Monday, July 16, 2012

Steve Keen Interview on Understanding Economics

This is an in-depth interview with Steve Keen by Aaron Wissner (a mathematician), conducted in July 2012 while Keen was at the Fields Institute for Research in Mathematical Sciences (University of Toronto, Ontario, Canada).

A wide ranging interview on Minsky, debt, banks, and neoclassical theory. Highly recommended.

And I will post here a highly informal bonus interview here, where Keen talks about some personal issues and general economic issues:


  1. Jan said: Professor Lars PĂ„lsson Syll writes in "The nodal point of the macroeconomics debate"
    16 July, 2012

    "This summer both Oxford professor Simon Wren-Lewis and Nobel laureate Paul Krugman have had interesting posts up discussing modern macroeconomics and its alleged needs of microfoundations.

    Most “modern” mainstream neoclassical macroeonomists more or less subscribe to the view that microfoundations somehow has lead to better models enabling us to make better predictions of future macroeconomic events...Yours truly basically side with Wren-Lewis and Krugman on this issue, but I will try to explain why one might be even more critical and doubtful than they are re microfoundations of macroeconomics.

    Microfoundations today means more than anything else that you try to build macroeconomic models assuming “rational expectations” and hyperrational “representative actors” optimizing over time. Both are highly questionable assumptions.

    The concept of rational expectations was first developed by John Muth (1961) and later applied to macroeconomics by Robert Lucas (1972). Those macroeconomic models building on rational expectations-microfoundations that are used today among both “new classical” and “new keynesian” macroconomists, basically assume that people on the average hold expectations that will be fulfilled. This makes the economist’s analysis enormously simplistic, since it means that the model used by the economist is the same as the one people use to make decisions and forecasts of the future.

    Macroeconomic models building on rational expectations-microfoundations assume that people, on average, have the same expectations. Someone like Keynes for example, on the other hand, would argue that people often have different expectations and information, which constitutes the basic rational behind macroeconomic needs of coordination. Something that is rather swept under the rug by the extremely simple-mindedness of assuming rational expectations in representative actors models, which is so in vogue in “New Classical” and “New Keynesian” macroconomics. But if all actors are alike, why do they transact? Who do they transact with? The very reason for markets and exchange seems to slip away with the sister assumptions of representative actors and rational expectations.

    Macroeconomic models building on rational expectations microfoundations impute beliefs to the agents that is not based on any real informational considerations, but simply stipulated to make the models mathematically-statistically tractable. Of course you can make assumptions based on tractability, but then you do also have to take into account the necessary trade-off in terms of the ability to make relevant and valid statements on the intended target system. Mathematical tractability cannot be the ultimate arbiter in science when it comes to modeling real world target systems. One could perhaps accept macroeconomic models building on rational expectations-microfoundations if they had produced lots of verified predictions and good explanations. But they have done nothing of the kind"

  2. Macro does need micro foundations if it wants to better explain the economic realities of this world. Assuming rational expectations is hardly a micro-foundation concept, it is just neoclassical nonsense, but to assume that rational expectations = micro-foundations, and rational expectations are faulty thus micro-foundations aren't needed for macro is just as nonsensical

  3. "Macro does need micro foundations if it wants to better explain the economic realities of this world."

    It does eventually, but we have to accept that in the interim we do not have a full picture of the aggregation effects.

    Macro from micro foundations is the Schrodingers Cat of economics. It is a reductio ad absurdum that demonstrates that we don't fully understand the effect of aggregation.

  4. I'm sorry Neil, I don't get your Schrodingers Cat reference

  5. Jan said:I found this paper that i found very interesting by Paul Davidson: "GALBRAITH AND THE POST KEYNESIANS

  6. "I'm sorry Neil, I don't get your Schrodingers Cat reference"

    Schrodingers Cat is a reductio ad absurdum to demonstrate the madness of trying to pretend that macroscopic entities have quantum states and the folly of relying on one particular answer to that question as though it can be the only possibility

    It asks the question: when does a quantum system stop existing as a superposition of states and become one or the other? And then shows clearly why the 'when it is observed' orthodox answer isn't satisfactory.

    Insisting on micro-foundations is exactly the same as insisting on the 'when it is observed' interpretation of state collapse.

    The macroscopic models fit the data and the causality relationships and provide insights into policy space that could be used to better the quality of life of millions.

    Both modelling approaches are fundamentally inaccurate, and therefore the information from both viewpoints is useful.

    As a policy decision maker you then choose the one that helps you achieve your political ends - always appreciating that it is not the entire picture.

    To suggest that we can't have full employment and price stability because your model shows it is impossible is to suggest that your model is accurate. It isn't accurate, and the data constantly shows that it isn't accurate.

  7. I feel like from your analogy, you are insisting that this is a 'one or the other' choice. This is to say, we must either decide between 'your' macro concepts or 'my' subjectivism (ie emphasizing more the individual's decision and choice ).... Both may be useful but neither represent the full picture.

    But I do not mean to suggest this at all...nor do people that emphasize the micro, in the sense that I am using it, suggest this (Shackle, Lachmann, Wiseman etc). This is why, for example, Wiseman speaks of moving "beyond positive economics" and not necessarily rejecting it.

  8. "I feel like from your analogy, you are insisting that this is a 'one or the other' choice"

    You may feel that, but I believe the point I made was that neither is the entire answer - ultimately just a set of opinions based on a bunch of deeply held beliefs.

    Therefore you assess them based on the best human outcome and the evidence as filtered by those beliefs. And all that is then resolved via the political process.

    There is always an alternative.

  9. I understand that what you meant was that neither answer is the entire answer (the last sentence from my first paragraph implied that btw). But nevertheless, your reasoning to this conclusion is one where we have to decide for one or the other.

  10. Isaac, just out of curiosity, are you a libertarian?

    1. Some people think I am, some people think I am not.