This week I have a book review of Steve Keen’s latest offering: Can we avoid another financial crisis? I really enjoyed Steve Keen’s other book, Debunking Economics and I have been looking forward to this new book all year.
Introducing this book, I should say from the outset, that if you were worried that an economics book would be all equations, tables and statistics, then fear not. Steve Keen writes in a critical yet approachable manner. He cuts through the noise and through the data to give the reader the information they need to understand what is really going on in the world.
Steve Keen is the maverick leather jacket wearing economist that you may have seen on TV. He sees the world differently, he thinks differently. As a result, he was one of only a handful of economists that predicted the global financial crisis. He is therefore a leading authority to speculate as to whether we can avoid another financial crisis.
About the book
The book is short, considerably shorter than his previous treatise Debunking Economics. But that can have its advantages, it can allow the writer to hone in and really prosecute one argument. Steve Keen takes full advantage of this and drives home his consistent message. The field of economics is broken. Just as the astronomers who thought the sun revolved around the earth were eventually proven wrong. Modern mainstream economists are also wrong. Let’s see how.
Would it surprise you to know that economic bodies like the OECD were forecasting that 2008 would be a bumper year? It surprised me. Their prognosis was that: “the current economic situation is in many ways better than what we have experienced in years.” You don’t need to be an economics professor to know that this prediction was well wide of the mark.
What if I also told you that mainstream economics believes that the macroeconomy should be modelled as if money, banks and debt did not exist? You would say I was a liar, but it is absolutely correct. Steve Keen describes this succinctly as their “barter illusion” this fantasy that capitalism can be analysed without considering money at all. If you want to check up on this, you can visit the Bank of England’s paper ‘Money Creation in the Modern Economy.’ Steve Keen frequently uses Bank of England, Federal Reserve and Bank For International Settlements data to back up his arguments. This only strengthens his position.
What is clear is that debt, specifically private debt plays a vital but pernicious role in a modern capitalist economy. You don’t hear a lot about this in the media, where the focus is primarily on national debt and its size. Take private debt in the USA, it grew from 37% of GDP in 1945 to 165% of GDP in 2008. This is staggering. By March 2016 the USA had cut this back, but only to a still eye watering 149% of GDP in 2016. What I found truly outstanding was that Australia’s private debt mountain was 208% of GDP in March 2016, 22% higher than at the time of the financial crisis. The UK’s figures are also remarkable, as the graph below demonstrates. Private debt, which had never been above 75% of GDP, rose from 60% in the late 1970s to a peak of 197% of GDP in mid-2009.
After all that, what are some solutions and a roadmap guiding the way forward? Firstly, we need a greater understanding that what we are dealing with is a complex phenomenon. Other sciences have got to grips with the fact that higher order phenomena cannot be directly extrapolated from lower order systems. In complex systems, the key is the interaction between the entities. We need a much bigger role for complexity theory in modern economics.
Secondly, greater appreciation needs to be paid to the role of private debt in the economic growth of a country. Some politicians catch a market at its lows, ride the bubble up and are crowned as economic geniuses. Some politicians catch the market on its highs, see it burst on their watch and are thus heckled as fools. A greater appreciation of the role of private debt by the general public would help the political process a great deal.
Thirdly, the most radical option would be for a modern debt jubilee. Where money would be injected into bank accounts, those with debt would be forced to write debt off, those without debt would get a cash injection. This is a bold vision that Steve Keen puts forward and he admits that it is easier stated than implemented.
What you need to know
In quick summary this is a fantastic book, very accessible, full of lots of great facts anecdotes and insights. Whether you are an economic pro or just interested in building a better world, this book is suitable for a wide range of audiences. Buy this book now.
Thank you for reading,
By Barnaby Nash
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Since writing this review and before publishing I was thinking a lot about the Einstein quotation “We cannot solve our problems with the same thinking we used when we created them.” I think this is highly relevant to what is going on in economics. Sure, a few laws were passed and regulation reinstated or amended, but very little has changed since the global financial crisis. By and large the outsiders who predicted the financial crisis have seen very little increase in their public standing. Steve keen and a select group of others managed to predict the biggest economic event of our lifetimes. We should listen to them; we should listen to what they have to say. I find it hard to believe that those institutions and individuals who let the global financial crisis take them by surprise have the solutions to the problems we face.