, that is: the abstractions of the Coase theorem. Clearly in reality there ARE transaction costs and those transaction costs are not necessarily constant in proportion to the aggregate amount of debt. It would seem that as the equity positions become dicier, the proportion of transaction cost to debt would rise.

    • engine-ear
      November 28, 2011 at 2:56 am

      Im into physics and engineering so forgive me, but, the transaction fees require more money to be present after all unwinds with the debt/asset exchange then was present in the original exchange. The other major point has to do with activity in that the loan is usually a lump some but the debt is settled later and slowly so that the activity produced is a kind of bubble. This type issue showes up in servo stability problems as a time delay issue. The problem with the static slices is that the effects of phase shifts are kind of lost. Another problem is related to complexity and chaos. As there are so many individuals, the effect of anyone individual exchange actually depends upon how elastic(?) the environment/playing field layer is. If everyone does and exchange at once the effect is very different then if the exchanges are distributed over time in a smooth fashion. Again in servos this amounts to what happens if something in the control string SATURATES and then the system goes NON-Linear and all bets are off. How it comes out of non-linearity can be chaotic and unpredictable. Again I apologize for dropping to some engineering ideas. – nope i take that back – I’m not apologizing for the real world.

  3. October 27, 2011 at 2:14 pm

    Steve,

    The key to unlocking this puzzle about the static mindset and “slice of time” is in Marshall’s 1898 essay, “Distribution and Exchange”: the concepts of external economies and cumulative causation. Just because in the short period you can put a lot of complications in the ceteris paribus pound doesn’t mean you can do the same for the long period or in cases where the external economies are disproportionately large relative to the internal economies of the firm.

    My draft, “The problem with ‘The problem of social cost” looks at these issues from the perspective of a critique of Coase and Pigou.

    • October 27, 2011 at 4:24 pm

      Where can I download Marshall’s “Distribution and Exchange”? I looked last night, but could not find anywhere.

      • October 27, 2011 at 4:56 pm

        JSTOR, if you have access. If not I can send you a copy if you send me your address. (lumpoflabor at gmail).

    • Dave Taylor
      October 27, 2011 at 7:33 pm

      I suggest the static mindset is a consequence of a couple of thousand years of static “family tree” logic, with time considered as an aspect of “being” already accounted for in hierarchical analysis. When it is understood that motion rather than existence is fundamental and that relative timing is fundamental to the analysis of cause and effect, then one needs to to develop logical skills (intuitive correlation of many things happening at once) which have in the Renaissance tradition been deemed less reliable than the sequential processing of verbal and symbolic forms detached in time and context from the data they represent.

      Pseudo-science builds time into models and tries to mimic known effects. Real science intuits causes and the way they lead to effects, but builds and tries out timed models of interacting causes to see if they were right, so that we can eliminate undesirable effects by varying the type of practices which caused them. I’m really grateful to Steve Keen for sharing his model with us (even more his seminar and links to Monbiot and Minsky), but my impression is that his method is still that of pseudo-scientific economics, glorifying successful prediction – rather than understanding, as a maintenance engineer for example has to, how to go about understanding the causes of our problems.

      Okay, so money circulates, but why? Is it like an electrical
      distribution circuit carrying power, or does it carry information, i.e. are people forced to do things or persuaded/intimidated/conned? If information rather than power is the key, is the information being used to set and control the amount or the distribution of power, minimising undesirable variations by means of short and long-term corrective feedback and foresight? Or does it work more like the internet, with rules which prevent misuse leaving individuals free to do more or less what they want, including control their own on-going process?

      Listening to Steve’s seminar, I was appalled at just how juvenile the discussion was. Do people not understand that money circulates because no-one has introduced them to flow diagrams, or is it vice versa: they don’t understand flow diagrams because they’ve never been exposed to the rudiments of electric circuitry?

