Episode 201 – System Dynamics and the Minsky Model with Tyrone Keynes

** Check out the transcript for this and every episode of Macro N Cheese on the Real Progressives website.

This week’s episode looks at using a recently developed economic model application developed by frequent Macro N Cheese guest, Steve Keen. The software is aptly named “Minsky” and Steve Grumbine’s guest, Tyrone Keynes, is an experienced user of the Minsky software modelling tool. Tyrone is a consultant whose specialties are economics, health, and ecological modelling systems.

Steve and Tyrone walk through the steps to develop processes that they both similarly follow to build a model. Tyrone then talks about his latest work using Minsky to build an unnamed U.S. State a model that will describe how to manage the state’s retirement system to improve the disparities between low and high wage state workers.

They discuss the prep work before running the model and validating results. Additionally, Tyrone describes examples of how Minsky has been used to validate MMT (Modern Monetary Theory) thinking and how the tool can be used in the future to help bring about consensus within the MMT community and acceptance in the economic community.

Most Macro N Cheese episodes are unique, this one reveals how to focus the MMT lens with some tips on why other tools fail.

Tyrone Keynes is a System Dynamicist, independent researcher, and professional consultant at BD Consulting, (https://www.bdconsulting.ca) showing how systems thinking can be applied to economics. He specializes in modeling economic, health, and ecological systems. He is also the main beta tester for the Minsky software and does most of the social media for it.

@TyKeynes on Twitter

Macro N Cheese – Episode 201
System Dynamics and the Minsky Model with Tyrone Keynes
December 3, 2022

[00:00:04.060] – Tyrone Keynes [intro/music]

I think that’s a fundamental thing when modeling a government spending money into existence, is to acknowledge that there is a difference between fiat and what your bank issues to you in the form of credit in the private sector.

[00:00:22.090] – Tyrone Keynes [intro/music]

If we could get to a place where we are using the same pair of glasses, then there’s room for fruitful debate on how we should move forward, for instance, on ecological problems, which is so complex. But we haven’t even figured out how money works yet. So, how are we ever going to deal with climate change, for instance?

[00:01:35.140] – Geoff Ginter [intro/music]

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43.140] – Steve Grumbine

All right, this is Steve with Macro N Cheese, a process engineer and a project manager by trade. Any plan you want to do, any system you’re building, project you’re running, product you’re creating, you need systems. You need to understand the inputs, outputs, the flows. You need to understand the factors in the system, not just the internal ones. You need to understand the external ones.

Because when you have external factors weighing in on your internal system, variables change. A whole host of things change. And so this stuff fascinates me. I am not, however, an econometrics doctor and an macronometrician but I talked with Steve Keen quite a bit, and he works with a gentleman named Tyrone Keynes. And Tyrone has become a friend of mine through our experiences in social media.

And he also works with friends of Steve Keen. And they do a show together, and it’s a lot of fun. And they talk a lot about Steve Keen’s software, Minsky. And before I bring Tyrone on, I want to state Steve Keen says, “Steve, Minsky is a piece of software that can prove the model of Modern Monetary Theory. This is why I did it. And he said, it’s a gift to the community.

I really hope people will begin to look at it and use it. And so we’ve had them on. We’ve done a demonstration of Minsky once or twice. But what I wanted to understand was the system dynamics at a more fundamental level, how systems operate, how they come to be, how you analyze something and develop a system. And so let me bring all my guest who’s going to talk to us about that stuff, mr. Tyrone Keynes. Welcome, sir.

[00:03:31.560] – Tyrone Keynes

Thank you. I am honored to be on, and I’m honored to talk about complex systems. I often refer to it as systems thinking. And you are correct. Minsky, which is the system dynamic program, is quite intuitive for explaining MMT. System Dynamics works with stocks and flows and MMT is a lens for your stocks and flows of money between accounts, whether it’s government accounts, central bank accounts, private bank accounts or the private sector firms, workers, capitalists, et cetera. So MMT in itself is fascinating to me. I wouldn’t call myself an MMTer, but I would suggest that it is probably the best tool to date to analyze our modern economy.

[00:04:32.290] – Grumbine

Well, you’re a system dynamicist, is that how we say it?

[00:04:36.030] – Keynes

Correct.

[00:04:37.160] – Grumbine

And an independent researcher and a professional consultant at BD Consulting. The idea of showing how systems thinking can be applied to economics. You specialize in modeling of economic, health and ecological systems. So let’s just jump right into the middle of this. What is the starting point with any system development? What is point one? Getting into developing a system?

[00:05:05.660] – Keynes

I would say the first thing you want to do is identify the entities in your system. So if we do something basic like macroeconomy, let’s say this is a new field that I’m freshly looking at. The first thing I’m going to look at is macro identity. So the fixed capital stock and the economy, the wage rate, what is output and how is output defined and what is investment and what influences investment.

And the way I would start traditionally as a system thinker before I even get into modeling with system dynamics is I would draw myself literally with a piece of paper, a flowchart. And I would draw arrows between the different variables that I thought in my own mental model contribute to influencing each other or through data and study whether it’s academic papers, real data from the Fred website. And that would be the first step in developing a system.

