Breaking the debt habit

Steve Keen’s is the best i’ve seen so far of the videos from the weekend’s Institute for New Economic Thinking (INET) conference in Berlin. Keen summarises some of Minsky’s ideas and explains his own policy proposals for cutting private debt. The first idea is the creation of jubilee shares which would be worthless 50 years after the seventh trade. You’d be stupid to buy the shares just on a bet that they’d rise. The primary market would become much more important than the secondary market. Shares would be just that: ownership of a share of a company, rather than a gamble on prices spiralling ever-upwards.

Keen’s second innovation is the PILL (Property Income Limited Leverage). He’d limit maximum mortgages to something like 10 times the annual rental income of the property. To get a bigger loan you’d have to stump up more savings, breaking the drive toward higher housing debt.

He also argues for a modern debt jubilee in which members of the public were given a pile of cash, much like the big banks are currently being given many billions in the form of quantitative easing. People would be legally required to pay off their debts and those without loans could keep the money. He’s argued elsewhere that we should take the banks under government control.

All these measure would herald the launch of a financial system which made money available for useful investment, not for gambling on house prices or stock markets.

To me this is real new economic thinking. Even if the ideas sound impracticable (and i’ve no doubt many nits will be picked), on the whole they’re truly radical and to my knowledge haven’t cropped up elsewhere; radical in that they’re new, and radical in the sense of going to the roots of the global economic problem, which is an addiction to private debt.

The seemingly most outlandish of ideas have sometimes become routine. It was once considered impracticable to give everyone the vote. The welfare state was radical. William Gibson’s idea in his novel Burning Chrome of connecting the whole word via an ethereal computer world known as cyberspace was received in 1982 as cranky science fiction.

Yet all these things are considered completely normal nowadays, and I don’t see why Keen’s proposals should be any different — in fact they’re even more modest.

Some of the other INET presentations were a bit disappointing. Apparently the  students were put in a separate room. None made presentations. As Mark Thoma points out, too many of the presenters were greying. His solution, though well-intentioned, doesn’t go far enough:

So what we also need to do — and I admit that I’m not quite sure how to do this — is to teach the students, as best we can anyway, what a good idea looks like. What makes a new idea more likely to be successful? What makes it more likely to be received by important journals? How can a student know whether to push forward or to back off?

I think the answer is mentorship of the type that exists between a Ph.D. candidate and their advisor, at least a good one. Part of that process is to help the students ask the right questions about their research, how to find the potential holes and fill them, and so on. So all of us who are pushing the profession to investigate new ideas and new directions need to be willing to talk to students about their ideas, ask them the questions they ought to ask themselves, read preliminary drafts that come by email out of the blue, and help in other ways as we can. We need to provide guidance and at the same time not inhibit the search for new and better paths forward, a somewhat delicate task.

I don’t suppose many of the iconoclasts from the history of economics were “taught what a good idea looks like”, or asked for “guidance” from a professor, or bothered much about which journals to publish in. David Hume was cast as a dangerous radical and at first was excluded from academia. Hume didn’t publish his Dialogues Concerning Natural Religion because it was so anti-establishment. His friend Adam Smith failed to see through the task after Hume’s death for fear of stirring up a hostile reaction.

Karl Marx’s ‘ruthless critique of everything existing’ led him to decry virtually the entire canon of political economy.

John Maynard Keynes was notoriously rude about several of his intellectual forebears. Michal Kalecki, the man who beat him to the discovery of the theory of effective demand, was initially completely disconnected from mainstream Anglo-American economic discourse before later moving to Cambridge.

Keen himself is a professor at the Professor of Economics & Finance at the University of Western Sydney, hardly the Ivy League. He’s far outside the mainstream, publishing a book called Debunking Economics: The Naked Emperor of the Social Sciences.

If you subscribe to anything like Thomas Kuhn’s notion of a paradigm shift (the title of the Berlin conference was “Paradigm Lost”), you’ll realise that genuinely new thinking comes from leftfield; that it’s new because it can’t be known in advance. I’d even say that it’s important not to teach students what a “good idea” looks like for fear of tainting them with old ways of thinking. I reckon some of the best new ideas in economics will probably come from unexpected quarters — even outside the academy.