1. A Monetary Multisectoral (Minsky) Model
Steve Keen
University of Western Sydney
Debunking Economics

2. The Bankruptcy of Neoclassical Economics
Before the crisis…
The state of macro is good…” (Oliver Blanchard: founding editor, AER: Macro)
After the crisis…
It is important to start by stating the obvious, namely, that the baby should not be thrown out with the bathwater…” (Blanchard Dell'Ariccia et al. 2010; emphasis added)
Reality
Neoclassical macroeconomics is a baby that should never have been conceived

3. The Bankruptcy of Neoclassical Economics
Neoclassical theory wrong from first principles:
Treats complex monetary exchange as barter
Assumes macroeconomy is stable
Ignores social class
Treats entire economy a single agent
Obliterates uncertainty
“Rational” as capacity to foresee the future;
Uses empirically falsified “money multiplier” model of money creation; and
Ignores credit and debt.

4. A tentative, but not-bankrupt, alternative
A new macroeconomics must do the exact opposite:
Economy as inherently monetary;
Model the economy dynamically;
Social classes rather than isolated agents;
Rational but not prophetic behavior;
Endogenous creation of money by banking sector; and
Credit and Debt have pivotal roles
Two instances
Monetary Minsky Great Moderation/Recession model
Dynamic Monetary Multisectoral model
Base models:
Monetary Circuit Theory (Graziani 1989; Keen 2008)
Goodwin Growth Cycle (Goodwin 1967)

5. Monetary Circuit Theory
Basic process of endogenous money creation
Entrepreneur approaches bank for loan
Bank grants loan & creates deposit simultaneously
Alan Holmes, Senior Vice-President New York Fed, 1969:
“In the real world, banks extend credit, creating deposits in the process, and look for the reserves later.” (1969, p. 73)
Assets
Liabilities
New loan puts additional spending power into circulation
Modeling this using strictly monetary framework:

6. Monetary Circuit Theory
Input financial relations in matrix:
Symbolic derivation of system of coupled ordinary differential equations

7. Monetary Circuit Theory
Symbolic substitutions generate model

8. Goodwin Growth Cycle model
Inherently cyclical growth (Goodwin 1967, Blatt 1983)
Capital K determines output Y via the accelerator:
Y determines employment L via productivity a:
L determines employment rate l via population N:
l determines rate of change of wages w via Phillips Curve
Integral of w determines W (given initial value)
Y-W determines profits P and thus Investment I…
Closes the loop:

9. Explicit Monetary Minsky Model
Coupled with Goodwin model to yield final system

10. Explicit Monetary Minsky Model
Single sector model (not yet calibrated to data) can generate “Great Moderation and Great Recession”

11. Multi-sectoral extension
Stylized version of monetary flows table:
Assets
Liabilities
Equity
Account
Bank Reserve
Sector 1 Loan
Sector 2 Loan
Sector 1 Deposit
Sector 2 Deposit
Worker Deposit
Bank Equity
Symbol
BR(t)
FL1(t)
FD1(t)
FD2(t)
WD(t)
BE(t)
Compound Debt A1 A2
Deposit Interest B1 B2
Wages
-C1
-C2
C1+C2
Worker Interest -D
Investment K E -E
Intersectoral C -F F
Intersectoral A -G G
Intersectoral E -H H
Consumption K I -I
Consumption C -J J
Consumption A -K K
Consumption E -L L
Pay Interest -M M
Repay Loans N -N
Recycle Reserves -O O
New Money P

12. Multi-sectoral extension
Profit now net of intersectoral input purchases:
Each sector modeled as Goodwin cycle
Financial flows matrix captures intersectoral dependencies

13. Multi-sectoral extension
“Conjecture: The repeated development of an unstable state of the economy is … an unavoidable consequence of, the local instability of the state of balanced growth.” (Blatt 1983, p. 161)

14. Multi-sectoral extension
“The usual image of the business cycle was of a wavelike movement, and the waves of the sea were the accepted metaphor… The reality in the nineteenth and early twentieth centuries was, in fact, much closer to the teeth of a ripsaw which go up on a gradual plane on one side and drop precipitately on the other…” (Galbraith 1975, p. 104)

15. Multi-sectoral extension
Model fundamentally monetary: physical cycles cause and caused by cycles in finance

16. Addendum: Reforming economic education
Making real dynamics sexy & accessible
Free prototype QED “Quesnay Economic Dynamics”
Inspired by Godley SAM approach
Extended to continuous time
Ideally suited to financial flows

17. Explicit Monetary Minsky Model
Freely available at
Advanced versions under development
Mathematica version for arbitrary number of sectors available soon
New economic dynamic monetary modeling program “Minsky” available by early 2012

18. Conclusion: Kuznets was correct…
According to … modern followers [of past economists], static economics is a direct stepping stone to the dynamic system…
According to other economists, the body of economic theory must be cardinally rebuilt, if dynamic problems are to be discussed efficiently…
… as long as static economics will remain a strictly unified system based upon the concept of equilibrium, … its analytic part will remain of little use to any system of dynamic economics…
the static scheme in its entirety, in the essence of its approach, is neither a basis, nor a stepping stone towards a proper discussion of dynamic problems. Kuznets, S. (1930, pp , ; emphasis added)

19. References
Bezemer, D. J. (2009). ““No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models.” Groningen, The Netherlands, Faculty of Economics University of Groningen.
Blatt, J. M. (1983). Dynamic economic systems : a post-Keynesian approach. Armonk, N.Y, M.E. Sharpe.
Bezemer, D. J. (2010). "Understanding financial crisis through accounting models." Accounting, Organizations and Society 35(7):
Biggs, M., T. Mayer, et al. (2010). "Credit and Economic Recovery: Demystifying Phoenix Miracles." SSRN eLibrary.
Blanchard, O., G. Dell'Ariccia, et al. (2010). "Rethinking Macroeconomic Policy." Journal of Money, Credit, and Banking 42:
Goodwin, R. (1967). A growth cycle. Socialism, Capitalism and Economic Growth. C. H. Feinstein. Cambridge, Cambridge University Press:
Graziani, A. (1989). "The Theory of the Monetary Circuit." Thames Papers in Political Economy Spring: 1-26.
Holmes, A. R. (1969). Operational Constraints on the Stabilization of Money Supply Growth. Controlling Monetary Aggregates. F. E. Morris. Nantucket Island, The Federal Reserve Bank of Boston:

20. References
Keen, S. (1995). "Finance and Economic Breakdown: Modeling Minsky's 'Financial Instability Hypothesis.'." Journal of Post Keynesian Economics 17(4):
Keen, S. (2008). Keynes’s ‘revolving fund of finance’ and transactions in the circuit. Keynes and Macroeconomics after 70 Years. R. Wray and M. Forstater. Cheltenham, Edward Elgar:
Kuznets, S. (1930). "Static and Dynamic Economics." The American Economic Review 20(3):
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.
Minsky, H. P. (1982). Can "it" happen again? : essays on instability and finance. Armonk, N.Y., M.E. Sharpe.
Schumpeter, J. A. (1934). The theory of economic development : an inquiry into profits, capital, credit, interest and the business cycle. Cambridge, Massachusetts, Harvard University Press.
Solow, R. M. (2001) “From Neoclassical Growth Theory to New Classical Macroeconomics”, in J. H. Drèze (ed.), Advances in Macroeconomic Theory. New York, Palgrave
Solow, R. (2008). "The State of Macroeconomics." The Journal of Economic Perspectives 22(1):