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Money is also easily modelled by borrowing the basic tool of the accountant, double-entry bookkeeping.5 Money and debt are created by bookkeeping entries, and the same paradigm can be used to derive dynamic models of the flow of money in one direction, propelling the movement of goods and financial assets in the other. The difficulty in developing a monetary dynamic macroeconomics comes not from the tools themselves, but from the beliefs that have to be abandoned to employ them sensiblyfrom other assumptions that Neoclassical economists have made to simplify analysis that instead have made it almost impossible to understand the real world. There are enough of these to literally fill a book to whit, my Debunking Economics6but Ill single out just three: Rational expectationswhich really means assuming that everyone can accurately predict the future (and therefore avoid any calamities like the one we are in right now); Representative agentswhich really means assuming that theres only one person in the economy, who produces and consumes just one commodity; and Perceiving macroeconomics as applied microeconomics
This last false belief, and not a quest for greater realism, was the driving force behind the development of macroeconomics since WWII. It was a fools errand, since as physicists realized decades ago, More Is Differentto quote the title of a famous paper from Physics Nobel Laureate Philip Anderson.7 Biology cannot be treated as merely applied chemistry, even though the elementary building blocks of living entities are chemicals, because properties emerge from the interactions of these chemicals that cant be explained from the chemicals alone. We call one of these emergent properties Life. We know a great deal about chemistry, but no chemist has as yet created life. The attempt to reduce macroeconomics to applied microeconomics was as futile a quest.
1
Robert E. Lucas, Jr, Macroeconomic Priorities, his 2003 Presidential Address to the American Economic Association, January 10, 2003. http://oldweb.econ.tu.ac.th/archan/chaiyuth/New%20growth%20theory%20Review%20in%20Thai/macro%20 perspectives_lucas.pdf. 2 Bernanke, B. S. (2004). Panel discussion: What Have We Learned Since October 1979? Conference on Reflections on Monetary Policy 25 Years after October 1979, St. Louis, Missouri, Federal Reserve Bank of St. Louis. http://www.federalreserve.gov/boarddocs/speeches/2004/20041008/default.htm. 3 Cotis, J.-P. (2007). Editorial: Achieving Further Rebalancing. OECD Economic Outlook. OECD. Paris, OECD. 2007/1: 7-10. http://www.scribd.com/doc/43756565/Oecd-Economic-Outlook-2007 4 Fortunately Godley (http://en.wikipedia.org/wiki/Wynne_Godley), has many young followers carrying on his work. For the list of economists who warned of the crisis, see Bezemer, D. J. (2009). No One Saw This Coming: Understanding Financial Crisis Through Accounting Models. Groningen, The Netherlands, Faculty of Economics University of Groningen. http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf. 5 th For an example of modelling a simple 19 century paper money system, see http://www.economicsejournal.org/economics/journalarticles/2010-31. 6 Steve Keen (2011), Debunking Economics: the naked emperor dethroned?, Pluto Press, London. http://www.amazon.com/Debunking-Economics-Revised-ExpandedDethroned/dp/1848139926/ref=sr_1_1?s=books&ie=UTF8&qid=1326839803&sr=1-1 7 Anderson, P. W. (1972). "More Is Different." Science 177(4047): 393-396. http://www.andersonlocalization.com/pdf/more_is_different.pdf.
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