Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Transcending Lucas Critique & Modelling in Minsky Steve Keen Kingston University London IDEAeconomics Minsky Open Source System Dynamics www.debtdeflation.com/blogs How to answer economic questions with models? • • • • How should one do economics? Work from microfoundations? According to Lucas, yes: Lucas 1976: “This essay has been devoted to an exposition and elaboration of a single syllogism: given that the structure of an econometric model consists of optimal decision rules of economic agents…” • Lucas 2003: “I also held on to Patinkin’s ambition somehow, that the theory ought to be microeconomically founded, unified with price theory. I think this was a very common view. • Nobody was satisfied with IS-LM as the end of macroeconomic theorizing. The idea was we were going to tie it together with microeconomics and that was the job of our generation.” How to answer economic questions with models? A water molecule • So macroeconomics must be derived from microeconomics? • Sure! Just like fluid scientists derive the properties of water (macro) from micro (single molecule of A steam molecule H20)… An ice molecule A snowflake molecule • Properties of water are emergent • Can’t understand without considering relationship between entities even when they are identical • Ditto economics: “microfoundations” a nonsequitur How to answer economic questions with models? • Realised by physicists half a century ago: – “The behavior of large and complex aggregates of elementary particles, it turns out, is not to be understood in terms of a simple extrapolation of the properties of a few particles. – Instead, at each level of complexity entirely new properties appear, and the understanding of the new behaviors requires research which I think is as fundamental in its nature as any other. – One may array the sciences roughly linearly in a hierarchy, according to the idea: • The elementary entities of science X obey the laws of science Y – But this hierarchy does not imply that science X is “just applied Y”. At each stage entirely new laws, concepts, and generalizations are necessary, requiring inspiration and creativity to just as great a degree as in the previous one. – Psychology is not applied biology, nor is biology applied chemistry.” (Anderson 1972 , p. 393) How to answer economic questions with models? • Anderson explicitly rejected “constructionism”: – “The main fallacy in this kind of thinking is that the reductionist hypothesis does not by any means imply a “constructionist” one: • The ability to reduce everything to simple fundamental laws does not imply the ability to start from those laws and reconstruct the universe.” • Result discovered in economics by Sonnenschein-Mantel-Debreu: – “market demand functions need not satisfy in any way the classical restrictions which characterize consumer demand functions… – Only in special cases can an economy be expected to act as an ‘idealized consumer’. The utility hypothesis tells us nothing about market demand unless it is augmented by additional requirements.” (Shafer & Sonnenschein 1993, p. 671) • But ignored (and misunderstood) by Neoclassicals • So we can’t “do” macro by extrapolating from micro • How to do instead?... How to answer economic questions with models? • Classical tradition that structure of capitalism is the main explicant of its behaviour • Work from structure of capitalism: – “Men make their own history, – but they do not make it as they please; – they do not make it under self-selected circumstances, – but under circumstances existing already, given and transmitted from the past.” (Marx 1852) • Consistent with Post Keynesian practice: – Derive dynamics of capitalism from its social & physical structure • Use this to pose the ultimate question about capitalism: – “Is capitalism stable or unstable?” Is Capitalism Stable or Unstable? • The (Ultra)-Orthodox Perspective – Edward Prescott (Nobel Prize 2004 for Real Business Cycle Theory) • “Some Observations