[00:06:15.790] – Grumbine

Whenever I start a software development project or some form of something from nothing project, I usually start with an ask. Steve, “I need you to develop a XYZ.” And I’ll do a little bit of fact finding to get the background, find out what my budget is and find out what kind of constraints we have, cost, quality, things like that.

But then when I am setting up to build my system to understand what needs to be done to go from nothing to something. If I was doing this in a spreadsheet, I would come up with my high level buckets across the top line of my spreadsheet and then I would drill down into each of those areas starting from the macro down to the micro. And then I would flow from column to column. The inputs and outputs of each would feed the next thing. Is that similar to this?

[00:07:12.260] – Keynes

Yeah. So the way I do it, after I develop my flow chart, then I start identifying what a stock is. So stock is something that accumulates over time and then you have your flows and now your flows either accumulate into stocks or they take away from stocks. So that’s the next step. With your spreadsheet analogy, you could have your stocks as each of your columns and then your rows or your flows.

So in column A, column A stock, and column B stock would have row A flow. And so if something’s going from column A to column B in row A, you would have minus from column A and then A plus in the column B. So you’re correct the way you describe it. And in fact, in Minsky, the software I used, developed by Professor Steve Keen, the Godley Tables operate in that manner.

[00:08:16.310] – Grumbine

It’s such a cool “and the Godley Tables”, such a great name. He did a good job naming these things. So walk us through that. Help me understand. Let’s talk about Minsky and the framework by which we just described.

[00:08:31.840] – Keynes

Well, Minsky is a traditional system dynamic program. Now, there’s other software out there Vensim, Stella, Simulink, very heavily used in the engineering community. And the way it operates is through ordinary differential equations. So the study of numbers through time. And Minsky, compared to the other programs, offers that it’s a traditional system dynamic program.

Where it differs is, it offers an accounting table. And this accounting table has your assets, your liabilities, and then, of course, your equity. Now, if you know the accounting equation, A minus L minus E necessarily equals zero. Now, with a traditional system dynamic program, in order to model your liabilities, you have to have negative numbers and you have to create loops back to your assets.

And it becomes a spaghetti diagram. Very hard to read. What Steve has done, and it’s very innovative, is he’s put his flows and his stocks for money into accounting tables. And those, of course, are operated by ordinary differential equations.

[00:09:54.260] – Grumbine

Very cool. So help me understand the various economic schools of thought. Like New Keynesians and Austrians, they all have their own models. And one of the things that we’ve always found to be incredibly important within the MMT community is the stock-flow consistent modeling and the understanding of sectoral balances.

In fact, I believe Steve Keen and other MMTers were able to call out the financial disaster that occurred using that modeling. And that is core to MMT. Help me understand how that plays into Minsky.

[00:10:38.360] – Keynes

Well, so in traditional economics, money is actually basically excluded. It’s an afterthought. But when you model in stock-flow consistency, money starts somewhere and it goes somewhere. Whereas if you just look at the flow, it comes out of nothing and it goes to nothing. So stock-flow consistency is identifying where the money is at a particular point in time.

And so that’s very important to analyze the economy. If you don’t know where the money is, what policy prescriptions can you leverage? Like, truly understand the leverage? So, as I said, in mainstream economics, money is completely excluded from the equation, which is baffling to me and to many people in the heterodox community, as we measure everything about our economy in dollar units.

So Minsky, and Steve has developed these Godley tables so you can track where the money is at all time. And then from there, you can build your dynamic equations, your behaviors in the economy, and trust that it is as close to reality as possible, because there is, in fact, a stock of money somewhere that you’re drawing these behavioral equations from.

[00:12:06.640] – Grumbine

So what kind of work are you doing with this software right now? Can you take us through some of the projects that you’re working on? How are you validating the work of Steve Keen or validating the work of the Minsky software?

[00:12:21.710] – Keynes

Right now, my biggest project is I am working with a fund manager. They’re developing an investment fund. I can’t say which state it’s in. That’s still kind of top secret, but it is developed for a specific state, and this fund is addressing the inequality in our capitalist society right now. And I’m sure you’ve seen the graphs where the workers share of income has been declining since the 1970s, and the power of a dollar to a rich person and the power of a dollar to a poor person is completely different.

And so this fund is addressing that. So if you’re on a lower income scale and you want to put your money to work, which is very hard in this day and age for poor people and even middle class people to put their money to work because every dollar so valuable, you get a larger return. So I am taking all the data from this specific unnamed state at this point, and hopefully in the future, I’ll be able to talk about it more in public.

All of the state government data, and I’m putting it into the Godley tables. And then I’m running behavioral equations that match the last 20 years of data and then projecting into the future. And then I’m adding this fund, and I’m trying to demonstrate how this fund is effectively stabilizing that decline we’re seeing in workers wages, which is happening all across Western nations, not just America, not just Canada, but in Europe as well. It is a phenomenon of capitalism.

[00:14:03.340] – Grumbine

Can you break down how the model flows? I want to talk to you about several different ways of looking at this model, but in the example that you just used, are you able to walk through how the system goes from following that stock through its flows?

