It has taken me a long time to finish Steve Keen’s . Its author has enjoyed great celebrity, at least for an economist. For example, he featured in a recent BBC Radio 4 Analysis programme, and has battled Paul Krugman in the blogosphere.  This might be a touch cynical of me, but I’m pretty sure his popular acclaim is due to the appeal of his conclusions rather than a detailed appraisal of the nearly 500 pages he takes to reach them. For this is a dense and rather academic book, although Professor Keen presents it as an explanation for non-experts – he explicitly says it is written for non-economists, but that does not make it an easy read.

The first two parts present a detailed critique of the basics of economic theory, all of it from the basics of consumer choice and theory of the firm through general equilibrium theory to conventional macroeconomics. Keen describes the flaws of conventional theoretical economics on its own terms, with detailed reference to original papers, and I think he does a reasonably convincing job.

Does that make me want to throw away everything I know about economics? Well, no. For example, the book spends pages analysing the internal contradictions of the standard derivation of a downward sloping demand curve: “Market demand curves should have any shape except the one that is drawn in the textbooks.” He draws a ‘true’ market demand curve as a wiggly snake. However, when I contemplate my eight years of market analysis on the Competition Commission, and more than a decade of consultancy, I conclude that, you know what, demand tends to go up when prices go down. Similarly, Keen concludes that output and prices will be identical in competitive and monopolistic markets. That could only be true by chance as firms with and without monopoly power set prices in completely different ways: competitive firms know what their costs are and charge a cost-plus price; firms with market power charge ‘what the market will bear’ and find it difficult to identify and allocate their costs.

After chapters of logical analysis, I realised that Professor Keen’s theorising is as abstract as the theories he criticises. I have no trouble agreeing with him about the practical unreality of the basics of economic theory, but I don’t think it’s the knock-out blow he considers it to be. The reason is related to a classification of types of assumptions he sets out on pp161-163 of the book. I for one regard most of the assumptions made in the theory as ‘heuristic’ assumptions, known to be false but useful as a device for thinking about a problem. It wouldn’t trouble me at all to ditch the formalities of Arrow-Debreu general equilibrium theory, as long as we keep the deeper reality that the economy is a connected system. My guess is that many applied economists are in my camp. Maybe, though, many academic economists would be as scandalised by Professor Keen’s debunking as he thinks. I certainly agree with his plea from the heart for wholesale reform of the way economics is taught. (See the forthcoming What’s The Use of Economics – watch this space.)

The book hits its stride in the sections on macroeconomics, in the third part, in which Keen sets out his own theory, a Marx-Minsky-Keynes (M-M-K) approach that meant he was able to issue public warnings of the impending crisis ahead of 2008. The key difference between his model and more mainstream ones is the inclusion of a financial sector and financial cycles with asset bubbles. All credit to Professor Keen for talking about a debt problem when most macroeconomists hadn’t even noticed the astonishing aggregate build-up of leverage in the global economy.

This section is easier going than the earlier parts of the book. Although Debunking Economics cites non-mainstream approaches such as Alan Kirman’s network and complexity theories (in ) earlier in the book, it does not include them in this section as an alternative way of thinking about the aggregate economy, which seems a bit of an omission. The trouble with Keen’s M-M-K synthesis, using aggregate variables in different relationships than in the conventional model, is that it might lack generality. This worry is what originally drove the project of finding micro-foundations for macro-models, even though it took us in the end into the madness of Dynamic Stochastic General Equilbrium modelling of representative agents. Perhaps a lack of generality is ok. I’ve always been a fan of Malinvaud’s distinction (in ) between different states of the macroeconomy, requiring entirely different policy regimes. However, I do think we ought to be open as well to a completely new modeling strategy.

So, without in any way wanting to defend the mainstream theories at all costs, I don’t think Debunking Economics is the last word on either what’s wrong with the subject or how to fix it. I have a lot of sympathy with the details of Professor Keen’s project, but not its ultimate ambition. For in the end I think the Naked Emperor needs to be reclothed rather than dethroned.

[amazon_image id=”1848139926″ link=”true” target=”_blank” size=”medium” ]Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned?[/amazon_image]



11 thoughts on “Debunkery

  1. A mirror image of my take on it.

    I, however, have a great psychological need for these kinds of books. To me, pretty much all of economic theory seem completely arbitrary. B usually does not follow from A at all, unless you say “hocus pokus” in the right places, ignore things which is supposed to be fundamental according to other models and add things that usually is considered irrelevant. When it comes to neoclassical economics however, even in empirical papers, the model is almost always derived from first principals. Every time someone shows that this is nonsense, I feel a little bit less alone.

    PS: I mean arbitrary with respect to what you would conclude analytically from the basic axioms.

  2. Thanks for this. It’s hard for a non-specialist to know how to assess a book like this. I’m starting from zero economics.

