#134 - Steve Keen - How Modern Economics Became Ideology

What It Covers

Economist Steve Keen challenges mainstream economic theory, arguing both neoclassical and Austrian schools misunderstand money creation, factory production costs, and capitalism's fundamental mechanics. He demonstrates how government deficits enable private sector financial health through integrated accounting models.

Key Questions Answered

• •Factory Cost Structure Reality: Empirical surveys since the 1930s consistently show manufacturers operate at 70-80% capacity with falling per-unit costs as output increases, directly contradicting the diminishing marginal productivity assumption that underlies both Austrian and neoclassical supply curve theory used in policy decisions.
• •Money Creation Mechanics: Money functions as a three-party promise system involving buyer, seller, and bank rather than commodity barter. Private banks create money through lending (loans create deposits), while government deficits inject liquidity by spending more than taxing, with no gold backing required for modern monetary systems.
• •Sectoral Financial Balance Requirements: Banks must maintain positive equity to function, mathematically forcing the combined private and government sectors into negative equity. Government deficits of roughly 20-25% of GDP create the negative government equity that enables private sector positive net worth, preventing perpetual household indebtedness.
• •World War Two Monetary Lessons: Beardsley Ruml's 1946 paper documented how wartime production was financed through direct money creation, not borrowing, proving governments create money through spending. Neoclassical economists spent subsequent decades erasing this understanding, creating current debates about government debt that were empirically settled eighty years ago.
• •Equilibrium Theory Failures: The obsession with supply-demand equilibrium curves ignores capitalism's defining characteristic of constant evolutionary change through product differentiation and competitive dynamics. Real markets involve firms with excess capacity targeting known rivals through innovation, not homogeneous products reaching price equilibrium points.