on the Great Depression” (1999) – “The Marxian view is that capitalistic economies are inherently unstable – and that excessive accumulation of capital will lead to increasingly severe economic crises. – Growth theory, which has proved to be empirically successful, says this is not true. – The capitalistic economy is stable, and absent some change in technology or the rules of the economic game, – the economy converges to a constant growth path – with the standard of living doubling every 40 years.” Is Capitalism Stable or Unstable? • The heterodox “Minskian” Alternative: Hyman Minsky (1969) – “In this "Chicago" view there exists a financial system, different from that which ruled at the time of crisis but nonetheless consistent with capitalism, which would make serious financial disturbances impossible – The alternative polar view, which I call unreconstructed Keynesian, – is that capitalism is inherently flawed, being prone to booms, crises and depressions. – This instability, in my view, is due to characteristics the financial system must possess if it is to be consistent with full-blown capitalism. – Such a financial system will be capable of both generating signals that induce an accelerating desire to invest and of financing that accelerating investment.” (Minsky 1969 [1982, p. 224]) Different ideology, or better logic? • A logically incontestable starting point: working from identities EmploymentRate Output Employment LabourPr oductivity Population Wages WagesShare Output • Can’t be disputed—just definitions • Put them in dynamic form and you get… Debt DebtRatio Output • The employment rate will rise if real economic growth exceeds the sum of population growth and growth in labor productivity; • The wages share of output will rise if money wage demands exceed the sum of inflation and growth in labor productivity; and • The private debt to GDP ratio will rise if the rate of growth of private debt exceeds the sum of inflation plus the rate of economic growth. Deriving the model from strict identities • Deriving Goodwin model from strict identities: – Employment rate Employment/Population d d L dt dt N L N d 1 1 d Y 1 d Y a Nˆ dt N a dt a a dt d 1 d Y Nˆ dt N dt a d 1L d Y L aˆ Nˆ dt N Y dt d Yˆ aˆ Nˆ dt d 1 d L 1 d L N dt N dt N N dt Y 1 d L N Nˆ a N dt 1 d a aˆ a dt 1 d Y Yˆ Y dt 1 d ˆ Yˆ aˆ Nˆ dt • “Employment will rise if economic growth exceeds the sum of population & labor productivity growth” Deriving the model from strict identities • Wages share of GDP Wages/GDP W Y d d W d w L d w R R dt dt Y dt L a dt a w 1 d d 1 d wR R a dt a dt a a dt d 1 d wR aˆ dt a dt w d 1 w d 1 d R wR aˆ R wR aˆ dt a wR dt a wR dt d wˆ R aˆ dt 1 d ˆ R aˆ ˆ w dt • “Wages share of output will rise if wage rise exceeds growth in labor productivity” Deriving the model from strict identities • Extending Goodwin to include (Hyman) Minsky • Private Debt Ratio Debt/GDP d D Y d d D 1 d D 1 d d D Y dt dt Y Y dt Y Y dt d 1D d 1 d d D d Y dt Y D dt Y dt d D 1 d d D d YˆR dt Y D dt d d d Dˆ d YˆR dt 1 d d dˆ Dˆ YˆR d dt • “The private debt ratio will rise if private debt grows faster than GDP” Turning identities into a simple model • Simplest possible model of this: – Output YR a linear function of capital KR – Investment IR a linear function of profit rate r (& depreciation) – Employment a linear function of output – Wage change a linear function of employment rate – Change in debt equal to investment minus profits 1 r d Z S v KR v S N Some fundamental nonlinearities apply… 1 r d S Z 1 r d v d S Z 1 r d d KR v v A Classical theory of economic cycles • Replicating this in Minsky (starting from basic Goodwin model) • Simplest form of this model: linear relationships between variables • So “Capital K determines Output Y” becomes K Y v • Output determines Employment L becomes Y L a L N • Employment rate determines rate of change of wages wr… Rate of change of wages 1 d wr fn wr dt • Simplest “Phillips Curve” function linear • Though Phillips insisted on nonlinear 3 factor