Steve Keen on rethinking money

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Loanable funds? The money multiplier? Steve Keen and Richard Murphy dismantle the myths. Double-entry accounting shows what really happens when banks create money and governments run deficits. If economics taught reality instead of dogma, austerity would be unthinkable.

This is the summary of our discussion:


Steve Keen on Double Entry, Economics, and Ravel

“Economics without accounting is like physics without mass.” That, in effect, was the theme of my second podcast with Steve Keen. Our discussion revolved around three questions: why Steve came late to double entry, what that means for economics, and why it led him to create his Ravel software.

The conversation revealed much about the weaknesses of mainstream economics and the possibilities of a very different approach.

1. Why a late convert to double entry?

Steve began with biography. His early degree in arts and law avoided the accounting training that traditional economics courses required. He thought accounting was dull. But when he built his first model of Hyman Minsky's Financial Instability Hypothesis in 1992, the problem became clear. He could model debt, but he could not properly model money.

That nagging absence set him on a path. Teaching at the University of Western Sydney, he encountered students rejecting orthodox economics and found in the work of Augusto Graziani a decisive insight: money is not a commodity, nor just a bilateral promise. It is a triangular relation between buyer, seller and bank. That three-cornered structure means banks are not mere intermediaries but creators of money.

Steve absorbed this, spent time at the Levy Institute alongside Wynne Godley, and began to see the power of stock-flow consistent modelling. Godley's tables suggested a way of formalising money and debt. But there was still a problem: did banks really destroy money when debts were repaid? His instinct was no. The accountants said yes. In time, he realised he was wrong. Bank deposits are money; when debt is repaid, deposits fall, and so the money supply contracts. Double-entry was not an optional technicality. It was essential.

2. The consequence of double entry

I suggested in the discussion that the true gift of double entry is that it forces us to see every transaction as two-sided. Government spending, for example, is not money poured into a black hole. Someone always receives it. Someone always spends it again. There are always multiplier effects.

Steve agreed. Neoclassical economics prides itself on “general equilibrium.” But its models ignore the feedbacks that make an economy real. Double-entry, by contrast, forces integration: if an asset rises, a corresponding liability or equity must rise elsewhere. There are no black holes. The system balances.

This matters because orthodox models of money creation collapse when put to the double-entry test. The “money multiplier,” beloved of textbooks, only works if all lending is in cash—a fantasy in a world of electronic deposits. The “loanable funds” model assumes households lend their savings to firms and government, mediated by banks. In reality, banks create new money when they lend. The accounting shows it.

In short, double-entry is not just bookkeeping. It is the logic of a monetary economy.

3. Money as ledger and flow

I pressed Steve on another thought. Double-entry shows money as a record: every unit of money is just a ledger entry. But money is also a flow, dynamic and constantly changing. It behaves, in some sense, like a quantum particle: it alters when we observe or record it.

Steve's answer was that the key is dynamics. Orthodox economics still treats equilibrium as the natural state, even though the founders admitted it was a stopgap until better dynamic methods arrived. With today's tools, we can model economies as constantly evolving systems of flows. Double-entry is the discipline that ensures those models remain coherent.

4. Ravel: software for real economics

That takes us to Ravel, the software Steve has built. Its foundation is the Godley table: every row must sum to zero, ensuring that assets minus liabilities minus equity is always balanced. From these tables, the program generates systems of differential equations to show how stocks and flows change over time.

What makes this powerful is flexibility. Ravel lets you model the world as mainstream economists imagine it—loanable funds, money multipliers—and then correct it to reflect reality. If households do not in fact lend directly to firms, you can shift the asset to banks, and the system instantly rebalances. Errors are caught; the logic is enforced.

The result is a tool that can model government spending, bank lending, private debt, and financial instability with a realism that mainstream economics avoids. It shows, above all, that government deficits create money. Far from “crowding out” private investment, deficits expand the money supply and enable activity that otherwise would not exist.

5. Policy consequences

This conclusion is explosive. It means that austerity is a self-inflicted wound. It means that Rachel Reeves and others who think deficits are dangerous are damaging the social fabric they imagine they are protecting. It means that rather than slashing the NHS we should fund it; rather than pricing higher education we should restore free universities. It means that climate investment is not something we must “save for” but something we must finance through government spending, which itself creates the money we need.

In short: deficits are not bugs in the system. They are features. That is how fiat money works.

6. Why neoclassicals resist

Why then does mainstream economics resist this? Steve traced the history. Early neoclassicals like Marshall and Jevons admitted that equilibrium was a fiction, a crutch until better dynamic methods arrived. But when mathematicians proved equilibrium was unstable, economists doubled down. They preferred to assume away the difficulty—even to the point of assuming tastes could change—rather than face the need for a paradigm shift.

The result is what Steve called a “religious belief in equilibrium.” What began as shorthand became dogma. Instead of mathematics, it became “mathimagics”—myth, magic, and misplaced faith.

7. Towards a better economics

Our conversation ended where it began: on the need for realism. Accounting is not optional; it is the grammar of money. Without it, economics is blind. With it, we can see that government spending creates money, that deficits are necessary, that austerity is folly, and that dynamic models are the only honest way to understand a capitalist economy.

Steve's Ravel software is a tool to build a better economics and a better economy. It embodies the logic of double entry and the dynamics of flows. It shows what is happening in the real world rather than in the textbooks.

And it leaves us with a challenge. If economics is to serve people rather than myths, it must abandon its equilibrium religion and embrace accounting, dynamics, and reality. That is the task for all of us working for a future that deserves to be funded.


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