[00:14:21.940] – Keynes

Yeah, I can, actually. So I started the basis of the model with the Keen/Minsky Cycle model, which identifies that declining wage for workers over time. So to start it, I use the Goodwin model, which is, capital by some output ratio equals your output or GDP, divided by productivity, gives you the amount of labor you have in your economy, and in this case, a specific state divide that by the worker population, gives you an employment ratio.

I feed that into a function for wages. So this is something that the mainstream has completely destroyed as the Phillips curve. It’s completely misrepresented in modern economics where there is this automatic trade off between inflation and unemployment. Bill Phillips never wrote a paper about that. I would suggest, and I kind of digress here, but if people really want to know what the Phillips curve is, they read Mechanical Models in Economic Dynamics by Phillips.

The Stabilization Policy in a Closed Economy, which is by Phillips, and the relationship between unemployment and the rate of change in money wages in the United Kingdom. And that’s the key there is the relationship was never with nominal prices in the economy, it was to do with nominal wages in an economy which makes a huge difference.

But that’s outside of my rant there. I fed into a Phillips type curve function and that gives me wages. If you take output and subtract wages, you get profit. I then took profit and I fed it into an investment function. So during times of booms, firms generally over invest because they’re in a euphoric state. I’ve run a small business, so I can say this for myself.

During good times I would invest in my company more heavily because I interpreted it that good times would go on forever. That’s human nature. And in fact, I would take out more loans during that time. So I created a function with that sort of behavior. And then of course, investment closes the loop which invest back into capital.

And I started with that framework and then I added Keynes work, which was debt and credit to the system. So what happens I’ll dial it back here. When you have two stocks in a dynamic system, you will get oscillations. That’s the predator prey model or the Lotka–Volterra equation and it will oscillate forever.

Interesting thing about complex systems is when you add a third system, state or stock, and in this case the third stock would be debt. So we have the stock of capital, the stock of wages we can call the wage rate and now debt. And that introduces a very chaotic complex system that’s hard to measure with traditional economic models which are done in discrete time.

And what happens is, as debt builds up, firms, if it’s accumulating in the firm sector, they have to maintenance that debt. And the only way they can do that is to literally reduce wages to maintain that debt level. And over time wages actually start decreasing. Profit stays about the same and the financial sector explodes. And we’re seeing that in our modern economy everywhere.

So I use that as the basis of my model. And of course I made hundreds of adjustments. The specific model I’m talking about right now is sitting at around 1200 variables. So what I just said was a very basic version and then I added the fund itself. And the way I’ve done that is there’s another brilliant man out there named John Sterman, and he did a textbook called Business Dynamics where he exclusively uses system dynamics to look at the micro community.

And I used one of his equations, which was the Product Adoption Equation. And so I’ve introduced that to show the start of this fund and how it’s taken up by a certain class of people over time, how other actors come into play and create funds that mimic the original fund. And then I run that system through time to explore the dynamics.

[00:19:20.290] – Grumbine

One of the things that I find fascinating between both Keen and Hudson, both of them are big purveyors of Debt Jubilees. And given that that’s such a large part of both of their work in terms of Minsky, what the impacts of something like a Debt Jubilee might be on a complex system,

[00:19:42.040] – Keynes

it would bring stability to the system. So the small model I described to you, it would flatten out the oscillations. And essentially a Debt Jubilee go back to either having two system states, two stocks, or three stocks. Two stocks will create just general oscillations on forever. You had a third system state and you introduced chaos.

And this was discovered by Edward Lorenz in the 50s who worked in meteorology. He discovered that just with three system states or stocks and a couple parameters, you can introduce chaos that you can’t measure, you can’t predict it. So introducing a Debt Jubilee is essentially removing that third system state and bringing stability back to the system.

[00:20:35.360] – Grumbine

Okay, one of the things that baffles me, and maybe this model can help me make heads or tails of this we frequently hear the purveyors of neoclassical economics lying from DSGE models to ISLM models. But when it comes to a currency issuing government, the only thing that is required is to pass a law. Now that money is spoken into existence, there’s your stock and your flow at the starting point of your model.

That can happen anytime. There’s nothing preventing a currency issuing in government from spending money at any given time right into the system. How do you take into consideration, when modeling a government’s ability to do bold things? How would you start assessing that? Schematically through modeling, especially through this model, how might you look at the government capacity to do bigger things?

[00:21:42.640] – Keynes

Well, obviously, as you said, the government has the ability to create as much of its own money as it wants. Now, where it spends it can be questionable depending on the government. But fundamentally, we as individuals operate with bank credit and the government operates with fiat money. So there are two different things.

This is the big thing in mainstream economics, is that government spending crowds out investment. But I have an analogy. You want to buy apples and you have money to buy apples, but there are no apples to buy. You don’t buy apples. In the end, governments don’t buy what’s not there. And to take that analogy further, if a government wants to invest in a very special product and there’s limited resources and they have to compete with the private sector, let’s say it’s titanium they can’t.

Usually in sectors where the resources are very scarce, there are contracts, forward contracts that make that resource spoken for so the government can’t come in and crowd anything out later down the line, they can bid for contracts. I think the fundamental thing when modeling something like that is there is a difference between fiat currency, which behaves as reserves in the private sector, and credit that’s issued by, let’s say, your bank.

