Neoclassical economists love saying critics don't understand equilibrium.

But the irony is this the more they explain equilibrium, the clearer it becomes that the concept has been stretched so far it barely means anything anymore.

Allow me to explain 👇
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https://twitter.com/JesusFerna7026/status/1994464610922238065

They say: Equilibrium isn't stable, it can explode.

If your equilibrium can be unstable, fragile, or blow up… then what exactly is equalised or balanced?

Redefining equilibrium to include instability strips the term of the meaning it has in every other science.
🧵2/15

🚨 My new working paper out today

I propose a post-Keynesian, system-dynamics alternative to the New Keynesian DSGE model, one that produces business cycles and financial instability endogenously, without rational expectations or microfoundations.


🧵1/8 dx.doi.org/10.2139/ssrn.5… DSGE models boil the entire economy down to 3 equations:
• IS (Euler equation)
• NK Phillips Curve
• Taylor Rule

But these rest on assumptions that simply don’t exist.
🧵2/8

You'd think the field that studies money would have a solid grasp of how it works.

But mainstream economics still teaches that banks are intermediaries, loans come from savings, and governments can run out of money.

None of that sh#t holds up.
🧵1/12 The textbook story starts with loanable funds: households save, banks lend those savings, and interest rates tidy everything up.

Nice f#$king story.

Also wrong.
🧵2/12

Neoclassical and New Keynesian (NK) DSGE models both claim to explain the macroeconomy.

One assumes perfect equilibrium. The other adds a few "frictions."

Under the hood, they share the same broken core.
🧵1/12 Start with old-school neoclassical DSGE.

Perfectly rational agents, perfect competition, instant market clearing.

Unemployment is just "leisure," crises are accidents, and everything glides back to equilibrium.
🧵2/12

Fractional reserve banking is one of the most persistent myths in economics.

It sounds technical, but it describes a world that no longer exists, and pretending it does keeps us misunderstanding how banks actually create money.
🧵1/12 The fallacious story goes like this: banks take deposits, keep 10% as reserves, and lend out the rest. That fraction supposedly limits how much credit they can create.

But since March 2020, reserve requirements in the U.S. are zero. There is no fraction.
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We're told central banks fight inflation by raising rates.

But rate hikes don't "cool" the economy, they just change who gets paid.

So why is it that interest rates don't actually control inflation.
🧵1/12 The textbook story: higher rates → less borrowing → lower demand → lower inflation.

Simple, right?

Except it rarely works that way in reality.

BIS (2023), The Transmission of Monetary Policy Revisited
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Every time deficits rise, someone cries "money printing."

Sounds scary, but it's a misleading metaphor.

Here’s why deficits aren’t printing presses, and what they actually do.
🧵1/12 Story: gov't spends → prints money → inflation.

Reality: spending credits bank accounts, creating deposits, matched by Treasuries. Balance sheets, not printing presses.

Fujiki (2001), Budget Deficits and Inflation - BOJ
🧵2/12

Balanced budget rules sound responsible.

In reality, they make recessions worse.

A thread.
🧵1/12 The idea is simple: governments should not spend more than they tax.

No deficits, no "irresponsibility."

But economies don't work like households, and enforcing a balanced budget creates vicious cycles.
🧵2/12

Treasury auctions sound like "the market funding the government."

But peel back the layers, and you'll see: all primary auctions are settled with reserves created by the Fed.

A thread.
🧵1/13 Every week, the Treasury issues new securities at auction.

Primary Dealers are OBLIGATED to bid. Indirect bidders (pension funds, foreign central banks, asset managers) now take 90% of the allocations.
🧵2/13

What is wealth? Different schools of economics give very different answers.

A thread.
🧵1/13 Classical economics (Smith, Ricardo):

Wealth = produced surplus.

It comes from labor applied to nature, creating output beyond subsistence.

The central issue is distribution: who gets profits, wages, and rents?
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The "crowding out" myth: government deficits don’t squeeze private investment.

They create net financial assets.

A thread.
🧵1/12 The textbook story:
Gov borrows more → supply of loanable funds falls → interest rates rise → private investment gets "crowded out."

