Steve Keen on Whether Mainstream Economics Can Save Us From Another Financial Crisis

Left Out,” a podcast produced by Paul Sliker, Dante Dallavalle and Michael Palmieri, creates in-depth conversations with the most interesting political thinkers, heterodox economists and organizers on the Left. Follow “Left Out” on Twitter: @leftoutpodcast

In this episode, “Left Out” speaks with Professor Steve Keen about his latest book, Can We Avoid Another Financial Crisis?, as well as the failure of mainstream economics.

A decade after the largest economic downturn since the Great Depression, it is still popular belief among the public and mainstream press that “no one saw” the 2007-08 financial crisis coming. The truth is, however, that a handful of unorthodox economists had the foresight to warn of the crisis, and were able to develop and apply the right analytical framework to the large amounts of empirical data available, allowing them to forecast why and how it would happen.

In late 2005, Keene became one of the first in this tiny club of economists to get it right (and one of only two do so with mathematical models), earning himself the Revere Award from the Real-World Economics Review for “being the economist who most cogently warned of the crisis, and whose work is most likely to prevent future crises.”

So what distinguishes Keen’s approach to economics from the mainstream theory (also known as “Neoclassical” economics)?

According to Keen, it’s because of his focus on the importance of credit in a dynamic, non-equilibrium framework. From that viewpoint, he identifies the ratio of private debt to GDP — and the rate of change of that ratio — as a key determinant of the state of the economy.

In the first half of our interview, Professor Keen explains why conventional economic theory doesn’t describe capitalism accurately, as well as Hyman Minsky’s hypothesis on the significance of private debt in the economy — something that is largely ignored by the predominant “Neoclassical” school of economics today.

In the second half, we turn to the prescriptive. Keen contends the main thing people need to think about is that “as well as workers and capitalists we have creditors and debtors in this economy — and by far the most important social clash these days is not between workers and capitalists, it’s between the financial sector and the rest of the economy.”

As for the left, Keen thinks in order to win it must be less reactive and more intelligent in their campaigning, otherwise the future we’ll face “will be that of The Hunger Games and not of a democratic society.” That means focusing more on the role of private debt than on wage campaigns or unionization, and fighting for a modern debt jubilee and universal basic income.

Keen wraps up our discussion with his forecast for the global economy and gives us his predictions for what countries are most likely to face a crisis in the next one to three years.

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