There is a huge fundamental difference, and that has to be acknowledged when creating any macro model. And the mainstream completely excludes money. And that’s shown in the DSG models, which are complete garbage, and any other mainstream method, for whatever reason, they exclude money. Even Ben Bernanke’s, Nobel Prize winner, his model, I examined it a few months ago, it has no money, doesn’t include money.

So I think that’s a fundamental thing when modeling a government spending money into existence is to acknowledge that there is a difference between fiat and what your bank issues to you in the form of credit in the private sector.

[00:24:06.940] – Grumbine

For those of you out there who are MMT and want to be able to talk about this, we welcome your comments and questions. Please leave them for us and let us know. We’ll be happy to have those discussions because I think that there is an opportunity to expand the world if MMT and other adjacent models are able to come together to synthesize a common go forward strategy.

So some of what I’m doing here, while I certainly understand the high level of the processes within the MMT lens, I may get something wrong, so be gentle with the layperson activist. But I recognize there is a dissonance between two closely aligned schools of thought, and it may be insurmountable, or it may be something that with subtle changes in framing, maybe there’s a way of bringing them all into alignment.

And that’s part of the reason why I wanted to do this interview. I really wanted to understand not only the way the Minsky model work, but some of the differences that maybe create some raised eyebrows. And maybe there are differences without distinction. But I guess the question becomes, in your framing, what is the difference between, as you call it, fiat money and bank money?

I’ve always assumed at some level that banks were agents of the government. These banks cannot function without a charter from the government, and by extension, they were able to provide loans, payable in the government’s unit of account, and that may just be a mask for an underlying debt obligation, whereas saying, I will allow you to have this credit.

However, in order for them to issue that credit, that credit has to be chartered by the government, which then in turn allows it to be a de facto agent of the government? That would be my understanding. I’m curious at what level that rings true with you.

[00:26:12.190] – Keynes

So you’re correct. Banks in all Western nations have a charter, usually from their central bank, how they can operate. And of course, the central bank is authorized by the government itself. And this goes for the United States. The Federal Reserve is independent. Its charter comes from Congress. Congress, If they were not so divided, and I’m a Canadian, I should declare that. So I’m an outside observer of the United States.

[00:26:43.010] – Grumbine

You got to apologize. Isn’t that the way it is? Canadian mosh pit. But you go, Excuse me, pardon me. Pardon me, pardon me, eh?

[00:26:53.740] – Keynes

So fundamentally, you’re correct. The private banks are an agent for the government. They are given special abilities that no other firm in the economy has. What I think people should understand is, as an individual consumer, you are not trading fiat money yourself. Let’s say you have a bank account at Bank of America. When you cash your check, Bank of America is not putting fiat dollars into your account.

They’re marking up your account with their own bank credit. And only Bank of America and its branches accept that credit. So when you buy a product from a firm that uses a different bank than Bank of America, and we’ll call that the Private Bank of Alabama. The Private Bank of Alabama doesn’t accept Bank of America’s credit. They just simply won’t. What they do accept is reserves.

And reserves are fiat money in the system. And the fiat part of the system is your government, your central bank and private banks. So the central bank is the bank of all banks and the government, what other banks accept from your bank, is reserves. So it’s fundamentally a different form of accounting, a different unit of accounting.

So the argument against MMT is that, well, private banks can just create as much bank credit as they want and they can pay taxes with it, and it has nothing to do with government spending. And the first part of the statement is correct. They can create as much credit as they want. There are no longer reserve ratios to restrict the issue of credit by banks.

But in our capitalist and democratic societies, we don’t just have one private bank, we have multiple private banks. So in order for multiple private banks to exchange between each other, in monetary terms, they have reserves. So you can create all the private credit you want as a bank. But if you don’t have the reserves, when your customer uses some of that credit to pay another customer that uses a different bank, you’re going to have to take out reserve loans, which, of course charge interest.

And if you create so much credit that there’s not enough reserves in the system, then you have to go to the central bank and ask for a discount loan, which charges a higher rate of interest than inter bank lending. That’s getting reserves from other banks and overnight loans. And obviously banks are hugely orientated in profit making, so they’re never going to do that.

So in that long explanation, at the end of the day, if there are no reserves, banks have nothing to trade between each other during purchases by private citizens.

[00:30:29.080] – Intermission

You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube, and follow us on Periscope, Twitter, Twitch, Rokfin and Instagram.

[00:30:55.010] – Grumbine

Okay, so if I’m not mistaken, reserves are what we call highpowered money, or HPM, correct?

[00:31:02.310] – Keynes

Correct.

[00:31:03.150] – Grumbine

And reserves never leave the banking system. You cannot lend a reserve.

[00:31:08.590] – Keynes

That is correct.

[00:31:09.840] – Grumbine

Reserves are purely for clearing payments within the system, bank to bank.

[00:31:15.090] – Keynes

Correct.

[00:31:16.090] – Grumbine

And so when a reserve is created where Congress in the United States for this use case, they reconcile the bill, the president signs it into law, they send it over to the Federal Reserve, who then looks at the Treasury’s accounts and keystrokes deposits into the Treasury’s accounts to spend that money onto the contracts that it’s entered into.