It’s tidy. It’s also not how modern monetary systems work.
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Elon Musk warns of "low birth rates."⚠️

But the real threat isn’t too few people, it’s the system’s limits.📈

The Limits to Growth study had the answer 50 years ago.

A thread.
🧵1/12

https://twitter.com/elonmusk/status/1962680097816879208

Musk’s story: if population falls, economies collapse.

His "fix"? Have more children.

But this assumes growth = bodies. It misses the real constraint: the material system that supports those bodies.
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MPT claims wages equal your individual contribution.

But the evidence doesn’t fit. CEO pay has soared while worker wages barely budged.

Either CEOs became omnipotent, or MPT fails.
🧵1/10 Since 1978:
– CEO compensation rose ~1,200%
– Worker pay ~15%
– Productivity ~70%

MPT can’t explain this gap.

citations:
-barrons.com/articles/worke…
-mdpi.com/1911-8074/14/5…
-businessinsider.com/ceo-compensati…

🧵2/10

Perfect competition is the textbook ideal:
– Many small firms
– Identical products
– Perfect information
– Free entry & exit

In this world, no firm has power. Prices are set by supply & demand.

But here’s the problem…
🧵1/9 No real-world industry looks like this.

Firms spend billions on branding precisely because products aren’t identical.

Information is imperfect. Entry is costly. Exit destroys capital.

The assumptions erase how markets actually work.
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📌 Share buybacks: greedy short-termism, or part of a broader capital system?

The debate is noisier than it is clear.

Here’s a systems view.
🧵1/12 Buybacks spark endless debate: are they corporate greed, or rational capital use?

Critics say they starve investment.

Defenders say they return cash to shareholders.
But the real story is more complex.
🧵2/12

📌 The "natural rate of interest" (r) is one of the most misleading ideas in macro.

If the natural rate is zero, then it isn’t a rate at all, it’s a fiction.

A thread.*
🧵1/10 Wicksell’s idea: there exists some "natural" interest rate where saving = investment and inflation is stable.

Mainstream macro still clings to this.

But once you examine how credit economies work, the floor falls out.
🧵2/10

Since 2008, central banks created trillions in reserves through QE.

Textbook logic said this would unleash lending & cause hyperinflation.

It didn’t. Inflation stayed low for over a decade. Why?
🧵1/9 Because reserves don’t flow into the real economy.
They sit at the central bank as electronic balances between banks.

QE swaps bonds for reserves, it doesn’t give households more cash.
🧵2/9

Mainstream econ says:
Households save → banks lend savings → firms invest.

Robinson flipped it: investment comes first, savings follow.

Once you see how money & banking work, it’s hard to unsee.
🧵1/10 The Goodwin growth cycle shows it:
Investment drives output & jobs → higher employment boosts wages → rising wages can squeeze profits → investment slows → cycle repeats.

It starts with investment decisions, not household savings.
🧵2/10

Mainstream macro blames crises on public debt or bad policy.

History tells a different story, The biggest crashes follow private debt booms , when households & firms load up on credit faster than incomes grow.
🧵1/8 1929, Japan’s 1990s bust, the 2008 GFC, all preceded by surging private debt-to-GDP.

In each case, public debt rose after the crisis, as governments absorbed the fallout.

Cause and effect are backwards in the textbook story.
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Fractional reserve banking" still shows up in textbooks, news, and even heterodox debates.

But the concept is dead.

Modern banking doesn’t work that way, and clinging to the term misleads more than it explains.
🧵1/9 Traditionally, it meant banks held a fixed % of deposits in reserve (say 10%) and lent out the rest.

But today?

There are no reserve requirements in countries like the U.S.

Banks aren’t lending most of your money. They aren’t required to hold any.
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Neoclassical models treat fiscal policy as neutral in the long run, only useful in “crises.”

But this idea rests on flawed assumptions: full employment, crowding out, Ricardian equivalence, and perfect markets.

Let’s unpack why none of these hold.
🧵1/7 Assumption: the economy naturally returns to full employment.

Reality: underemployment, labor market hysteresis, and demand shortfalls are persistent.

When you assume away slack, you assume away the need for fiscal intervention.
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