'Debunking' some of the greatest economists of our time
MOST modern economics is "neat, plausible and wrong", which is why so few economists forecast the great crash, a leading Australian economist said in Dublin yesterday.
Prof Steve Keen said the models used by mainstream 'neoclassical' economists treated the effects of debt as neutral. His analysis, by contrast, is that increases and falls in debt is the driver of the economic cycle.
Prof Keen, of the University of Western Sydney, is author of the best-selling book, 'Debunking Economics'. He is a fierce critic of some of the biggest names in economics, including Federal Reserve chairman Ben Bernanke and Princeton professor Paul Krugman.
"Mr Bernanke tries to find explanations for the Great Depression of the 1930s which are consistent with neo-classical theory. In 2000, he argued that debt does not add to demand.
"To some extent, I am delighting in his present discomfort. In the real world, it is debt which allows demand to exceed income. The theory ignores that, which is why we are in the present difficulties."
He told a meeting of the Institute of International and European Affairs (IIEA) that he had been accused of attacking "straw men" in his books.
"I reply, 'If that is the case, why do they keep giving Nobel prizes for economics to these straw men'?"
Prof Keen argues that the cycle of growing debt always feeds into rising asset prices as the "euphoria economy" takes over. "The final stage is the emergence of "Ponzi financiers" who invest purely on the basis of rising prices.
"They do not have the cash flow to service their debts. When the cycle turns, they are bankrupt at once and are the first to go."
Prof Keen said the ratio of public and private debt to GDP in the USA was 1.7 times greater than in 1929. He calculates that debt added $4 trillion to US demand in the boom, but $3 trillion has already been taken out by debt reduction.
"The only way out of this is large-scale abolition of the debt that is owed," he said.