    I guess the thing for me is that since 1970ish mainstream economists have presided over the destruction of economies in Africa, South America, South East Asia, Japan, and now UK, Europe, and USA (and maybe China soon). Something is grossly and horribly wrong. Even if Steve doesn’t have all the answers, his ability to see problems dating back to 1995 should at least give him a place at the table. Which he doesn’t yet have.

    • I certainly agree about needing a new range of perspectives. Seems to me Prof Keen does have a place at the table now, and Minsky approach certainly does eg. Martin Wolf mentions this quite often. Still a long way to go with macro, however – though it’s clear from comments on this blog that many people would disagree with me (and you?) about that.

  3. No offence – you’re clearly quite reasonable – but when I read reviews like this I just think economists have too much cognitive dissonance to understand why their subject is so flawed.

    “The trouble with Keen’s M-M-K synthesis, using aggregate variables in different relationships than in the conventional model, is that it might lack generality. This worry is what originally drove the project of finding micro-foundations for macro-models”

    Keen spends the first substantive chapter knocking down the concept of a market demand curve, only to conclude that an inverse relationship between price and demand is actually fairly reasonable. Why? Because more is different. Microfoundations have not just failed in practice; they are an unworkable approach to science. All real scientists understand this.

    The ‘Lucas Critique’ (which, like all things in macro, was first noted by Keynes and also noted by Phillips himself, so is a misnomer) simply tells us to watch out for the relationship between policy and the economy. This doesn’t mean one can dismiss models such as Keen’s ‘because Lucas Critique’; what it does mean is that we must address specific aspects on a case by case basis.

    I am not wedded to all of Keen’s criticisms of economic theory – he may well have taken some wrong turns. However, I don’t think they are necessary to dismantle neoclassical economics. Your ‘don’t throw the baby out with the bathwater’ attitude is fairly common, but I feel that neoclassical economics is flawed from the ground up. This essay identifies exactly what that ‘ground’ is, though offers only limited critique:

    • Actually I agree with you about the hunt for ‘rigorous’ microfoundations being futile. Physicists live with separate macro and micro worlds, and social scientists might have to as well. However, the ‘meso’ layer is really interesting – the structure and behaviour of different markets, and the links from individuals/firms to markets and separately from markets to macroeconomy. So for instance, one can’t analyse QE while ignoring the structure of the banking markets (although of course most people do just that). But then, markets are what I spend my days looking at so of course I find them interesting.

      • Mesoscopic physics, where microscopic physics (Quantum Mechanics) meet Macroscopic physics at the level of macroscopic measurable quantum mechanical phenomena is a very interesting area.

        A standard example is superconductivity, but a lot of the physics underpinning new materials and semiconductors (nanotechnology) is also today in the mesoscopic realm.

        Atomic bombs and nuclear energy are off course another realm where quantum mechanics moves to macroscopic physics impact.

        So a fruitful approach is to analyse mesoscopic economics by studying the extent of phenomena predicted by microfoundations that have real macroscopic effects.

        In this way you get out looking for microfounded peaks in a sea of macro-economic phenomenology models and attempt to determine what causes these “peaks” to sustain and not be washed away to limited impact as so many smaller scale phenomena are canceled out by other phenomena in the aggregate world of macro-economics.

        I wouldn’t be surprised if the findings tend to point at accumulation of economic power and hence in political power to preserve and extend a specific microfounded and working system.

        So what micro-founded economic findings, when blown up to macro-economic generality via micro-founded based economic policies effectively work out as the economic equivalent of a country/ group of businesses engaging in constructing Atomic Bombs with the intent to drop them?

  4. Also, I don’t think all of the assumptions in economics are heuristics (and even if they were, economists need to be more willing to abandon them). For example, perfect information is a domain assumption, for which the conclusions are only true as long as the assumptions hold. See Akerlof’s paper – once information is imperfect, you cannot simply ‘relax’ the assumption in the existing model; you have to start again.

    Sorry for double comment.

      • Realise I’m a bit late to this party but thought I might still get a response!
        I’m currently a second year economics student at LSE and was just wondering, seen as so much of what is being taught to undergraduates has been disproved by subsequent events what would you suggest for students to do? I’m interested in economics to the extent that I read a lot of heterodox works (such as Keen’s book) but obviously I still need to pass exams and professors don’t take too kindly to being told they’re wrong… Do you have any advice?

        Incidentally, I would agree with you on asymmetric information models, to me perfect information is a limit, that markets may tend to and is useful to think of but not the general case.

        • Advice? Oh dear ….. You have to jump through the hoops of exams, but retain enough interest to get back to thinking afterwards. Cold comfort. At the LSE you are blessed with some terrific empirical economists, in the economics department and other departments. From the outside, they seem to be in a Manichean struggle with the more technical and ur-neoclassical kind.

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