And now it’s left the internal mechanism, which is the government sector, where money doesn’t really exist, and it’s now into the economy beyond the government, the non-government sector, where money does exist and it’s spent around. And when it’s returned as a tax, it comes back and eliminates that reserve that each one of those dollars created within the banking system when it was spent. Am I close?

[00:32:11.440] – Keynes

You’re spot on. The only thing I will add is the argument, I guess you’ve heard – what is it called? The TABS and the STABs.

[00:32:23.510] – Grumbine

Yes.

[00:32:24.450] – Keynes

So that’s a big mask, really, by law, and this applies up here in Canada and down in the states, the government account at the central bank can’t go negative. So that’s the argument against MMT. But MMT doesn’t say that our theory says that, yes, the government account has to be negative because we spend first and then we tax and sell bonds after.

So reserves settle between banks in the private sector. Reserves also buy government bonds, which reserves are, of course, initially created by the government. What gets a little tricky is it’s all the government’s past spending, not the simultaneous spending. So a government spends $100 million. The central bank, and Ben Bernanke said this himself twelve years ago, simply marks up the account of the bank, the appropriate amount of reserves.

What the critics of MMT say is well, the banks don’t just simultaneously buy the appropriate amount of bonds on the spot and swap that out. And they’re correct. They actually have auctions usually a week to a month before to account for that spending.

But those reserves that they are going to use to buy those bonds were original reserves created by government spending in the past. So the big argument against MMT is that no, the banks are buying this from their own reserves. Those reserves were created by government spending in the first instance. So it gets a little bit confusing because the critics of MMT says, no, the government doesn’t create money with spending and then banks balance that out with buying the bonds or taxing because that means the government account is temporarily negative, which is against the law.

It can’t happen both in Canada and in the States. But what’s really happening is there is a stock of past government spending sitting in the form of reserves in the banking sector that is used to buy the bonds to offset upcoming government spending. So at face value it looks like bond purchases and taxes are happening first.

But the reserves that are used to pay those were created by the government in the past, in the first instance, which proves that government spending creates the reserves in the first instance. Now, with Minsky, you can really stylistically identify that in charts and in graphs. And that’s why when Steve says I wish MMT would jump on board and use Minsky.

Well, there’s a prime example of why, because there are strong arguments that at face value look to debunk MMT. But if you look a little bit deeper, then you can model it out and find out that all reserves are created by government spending. Now, there is an exception, and this is another argument that the discount window is reserves created temporarily by the central bank.

This is the case, but there is a 90 day limit on the discount window. And when a bank can’t get interbank loans from the banking sector, the private banking sector, they go to the discount window at the central bank and the central bank will more than gladly issue the loan at a higher rate of interest from the interbank market.

But that bank that gets that loan wants to quickly find a loan in the reserve market to pay the lower rate of interest and pay that discount window back. So the reserves created in the discount window don’t go to paying taxes or buying bonds. They cover a temporary imbalance. So again, it goes back to the fact that all reserves are created by government spending.

[00:36:37.240] – Grumbine

Very interesting. I appreciate your explanation of that. One of the things that I think that is important and again, the work that you’re doing here would be great if we could pull other minds into this with you so that we could expand that knowledge. Or if there’s issues, let’s find out what they are and let’s find a way to have a meeting of the minds of these brilliant people and come up with a synthesis that represents the whole.

If it’s just merely semantics, let’s figure that out. We’re stronger together because we are fighting an orthodoxy that is so deeply entrenched. Every time I see some of these neoclassical economists online taking shots, I envision Obi Wan Kenobi. These are not the droids you’re looking for. They just expect that they can hand wave and say, oh, this is hogwash, and that qualifies as science.

Somehow or another, some dipshit from Princeton or Harvard says it’s hogwash, and that’s enough. Did you hear what Jason Furman said? He said it’s hogwash. Well, it must be hogwash science. It’s settled. It’s craziness. I would love to make Jason Furman apologize to the world for preaching austerity, for lying, for every person that has died from austerity minded economics.

From these neoclassical lies, the Larry Summers of the world, and make them tell the truth that they lied to everyone. That’s my dream. But this model may be able to do something like that empirically, show you’re lying. Help me understand some of the neoclassical lies that Minsky helps destroy.

[00:38:26.060] – Keynes

Well, the first thing I’ll just address that I almost don’t fault the everyday economists out there, especially the PhD students who have spent 6 – 8 years paying for a very expensive education, hearing the same rhetoric during that time period. Over and over and over again and being afraid to step outside of the box and think with that heterodox mind because we see it every day with all the economists in the MMT field, whether that’s Kelton, Mosler, Mitchell, et cetera, et cetera.

In the mainstream, they’re ostracized. So to the average economist who spent all this money earning a degree know that the paradigm is so strong in the field, I don’t blame them for not speaking up. I kind of blame that on the university institution itself. It is so profit driven now. But that aside, the other aspect is, yes, there is division on the hetrodox side.