      • Robert Dulin
        October 30, 2011 at 2:17 pm

        Okay, so money circulates, but why? Is it like an electrical
        distribution circuit carrying power, or does it carry information, i.e. are people forced to do things or persuaded/intimidated/conned? If information rather than power is the key, is the information being used to set and control the amount or the distribution of power,

        Dave Taylor is even more right than he thinks.
        Money is the information and control system that regulates property exchange. The problem is that the control system ( the financial economy) demands an ever increasing share of all property exchanged and also creates false control signals to give itself title to property that belongs to someone else.
        Lender Created Debt

  4. October 27, 2011 at 2:15 pm

    The URL tag in the above appears to be broken. Here is the link:

    http://ecologicalheadstand.blogspot.com/p/problem-with-problem-of-social-cost.html

  5. Bruce E. Woych
    October 27, 2011 at 2:55 pm

    http://blogs.reuters.com/felix-salmon/files/2009/11/computer-power-and-human-greed.pdf

    http://blogs.reuters.com/felix-salmon/2009/11/23/the-role-of-the-database-in-the-financial-crisis/

    (the comment by Norm Cimon to Salmon is a critical gem, slightly hedged to the safe side of corrupt accusations, but the implications are devastatingly depicted in the assessment.

    ALSO:
    http://blog-imfdirect.imf.org/2011/10/26/how-iceland-recovered-from-its-near-death-experience/
    By Poul M. Thomsen
    How Iceland Recovered from its Near-Death Experience
    Posted on October 26, 2011 by iMFdirect
    TODAY: OCTOBER 27, 2011
    “To take stock of Iceland’s crisis and recovery, the IMF and the Icelandic government are co-hosting a conference on October 27 that will see prominent economists such as Nobel Prize winner Paul Krugman and international economists Willem Buiter and Simon Johnson debate civil society, academics and IMF officials on whether the lessons learned can be applied elsewhere. Do join the discussion.”

    LINK TO IMF SITE AND DISCUSSION FOR Thursday October 27, 2011
    http://www.youtube.com/imf#p/u/0/z4ftnNBAa-8

    • Dave Taylor
      October 28, 2011 at 10:59 am

      Bruce, thanks particularly for your first link, to a wonderfully lucid review of Weizenbaum’s book on the mis-use of Ted Codd’s relational databases in the finance industry. This has been a particularly good discussion, but we all need to get our heads round the technical issues explained in this paper, i.e. http://blogs.reuters.com/felix-salmon/files/2009/11/computer-power-and-human-greed.pdf.

      Reflecting on its human aspects, I was involved in the development of the database architectures in the early 1970’s, before Codd’s relational methods had become available, and even then management couldn’t understand the difference between an automated and a computer-assisted information system, i.e. a control system and a PID servo (i.e. an information system directing an actual controller). We wanted management to be able to see where to rearrange resources or provide help if staff were to meet targets, but what they usually saw was the easier option: to change the targets.

    • Dave Taylor
      October 28, 2011 at 2:04 pm

      Actually, alerted by the writer, Norm Cimon, gratuitously calling Codd “irascible” (angry) and database design “arcane” (secretive), and wondering if there was a problem of logical atomism in the theory (i.e. an assumption that entities don’t change type, which it turns out is allowed for), I’ve realised Codd and his theory are here being blamed for a problem in the design process, where “garbage in” results in “garbage out”. Cimon picks out a problem shown up by the guys who added a tiny bit of code diverting all fractions of a penny into their own account, which over billions of iterations made them millionaires. The real problems occur when paymasters (rather than those affected) direct the design, reducing costs by reducing the scope of the model to exclude the details and real value (possibly negative) of what is being done or traded, thereby building into the model the immorality of their being interested only in money-making.

      There is nothing secretive or even particularly difficult about systems analysis, though as a process of discovery it has to be painstaking. SSADM was intended to involve users and operators as well as managers and analysts in the evaluation and acceptance of proposals. The difficulty at all levels seems to be fear of what is not yet known.

  6. Bruce E. Woych
    October 27, 2011 at 3:45 pm

    As an anthropologist outside of the self-interests of economics as a school house or lineage, I have grown impatient with the circular evasions of sectors and factions within economic disciplines that portend a corrective factionalism but literally sustain each other through a process of polemical validation. If we need a special language to discover that we are being manipulated into a self-promoted “dependency” crisis than perhaps we should “exclude” economists out of the process for a period of time and see what we come up with by collecting real evidence.