function—introduced in later lectures How much wages change for a given gap between actual employment and zero change rate 0 A function of the rate of employment fn S 0 Rate at which wage change is zero A Classical theory of economic cycles • Minsky Interface: • You develop a model by • Putting variables and mathematical operators on the canvas • Joining them using “wires” • For example, 2nd equation in Goodwin model is Simulation controls Toolkit of functions • In Minsky looks like… “Canvas” where modelthis is drawn Y L a • Start entering this equation in Minsky by either – Choosing “var” (“Variable”) from menu and naming it Y; – Or simply type Y on canvas and press Enter key… A Classical theory of economic cycles • Key block in any system dynamics program is “Integral” block • Used to relate flow (Investment) to a stock (Capital) • Take equation like dK I K dt • Integrate both sides dK dt K I K • In Minsky this looks like… • Integration used rather than differentiation because it’s more stable • Now let’s build whole model starting from definition of K… A Classical theory of economic cycles • Building model in Minsky • Using parameter values: • v=3 • a=1 • s = 10 • Z = 0.9 • = 0.1 • N = 120 • Initial conditions • K(0) = 300 • wr(0)=0.8 • Equations… K • Enter these on the canvas like this: v Y L a L N fn S Z Y dwr fn wr dt W wr L Y W I dK I K dt • You should get something like the above… • Now press Run… • What you should see is sustained cycles in employment rate and wage rate wr—not “equilibrium”… A Classical theory of economic cycles • Two basic ways to render model—closed form or full structure: A Classical theory of economic cycles • For now let’s add next level of realism: an investment function… • Simple Goodwin model has capitalists investing all profits – But they don’t • Instead invest more during a boom, less during a slump • Ignoring source of finance for this for now, add a linear investment function to this model – Linear only for simplicity—replaced later with more realistic nonlinear function • Have capitalists – Invest on basis of investment function (Ifn) where they: • Invest all of profits when profit rate = 3% • Have reaction coefficient as big as that used in Phillips curve = 10 – Z = 0.03 – S = 10 • In Minsky this will look like: A Classical theory of economic cycles • A model of capitalism without “bankers behaving badly”: – Pure free-market system: No government, Ponzi Finance, bankruptcy – Nothing to “reform away” if there are problems • Model has two main equilibria: – “Good” equilibrium: Positive employment rate & wages share of output; Finite debt ratio – “Bad” equilibrium: Zero employment rate & wages share of output; Infinite debt ratio • Only the beginning of modelling cyclical dynamics of capitalism – Multiple other sources of cyclicality (& possible systemic crises) • Innovation cycles (Schumputer); inventory cycles (Meztler, Kitchin); multi-sectoral cycles (Goodwin, dynamic versions of Sraffa); ecological feedback (Limits to Growth, thermodynamics) • Actual production & behaviour nonlinear – But linear approximation (truncated Taylor series) dominates behaviour in vicinity of equilibrium – Model tells you deep characteristics of capitalism Two possible outcomes • (1) Convergence to “good” equilibrium Stable system (Linear functions) Wages Employment Private Share Debt of Rate Ratio Output Percent of GDP peremployed year Percent of GDP Percent of population 100 66 80 64 90 60 62 80 40 60 70 20 58 60 0 56 54 50 20 00 0 50 50 50 100 100 100 www.debtdeflation.com/blogs www.debtdeflation.com/blogs Stable 150 150 150 200 200 200 Two possible outcomes • (2) Convergence to “bad” equilibrium after apparent “moderation” Unstable system (Linear functions) Wages Employment Private Share Debt of Rate Ratio Output Percent of GDP Percent of GDP peremployed year Percent of population 120 400 70 300 100 65 200 60 80 100 55 60 0 100 50 40 000 Unstable 20 20 20 40 40 40 60 60 60 www.debtdeflation.com/blogs www.debtdeflation.com/blogs www.debtdeflation.com/blogs 