Monday, September 12, 2011

Steve Keen on Behavioral Finance, Lecture 6

Lecture 6 by Steve Keen on what is wrong with neoclassical macroeconomics.

In the second video, Keen refers to the empirical work of Finn E. Kydland and Edward C. Prescott (1990) on money supply and the trade cycle, which supports the Post Keynesian theory of endogenous money. Some interesting facts:
(1) M1 and M0 (the monetary base) do not lead the business cycle: they both lag it.

(2) M2 – M1 represents credit money. This leads the cycle. That is, changes in credit money precede the cycle.

(3) The velocity of money is quite volatile. It is not essentially stable, as assumed and required by the quantity theory of money.
These data do not support the orthodox theory of exogenous money or even the orthodox explanation of inflation via the quantity theory of money. Instead, they confirm the Post Keynesian endogenous money theory (Palley 2002; Moore 1988), and the view that credit dynamics are a major cause of business cycles, as argued in Hyman Minsky’s financial instability hypothesis.

The direction of causation to explain inflation as postulated in the quantity theory of money is in reality reversed: it is not growth in the money supply causing inflation and wage rises, but wage rises and rises in factor input costs financed by business credit/debt from banks that cause money supply growth.


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.

Moore, B. J. 1988. Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, Cambridge and New York.

Palley, T. I., 2002, “Endogenous Money: What It is and Why It Matters,” Metroeconomica 53: 152–180.


  1. "which supports the Post Keynesian theory of endogenous money."

    Endogenous money is not post Keynesian, it's a very old idea that is common to many schools. A post Keynesian trying to claim endogenous money as its own is like Ferrari saying it is the only car brand with a claim on the concept of tires. But tribalism runs strong, even in a discipline that is (supposed to be) scientific.

  2. I am well aware that the idea was held by others and before the emergence of modern Post Keynesianism.

    The expression "Post Keynesian theory of endogenous money" doesn't deny that, but merely that the theory IS part of modern Post Keynesian theory.

  3. Then you should have written: "...which supports the theory of endogenous money, which is subscribed to by many tribes, including the Post Keynesian one."

    But your chosen phrase is good as far as branding goes.