    The contemporary context of “classical” economic classification is tantamount to virtual fraud.
    The contemporary “design” of computer enhanced transactions presumes a “systems coherent capacity” with a (literal = corporate) cooperative foundation with the entire emergent process (real sustained support growth) in mutual consent towards a common outcome. But the exclusivity of competitive based zero sum profit gains in mathematical formulas that maximize pure monetary gain (fiat over substance) nearly obliterates the imbalance of growth potentials of a cooperative and mutual base, in favor of “winner takes all” and desperate “succession by any means” as the primary hidden agenda for survival. Monetarist priorities make a mockery of the “as if” confabulations of “classical” theory and its taxonomy that blind sides a false reality with “slight of hand” shifts of emphasis and Ponzi scheme economics distribution of assets regally portrayed as privatization.

    The realism of “if so, then so” evidence based foundation demonstrates that “zero sum” financial sector “gaming the system” is not a balance between contractual obligations or an equal exchange of debt and transubstantiation into real infrastructurally secured economy. It is more of a lop sided confidence game based upon loss and scavenger sell outs. You have to deny real history and the destruction of commercial enterprise in America to try to substantiate a balance of assets to debt in the contemporary global sectors. In fact it is more and more true that one sector of debt has become another sectors liability to the tipping point of chaos.

    If one so choose to benchmark analysis towards the perverted incentive potentials and moral hazards (computational speculation in finance makes classical “ratios” totally obsolete and obliterates the moral compass of these terms…); and, one is to truthfully evaluate “rational choice” manipulations of asymmetrical information and the obfuscations and machinations made possible under the margins of corruptability and abuse under the potentials presented by “relational database” exploitation? The “design” of computer enhanced transactions becomes an agent of power dynamics and social domination. A monetary system that does not build civil society but seeks to capture and control it is not economic in nature or culture…it is political economic tyranny and financial collusion.

    In essence, so-called “classical” economics (as much as it is a utilitarian template over the veil of discovery in the contractual market system of society) has become a shroud over a still born science. It has long since become a knowledge based control fraud over domestic economies as industrial systems of wealth, and to hell with the costs…they are gains and assets to the subset of looters that progressively pretend to be “leaders” of the economy.

  7. October 27, 2011 at 4:07 pm
  8. Ramon Garcia Fernandez
    October 27, 2011 at 4:26 pm

    Maybe I am too simplistic, but the problem is that the term “asset” includes mainly two different things. If you had money to buy a car, and instead of buying it you lend it to me, I have a debt and you have an asset created in this transaction, but this was a transaction that involved a passage of puchasing power from hand to hand. In this case, it is very clear that “one person’s debt is another person’s asset, therefore the level of debt doesn’t matter”.

    However, when a bank (or any financial institution) gives you credit, they are creating this asset out of nothing. This is in principle perfectly reasonable, it may improve people´s welfare, but of course the total ammount of this operations (the volume of debt created) involves assets that did not exist previously. Which are the limits? Is it irrelevant if this kind of assets add up to 10%, 100% or 1.000.000% of the GDP? This makes my point (I would like to believe that it makes Steve Keen´s point too).

    Besides, I guess that when you create assets over assets over assets, the problem only gets worse, but the mechanism is essentialy the one described above.

    • Dave Taylor
      October 27, 2011 at 7:58 pm

      If I lend you money and you buy a car, you have an asset and I have not. I may have your IOU, but that is not an asset, only a record of my entitlement to assets. Jewish psychoanalyst Erich Fromm expressed the point lucidly when he said “The first commandment of the Decalogue is the first commandment of logic: Thou shalt not mistake the image for the reality”.

      Which gives me an opportunity I’ve been seeking to quote the blurb on Huber and Robertson’s extremely sensible proposals on “Creating New Money” (2000, NEF). “In the information age, money has mainly become information, electronically stored and transmitted. Monetary policies that serve the public interest can no longer be founded on a “smoke and mirrors” fiction that “real money” lies behind the information”.

      So, folks, don’t let all the “smoke and mirrors” con any of us any longer into worshipping the Golden Calf.

      • October 27, 2011 at 11:41 pm

        I ain’t fooled. A promise is only as good as the promise maker.

