Episode 149[2/2]: Steve Keen's Minsky modeling software, and why it's important for MMTers
Apr 2, 2024
Welcome to episode 149 of Activist #MMT. Today's part two with post-Keynesian economist Steve Keen. Today's an hour-and-a-half-long video interview, where Steve walks me through the basics of his Minsky modeling software, and why it's an important tool for MMTers.
(Here's a link to part 1. A list of the audio chapters in this episode can be found at the bottom of this post.)
(The episode description continues below.)
The full episode
Our process starts by creating a definition of the economy in what he calls Godley tables. Godley tables are not accounting, but meta-accounting. They define the possible accounting for an entity. The top line is a snapshot (the stock), and every line below it, all the possible flows. If that definition is a realistic version of the real world – although necessarily simplified – then running the models should reflect what will happen in the real world.
(A crucial difference between the models created by Minsky and many neoclassical models, is that nothing is hidden. Everything is there for you, directly accessible via the Minsky tables. The software will not let you proceed until every loose end is resolved. Not to mention, you created it yourself!)
Starting at the six-minute mark and going all the way through the 46-minute mark, we walk-through a very specific neoclassical model called the loanable funds theory of investment. For those studying neoclassical economics and this model specifically, it's a valuable discussion. For the general listener, I recommend starting at the beginning, then once you pass the six minute mark, continue only as long as it holds your interest. After that, you should skip ahead to the 46-minute mark. That's when we start all over again with a fresh and realistic model the economy.
I put many of my observations into the show notes, each with a timestamp of where it's discussed.
As Steve mentions, he's just finished writing a new book, called Rebuilding Economics from the Top Down. The specific publishing date has not yet been determined, but the book will be released to his patrons on a chapter-by-chapter basis. Become a patron of Steve's by going to Patreon.com/ProfSteveKeen or profstevekeen.substack.com.
Finally, as I mentioned in part one, Steve and I had an in-person musical encounter last year. A brief audio highlight from it can be found after the closing theme in part one. At the end of this part, you can see that same thing in video form.
And now, on part two of my interview with Steve Keen. Enjoy.
Audio chapters
- 3:47 - Hellos and my initial thoughts on the basic concepts and intentions of economic modeling. Loanable Funds Theory of Investment: John Harvey describing the world in which the model exists made the model itself come to life for me.
- 10:07 - LFTI model: setting it up in the Godley table, starting with banks
- 16:37 - The LFTI has no money creation at all – not even the interest.
- 18:47 - adding savers and borrowers to the Godley table
- 28:17 - The LFTI results in ludicrous situations if you think it through. One example: Banks have no accounts for themselves. The interest interest goes immediately back to the lenders – households. But if that's true, then what does it even mean for a bank "to be profitable", which indeed is needed in order to survive? (Definitions: A term deposit is an account you don't have access to four a certain amount of time predetermined amount of time (also called a certificate of deposit or CD). However the bank can use these funds as they please in order to make loans. This is as opposed to a demand deposit which has no term. You can get it on demand.)
- 34:17 - Introducing charts/graphs.
- 36:17 - Causing changes over time by changing parameters
- 39:17 - The LFTI is boring on paper. The real world must bend and break in order to keep that paper boring.
- 39:47 - Transitioning from unrealistic LFTI, step-by-step to the real world. Changing them from being intermediaries of the money in other peoples accounts (lenders and borrowers), to having their own accounts. Also introduces money creation. In the real world, loans are not an asset of the saver, they are an asset of the bank.
- 45:47 - Adding in the government and it's spending
- 50:47 - Starting all over, in the real world, and with a completely new model.
- 56:47 - Creating relevance for myself, partially to repeat: We are defining a realistic economy. We know these things to be true. Therefore, when the model is run, we know its predictions are realistic. "That's what creates meaning for this learning. Linking this abstract to the world."
- 57:32 - Fred Lee's History of Heterodox Economics. Orthodox economics (backed by the powerful) is shiny fancy and glossy, heterodox economics (backed by real people) is paper hand-bound and printed in copy shops.
- 59:47 - Adding in the Treasury view (Minsky table). (Color commentary normally adds depth. My color commentary dumbs it down.)
- 1:02:47 - We now have a minimally realistic model – definition – of the economy.
- 1:03:47 - A godly table is not an accounting table. It's the current state, and the definition of all possible actions. It is the meta of accounting for that entity. The top row is a stock, everything below it are all the possible flows.
- 1:10:17 - Our model is defined. Now let's do something with it. Running a model via a graph. Some other examples.
- 1:14:47 - Minsky forces you to define the entire economy before anything can be run. Nothing is hidden.
- 1:18:17 - Regarding graphs, how can values go backwards in time? (To the left.) How is it possible to create odd shapes such as circles. The answer is by changing the X (horizontal) axis. It's defaulted to be time (so every tick to the right is usually a year passing). But this could be changed to anything. It doesn't have to be time at all.
- 1:24:47 - Closing thoughts and review. "If you disagree with MMT (regarding how banks and governments spend), you don't understand accounting."
- 1:27:47 - Nothing is hidden. Everything is visible in our definition. You created that definition! Friedman and his assumptions. Mixing assumption types: pretending that assumptions are temporarily relaxed only for pedagogy, in reality is permanent deception. "Assume things that contradict my desires are simply false."
- 1:27:51 - Nothing is hidden. Everything is visible in our definition. You created that definition! Friedman and his assumptions. Mixing assumption types: pretending that assumptions are temporarily relaxed only for pedagogy, in reality is permanent deception. "Assume things that contradict my desires are simply false."
- 1:32:21 - In-person music encounter in Princeton, NJ.