Econintersect: We interrupt our series on the PBS Frontline documentary “The Untouchables“. The reason is that there is an aspect of macroeconomic theory which continues to be a cancerous problem, and that is the role of money and credit in economic function. Modern mainstream economic theory (“Neoclassical theory”) does not include money and credit as a variable. Although it is becoming more frequent to see recognition of money and credit as a function variable in economic modeling, the vast majority of economists are still ignoring what might seem to the non-economist to be the obvious.
[Video accessible at end of article.]
A 2009 paper by Groningen University professor Dirk Bezemer was reviewed at the time it was first available by this editor and updated in 2010. This paper identified the lack of accounting logic as a problem in economic modeling (from the Lounsbury review 2009, 2010):
Bezemer concludes that the reason this condition exists is that macro equilibrium theory dominates academia and has become institutionalized in governments. He defines the objective of his paper to encourage the merging of accounting and economic theory.
An illustration of the extent of the problem is exemplified by several vitriolic exchanges between Steve Keen and “mainstream” economists, the most notable being Paul Krugman. See here and here. Keen has engaged Krugman further here and here.
If you read only one discussion of the Keen-Krugman debate, read The Great Debate©: Keen and Krugman on Money and Banking.
The documentary video this week has two parts: a 40 minute lecture by Steve Keen followed by about 80 minutes of questions, answers and discussion. The lecture was made in the Fields Institute Seminars Series (The Fields Institute for Research in Mathematical Sciences) 05 June 2012, Toronto.
This is a very important lecture. It is elementary but the content will not be found in many undergraduate or graduate courses in economics. This gets at the heart of what has to be changed if economics is not to continue to be irrelevant to economic description.