      • Merijn Knibbe
        October 28, 2011 at 6:55 am

        Dave, some accounting:

        Suppose I sell you a car for 10.000,– and you pay with a debt: I’ll get 10.000,– in one month. At the moment I accept this debt, according to our laws, the car is yours. You might sell it the next day for 20.000,–. I’m not entitled to any cent of your profit. During the first month I’m not even entitled to any cent…

        Should my balance sheet however include, on the left side, “10.000,– due in one month, debtor Dave Taylor”? The answer of accounting is: Yes, Yes, Yes. And that’s the way our economy works, for instance in the case of credit cards, or mortgages, or whatever. Debts really, really are a means of payment. Because we accept them as such.

      • Dave Taylor
        October 28, 2011 at 8:20 am

        As if I didn’t know that! So where did the money I lent you come from? Good for Helge! The banker’s promise to pay is only as good as the banker. I’m trying to get people’s heads round the fact that the real credit is given by the people who sell us things, trusting the rest of society to do likewise. It is not possible to account for all the people we ought to be grateful to: better to accept that all banks do (as with your IOU) is to authorise the giving of credit, and that we owe it not just to immediate benefactors but to the rest of society to do our best to EARN our keep. That is better summed up in my “hitch-hiker” philosophy than in justice conceived as “an eye for [the image of] an eye”, with compensation.

  9. October 28, 2011 at 2:43 am

    I would say that the statement
    “One person’s liability is another one’s asset” is clearly correct,
    while the statement
    “therefore the aggregate level of debt is irrelevant” is clearly false.
    The first question or remark in the discussion after Steve Keen’s presentation pointed out that debt is a contractual relationship between two persons and therefore the level of debt must be a question of distribution between different persons. But that does, of course, not mean that debt does not exist nor that it somehow should not matter.

  10. October 28, 2011 at 6:19 am

    “one person’s debt is another person’s asset” is tautologically true is a trivial way. If I have a debt of $100 and you have an asset of $100, they’re the same. Now if I default I have no debt and you have no asset! They’re both still the same. It follows that default doesn’t matter because the identity between debt and assets hasn’t changed!

    As soon as you bring in conditions that acknowledge that default and repayment are not “the same thing,” then the tautological identity disolves. Transaction costs matter, especially because they are cumulative. Half a cent on the dollar may be a trivial amount of overhead that can be overlooked but five or ten cents on the dollar is something else. Has anyone ever looked at the fees they charge at those check cashing stores? It’s like they’re loaning the poor their own money at usurious rates.

    • Dave Taylor
      October 28, 2011 at 9:20 am

      Yes to the first para – if you are talking about monetary debt. In the case of the loan of surplus goods, the giver may or may not have been helping someone who really needed it, so it may or may not be appropriate to write off the debt,i.e. interpret it as a gift. The sacrifice of necessities to help those in need is surely always admirable and should be repaid at least with gratitude.

      The second para is significant too. Transaction costs matter, but “especially WHEN they are cumulative”?

      • October 28, 2011 at 1:34 pm

        I’ll stick with “because”. They are always cumulative, in principle. Sometime the accumulation will not yet have amounted to much and can be disregarded for all intents and purposes.

  11. Bruce E. Woych
    October 28, 2011 at 12:52 pm

    Once again, the evidence base should not be predominantly theoretical but empirical. It is of interest that the example set in Iceland is ignored by those who say the model is “too” simple. Nevertheless, one can extrapolate better from a real life model than initiating theoretical reconstructions within bounded rationality frameworks of politically inclined interests.
    Aggregate irrelevance?

    Debt = liability that grows in the aggregate to demographic scale proportions.

    http://en.wikipedia.org/wiki/2008%E2%80%932011_Icelandic_financial_crisis

  12. Robert Dulin
    October 30, 2011 at 12:46 pm

    If I were to rob a bank, the bank’s loss would be my asset.
    I might even put the money in another bank increasing it’s assets.
    The problem is the transaction is non-productive.
    Consider the whole range of possible negative externalities:
    A guard shot and killed.
    Several people run over in the getaway injured or killed.
    Cost of increased security (both bank cost and social costs) to prevent further robberies.
    These cost are not fully represented on the bank’s balance sheet.
    Hard to prove a point when the numbers are not right.

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