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How to Predict a Financial Crisis

27 Jul 2017
On May 10th we were treated to an exceptional talk from Professor Steve Keen at Blenheim Palace. He set out to show us how to predict a financial crisis. I’ll attempt a brief summary of a talk that covered a lot of ground.

Firstly Professor Keen demonstrated that the economic theories devised in the 20C are broken. Two of the key reasons why they are broken include:

1) They do not take money (and credit) into account;

2) They assume equilibrium, when in fact the real world is a dynamic system.

How do we predict crashes? Increasing credit is like pressing the accelerator on a car, pushing GDP forward. Take the foot off the gas, and GDP slows abruptly, with job losses and other unpleasantness. Private debt is, therefore, hugely important to understanding booms and bust. High rates of borrowing by firms and private individuals leads to the dangerous instability that gave us the Credit Crunch. Economists need new and better models which do not ignore credit.

Public debt is a very different matter. When politicians talk about “balancing the books” and “living within our means” they are committing the Swabian Housewife fallacy, because my debt is your asset, and your income is my expenditure – it cancels out to zero at the level of the country as a whole. Beware the politician’s soundbite.

In the fertile question and answer session, we touched on one of the things that leads to wrong-headed thinking about economics. The failure to grasp what money is. It isn’t gold, or coins, or paper, or even bitcoin. These are a record, as are entries in a ledger or notches on a tally stick. If we transfer coins, we are transferring the record. What money is, is a record of the debts owed by society to each other.

My view is that this is the most crucial area economics needs to tackle. It is the foundations, required before the rest can be built. If you have money, then that is recognition that you have put something in to society, society owes you a debt. A lot of interesting implications fall out of this (e.g. what is a loan? What are banks doing when they lend you money? What is the role of the state when it comes to the money supply?).

Meanwhile, the economic thinking of the 20C still drives the policymaking of politicians, bankers and business. Beware.

Clearly, Professor Keen is doing important work, well worth funding. If you know any philanthropists or would like to help further this research yourself, please put them in touch or go to

Sign up for our next Blenheim Palace Breakfast on the 13th September here

Ivor Middleton

IoD Oxfordshire Committee Member

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