80 80 80 100 100 100 We’ve seen this before—in complex systems • Property of Lorenz “chaotic” model of fluid flow • This behaviour cannot be generated by standard equilibriumoriented “linear” model • Inherent nonlinearity & nonequilibrium dynamics are essential 800 • Decreasing followed by increasing turbulence 600 400 200 • Convergence to laminar flow… 0 200 0 5 10 15 20 Emergent Phenomena 1: Diminishing cycles then crisis • Both had declining volatility before the crisis 1980-Now: 1920-40: Diminishing Diminishingcycles, cycles,then thenBreakdown Breakdown 16 30 Crisis Crisis 14 25 12 20 Percent Percent 10 15 8 10 6 5 4 0 2 0 5 0 0 10 2 Inflation Unemployment Inflation Unemployment 15 4 1980 1920 19821922 1984 19861924 1988 1990 19261992 1994 19281996 1998 1930 20001932 2002 2004 1934 2006 2008 1936 2010 2012 19382014 1940 2016 www.debtdeflation.com/blogs Emergent Phenomena 1: Diminishing cycles then crisis • Both also had rising private debt, followed by deleveraging 1920-40: Rising 1980-Now: RisingDebt, Debt,then thenDeleveraging Deleveraging Percent of GDP 140 160 Debt Ratio Debt Change Crisis Crisis 80 80 70 70 130 150 60 60 120 140 50 50 110 130 40 40 100 120 30 30 90 110 20 20 80 100 10 10 70 90 0 00 60 80 10 10 50 20 70 20 1920 1926 19281996 1998 1930 2000 1932 1934 1936 19382014 2016 1940 1980 19821922 1984 19861924 1988 1990 1992 1994 2002 2004 2006 2008 2010 2012 www.debtdeflation.com/blogs Percent of GDP change per year 150 170 Simple complex systems model… • Slightly more complicated but still simple model (in equations) s s 1 t r t d t ; r v Inflation-adjusted r t if inflagnominal inflag t , rrate t 0, rb interest b 1st 1 1 inf t 1 t order time lag determines inflation P 1 s Ifn r 1 d Kr dt v 1 d w fnaffects inf t share Inflation wages dt Ifn r s debt v affects Ifn rgrowth 1 d Inflation d Kr inf t d dt d v inf t 1 d 1 inflag t rate 1 Lagged interest reaction toinflation inflag t dt inf inflag t Simple complex systems model… • The same model in Open Source system dynamics program Minsky: Rising inequality & crisis (full nonlinear price model) • Falling workers’ share… • Offsets rising bankers’ share… • Capitalist are the last ones to know that capitalism is coming to an end… Crisis because the mainstream ignores private debt • Employment, inflation & profit give no warning of crisis: • Private debt ratio is the key indicator of impending crisis Crisis because The Left ignores private debt too • There is no “tendency for the rate of profit to fall” • There is a “tendency for private debt to grow exponentially” Simple reason why credit slowdown causes crises • Slowdown in credit growth causes crisis if Debt/GDP already high… Where the next crisis will come from • Candidates (1) : private debt > 175% of GDP (in rank order) Private Debt to GDP Ratios 340 320 Percent of national GDP 300 280 260 240 220 200 180 160 140 120 100 80 1990 Spain France Finland Korea China Portugal Australia Canada Belgium Switzerland Norway Denmark Sweden Netherlands Ireland 1992 1994 1996 Hong Kong GFC 1998 2000 2002 2004 2006 2008 www.debtdeflation.com/blogs 2010 2012 2014 2016 2018 Where the next crisis will come from • Candidates (2) : Debt growth > 8% GDP per year since 2010 (rank order) Percent of national GDP per year Private Debt to GDP Growth Rates 50 48 46 44 42 40 38 36 34 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 2010 Hong Kong China Korea Canada Australia Norway Sweden 2011 2012 2013 2014 2015 www.debtdeflation.com/blogs 2016 2017 2018 Implications for economic pedagogy • A Rethinking and Re-Learning of Economics is needed • Learn Neoclassical economics well – Warts and all (not the airbrushed textbook version) • As a (hopefully passing) phase in the history of economic thought • Learn other existing schools well too: none have complete alternative – Austrian, Marxian, Post Keynesian, Evolutionary, Ecological, Feminist • Learn complex systems approaches & thermodynamics • But you won’t find that curriculum at Oxford or Cambridge! • S0…