And I think one way to bridge that division between each group is for the other group to acknowledge. For instance, it’s very important for MMT to acknowledge endogenous money and acknowledge the people in that field and certify it in a way. And it’s very important for people in the endogenous community to accept and acknowledge the work of Warren Mosler or Stephanie Kelton’s book.

And that’s how you begin to bridge it. Like you said, it comes down a lot of the time to different languages. There’s no one universal economic language out there. It’s a bunch of subjective stuff. For instance, reserves in some country, they’re called settlement balances. Well, settlements in an economy mean 20 different things.

So a lot of the times, it just comes down to language, and that’s actually inclusive in the mainstream as well. There’s a divide between the heterodox and the orthodoxy. Is language the barrier of communicating ideas? But where geoclassical and mainstream economics goes wrong mathematically with modeling is they use different equations and discrete time. That is a fundamental flaw in modeling in the mainstream.

[00:41:05.740] – Grumbine

Very interesting. When Kelton wrote her paper, I guess it was her doctoral thesis back in, I think it was 98, it was, can taxes and bonds fund government spending? But in that, she actually went out to disprove Warren Mosler, and what she ended up coming back with was proving Warren Mosler. And so a guy like myself who reads this and then reads Beardsley Ruml in 1946 when he addressed the Federal Reserve and he said, taxes for revenue is obsolete.

So guy like me, trying to make a bumper sticker to make people that have ticked off the focus listen to something that they purposely avoided in high school and college, and now they get this activist screaming at them, taxes don’t fund spending. I’m trying to make the case that there’s nothing preventing us from spending as much money as we want.

The question is, can we create an economy where the real resources are available? And so I say, taxes don’t fund spending. And I have an army of people wagging their fingers, come up with a million reasons why that simple statement that is intended to make a lay person understand that they’re using the concept of the constraint of your tax as a means of austerity to keep you from asking for more.

This is not a real thing. But for me, trying to communicate a very simple concept and drawing the flows at a very high simple level is fundamentally key to being able to address come things like climate crisis. It would require tremendous outlays by currency issuing governments, and especially if they work collaboratively together to address this, it would be huge.

And very serious people try to critique that simple statement and take the inch you gained with the layperson and put them back to the Stone Age in terms of understanding. I’m hoping that these models will help us codify and institutionalize these truths so they’re not debatable anymore, so that we can do the important things that need to be done. Do you see that as a potential for this model?

[00:43:26.290] – Keynes

Yes. So the old saying, men lie, women lie, but the numbers don’t. You use accounting. Double entry bookkeeping accounting. It’s zeros and ones. Yep, it’s yes or no. It’s as simple as that. So Minsky is capable of moving through the language which you just brought up. I had the same experience on one of my recent blogs.

I used the word debt. Boy, did I hear it from the MMT community. But we have to accept that we’re going to have to somehow generalize things for the general population. So, yes, Minsky is capable of bridging that gap because we’re speaking in accounting numbers and the way we interpret the world math is rock solid. It’s either a one or a zero.

[00:44:22.890] – Grumbine

Boolean logic.

[00:44:24.390] – Keynes

Yeah. So another thing you touched on was the TGA, and that’s another thing that I just want to address. Where it’s used against MMT, there are accounts that the government owns in the private banking sector, and there is this thought process out there that is used exclusively for all the government taxing and spending. And there are multiple accounts at different banks.

I want to just clarify the reasoning for that. What that does for a bank, instead of using their accounts at the central bank and in the States it’s called the Federal Reserve is that prevents during tax season from reserves being drained out of the system to the point where banks can’t exchange reserves for each other. And it’s only a temporary spot.

So let’s say we’ll use Bank of America holds an account for the US government, tax season comes along, different banks collect taxes from individuals and firms. Those banks take their reserves and give them to the Bank of America. What this does is it keeps the reserve somewhere in the system so they can still be loaned out overnight in the intra bank system, so banks can function.

But ultimately, at the end of the day, it’s all consolidated at the central bank. And who operates this is an agreement between the private banks and the central banks to slowly drain those reserves off and put them into the government account at the central bank. It is not the primary account for government to spend on projects, and it’s not the primary account for governments to tax.

[00:46:09.940] – Grumbine

Basically, it’s an overdraft protection.

[00:46:12.370] – Keynes

It protects the loss of reserves during tax season. When’s your tax season down in the States in April, it used to be April 15.

[00:46:21.370] – Grumbine

I don’t know whether they’re going to yeah, that’s April 15.

[00:46:24.330] – Keynes

So you can see, if everybody pays their taxes on April 15, banks mark down your bank account and then they take reserves they have at the central bank and the central bank transfers it to the government account. If that were all happened during the same day, the banking system would have no reserves. And so that’s why the government will have select private banks that they hold accounts at, and that is simply to stop disturbances and the level of reserves in the banking system, it is not the primary account that the government spends from.

[00:47:00.720] – Grumbine

Sure.

[00:47:01.270] – Keynes

So that’s another fallacy that’s used to argue against.

[00:47:06.910] – Grumbine

MMT strawman, yes.

[00:47:07.300] – Keynes

If you look up the data at the Federal Reserve, the Bank of Canada, it exclusively says the reasoning for it is to preserve reserves in the system so they’re not drained all at one time.

[00:47:21.640] – Grumbine

Very nicely stated. I appreciate that. One of the things I’d like to do and I’m not the great uniter, unfortunately. At times, I wish I was. But in this particular case, I hope I can be between Scott Fulwiller and Eric Tymoigne they’re the go tos when it comes to the more intricate banking side. I know that Nathan Tankus is also savvy, and that is Rohan Gray, but I think you actually talk to Sam Levey and he played with Minsky as well, if I’m not mistaken.

[00:47:54.330] – Keynes

Correct.

[00:47:55.760] – Grumbine

I believe they’re definitional mismatches, but I believe there is a nuanced element that probably each side could be informed on. It would be interesting to find out what that difference is and if the people in the spaces can find a way to normalize those frames. If five people say the same thing the same way, I’d be shocked. And I’m talking about even in our own MMT space.

Bill Mitchell, who I have a great love for, says things a little bit differently than Randall Wray and Randall Wray says it a little bit differently than Warren Mosler. But they all are saying the same thing. They’re just choosing different words to use. Let me give you my one critique of MMT, and I am a true blue MMT guy. My one critique of MMT is the politics. We just got to get enough votes.

I think that fundamentally is a mismatch in understanding the way this government operates and the capture that is there. It’s not an economic discussion, that’s a political one. And the thing is beautiful about our discussion as it pertains especially to the modeling and to the scientific side of this, is that the science debunks the fairy tales, but the myth of we can just vote our way to a better tomorrow.

To me, fundamentally misunderstands a lot of the work, especially from people that have been following Empire, the way capital works and the way that the people that own things, the powers that be, that keep the system working for them, they have too much power to the point where the very veneer of democracy at times feels clownish.

And so from that angle it becomes a challenge. But my goal in talking about this stuff is to radicalize enough people to realize that you’ve been lied to, that you could survive. We don’t have to be in austere conditions, and yet we are. Why is that? To me, that’s the fundamental question. Once you understand MMT, now you understand this is true, so why aren’t we better off?

And then you look at politics and you realize 80% of the people want Medicare for all, 70% of the people want a Green New Deal, huge numbers of people want to eradicate all student debt. Why is that happening? And this is stuff you can’t model out. These are the lies that I hope something like a Minsky can help us model. What do you think? Is that something that Minsky could do as well?

[00:50:31.090] – Keynes

I think you hit the nail on the head. If we could get to a place where we are using the same pair of glasses, then there’s room for fruitful debate on how we should move forward, for instance, on ecological problems, which is so complex. But we haven’t even figured out how money works yet. So how are we ever going to deal with climate change, for instance?

How are we ever going to deal with the benefits of just providing free university? This is fascinating to me, the political rhetoric right now is we’re all competing against China. How could we do that? How can we compete against them? Be more productive? How do we do that? Well, we give higher education for free to everybody in our countries, Canada, US. Why wouldn’t you?

Then you can compete. If that’s the political story. Healthcare, we manage it up here in Canada, our deductible is time, and your deductible down there as well, being poor. So I have a lot of American friends. Most intelligent people understand that Americans are very liberal people, and to a great degree I don’t want to use this word because it’s so dangerous in the States.

You’re very socialist type people. The groundwork for that is there, but for some reason, there is this political divide that stops it. So Minsky can if it’s used correctly and the right theories are used in conjunction with MMT endogenous money can provide the pair of glasses that is a universal language and math for people that then have the very hard discussions about how should we provide health care to our citizens?

How should we provide education to our citizens? How can we globally address CO2 emissions? But until we understand the modern mechanics of money, MMT, whatever word you want to apply to it, we can’t have those really complex in depth discussions. There is no math for politics. That part of it has to be people with different ideas being willing to wear the same pair of glasses, sit down at the same table, and suss out the different ideas they have and come to a consensus that’s greater than themselves, even greater than their own country.

And it’s something on a global scale that can make a difference. So we still have generations in 70 years, because the way we’re going right now, we can’t figure out money. Things are going to get really tough. There’s one side of the coin business as usual forever. Don’t be an alarmist, but the science and the data is there.

Now I’m in Western Canada. In Vancouver? Who use celsius up here? I know it’s crazy, but we were getting 25 degrees Celsius in mid October for weeks on end. We had no rain in the month of October. I’ve lived here my whole life. I’ve never seen that. I’ve never seen that. The evidence without the academic papers is right there in your backyard.

[00:53:53.440] – Grumbine

This has been a phenomenal conversation. I really appreciate I hope folks recognize that this conversation is done in good faith. I really appreciate this. Ty, I really appreciate you. You’re a very approachable guy, and I appreciate the level of care you took in answering questions. Tell us where we can find more of your work. I know you’re doing stuff with Steve Keen tell us where we can find more about you.

[00:54:23.060] – Keynes

So if you’re on Twitter, I’m @TyKeynes, and on my profile, you can find my YouTube page. Now, this is something I think everybody should check out, is I’m on YouTube. So YouTube.com/Modelling with Minsky, and I give tutorials on how to use Minsky to model any number of situations, whether it’s the ecology, whether it’s economics, the pandemic, COVID-19 I give a lot of tutorials and they’re basic tutorials.

And what I really want to stress on that channel is you do not need to be an eight year PhD to do this stuff. You can explore your own mental models and do the math in Minsky. I know I may use some big words like ordinary differential equations. For the most part, simple little models. Minsky will do all the math for you.

So anybody could start building a model within a week if they watch my YouTube channel. I also have a blog. You can find that at plankzip.org/TyroneKeynes. You can find that on my profile on YouTube. I cover a lot of issues in the systems thinking community. So not just economics, but any complex problem.

And I really write that blog for myself. It’s for my own mental health. So, like you were just saying, Steve, maybe I’m off base on some things, but I try to make it an exercise where the reader can just think for a moment outside of the traditional rhetoric we hear in the media.

[00:56:05.440] – Grumbine

Well, I really appreciate it. This is Steve Grumbine. My guest, Tyrone Keynes. Thank you once again, for Macro N Cheese, we are out of here.

[00:56:22.160] – End credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit Patreon.com/realprogressives.

Tyrone Keynes  

A System Dynamicist, independent researcher, and professional consultant at BD Consulting, (https://www.bdconsulting.ca) showing how systems thinking can be applied to economics. He specializes in modeling economic, health, and ecological systems. He is also the main beta tester for the Minsky software and does most of the social media for it.

Modelling with Minksy – YouTube tutorials to help people understand how to model their own ideas

@tykeynes on Twitter 

Steve Keen / Minsky Software

An Australian economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported.

Keen is a Distinguished Research Fellow at UCL and the author of “Debunking Economics,” “Can We Avoid Another Financial Crisis?” and his latest “The New Economics: A Manifesto.” 

Most of Steve Keen’s recent work focuses on modeling Hyman Minsky’s financial instability hypothesis and Irving Fisher’s debt deflation. The hypothesis predicts an overly large private debt to GDP ratio, can cause deflation and depression. Here, the falling of the price level results in a continually rising real quantity of outstanding debt. Moreover, the continued deleveraging of outstanding debts increases the rate of deflation. Thus, debt and deflation act on and react to one another, resulting in a debt-deflation spiral. The outcome is a depression. Steve Keen argues the current global economic crisis is the result of too much private debt.

@ProfSteveKeen on Twitter

Buy his books: 

The New Economics: A Manifesto

Can We Avoid Another Financial Crisis?

Steve Keen on Macro N Cheese: 

Episode 180 – The End of Dollar Diplomacy? with Steve Keen and Michael Hudson

Episode 99 – A Modern Debt Jubilee with Steve Keen

Episode 64 – Supply Chains and Pandemics with Steve Keen

Minsky Software

Minsky brings system dynamics and monetary modelling to economics. Models are defined using flowcharts on a drawing canvas (as are Matlab’s Simulink, Vensim, Stella, etc). Minsky’s unique feature is the “Godley Table”, which uses double entry bookkeeping to generate stock-flow consistent models of financial flows. 

Wynne Godley (namesake of the Godley Table)

Wynne Godley (26 September 1926 – 13 May 2010) was an economist famous for his pessimism about the British economy and his criticism of the British government. In 2007, he and Marc Lavoie wrote a book about the “Stock-Flow Consistent” model, an analysis that predicted the global financial crisis of 2008. He was a Distinguished Scholar & longtime head of the Levy Institute’s Macro-Modeling Team.

Much of Godley’s work focused on the strategic prospects for the US, UK, and world economies, and the use of accounting macroeconomic models to reveal structural imbalances. He published extensively. His 2007 book Monetary Economics: An Integrated Approach to Credit, Money, Income, Production, and Wealth (with Marc Lavoie) is an elaboration of his classic textbook Macroeconomics, written in 1983 with Francis Cripps. With it, Godley aimed to revive the tradition of macroeconomics practiced by the original Cambridge Keynesians, in combination with the theory of asset allocation pioneered by James Tobin.

From 2001 to 2005, Godley was senior visiting research scholar at the Cambridge Endowment for Research in Finance, part of the University’s Judge Institute of Management, and he remained active in the field up until his death. An extensive obituary was published in the Times of London on May 17, 2010. “Wynne Godley,” it read, “was the most insightful macroeconomic forecaster of his generation.”

William “Bill” Phillips/Phillips curve 

Bill Phillips (1914-1975) was a New Zealand economist who spent most of his academic career as a professor of economics at the London School of Economics (LSE). His best-known contribution to economics is the Phillips curve, which he first described in 1958. He also designed and built the MONIAC hydraulic economics computer in 1949. 

The Phillips curve is an economic model, named after William Phillips hypothesizing a correlation between reduction in unemployment and increased rates of wage rises within an economy. While Phillips himself did not state a linked relationship between employment and inflation, this was a trivial deduction from his statistical findings. Paul Samuelson and Robert Solow made the connection explicit and subsequently Milton Friedman and Edmund Phelps put the theoretical structure in place. 

Lotka–Volterra equations 

The Lotka–Volterra equations, also known as the predator–prey equations, are a pair of first-order nonlinear differential equations, frequently used to describe the dynamics of biological systems in which two species interact, one as a predator and the other as prey. 

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