Archive for January, 2013

Institutions and Economics

Recently, I’ve been reading a lot from the school of institutional economics. Consequently, I have noticed another problem with the way economists approach theory and evidence: the lack of institutional considerations. This can blind economists to the fact that they may be studying entirely different phenomenon due to differences between countries, periods of history, companies, genders, cultures and much more.

The standard procedure of economists is to derive a model ‘rigorously’ based on a set of assumptions or axioms. Economists, unlike physicists, cannot perform controlled experiments in order to verify these models; instead, empirical corroboration entails the use of econometrics to verify predictions. Economists must rely on collections of data, sometimes from disparate sources, and try to ‘correct’ these collections of data for said disparities. They then perform regressions in an attempt to isolate the relationship between two variables, and cautiously interpret the results. However, the problem with this approach is that institutional differences could mean that some of the data in question are simply irrelevant, whether or not they disagree with the predictions of the theory in question. 

Problems with this Methodology

It appears that underlying the methodology used by economists is a search for unifying principles that can be applied to all economies across space and time. Both the neoclassical and heterodox schools reflect a discipline aiming to isolate the ‘true’ mechanics of the economy and build a model around it. The mentality often seems to be that, if only we could isolate these true mechanics, we’d be able to understand the economy and make informed policy decisions based on our ideal framework. I’m sure many economists would agree that the institutional, legal, and cultural contexts are not the same for all economies. However, many economic models and the economist’s rhetoric reflect a discipline looking to uncover an equivalent of physical laws. Indeed, Larry Summers went so far as to claim that “the laws of economics are like the laws of engineering. One set of laws works everywhere.”

Even though most rational minds would disagree with Larry Summers, I find there is a tendency among economists to imagine that the institutional, legal, and cultural contexts are viewed as ‘constraints’ against which the ‘underlying mechanics’ of the economy are continually pushing. However, there is good reason to believe that the ‘real’ mechanics of the economy are determined by the context in which the economy operates, rather than said context merely influencing the economy exogenously. Here are some historic and contemporary examples to illustrate my point.

Industrialisation: the US versus England

English firms were fairly small during the industrial revolution. For reasons beyond the scope of this blog post, firms typically took it upon themselves to educate and train new employees on the job. Such a system diminishes the need for state education, at least from a labour market standpoint, and it wasn’t until the late 19th century that public education was finally established, by which time England was industrialised and the old system was becoming obsolete. In contrast, the USA followed a different path. During the growth period of the US, firms generally emphasised large production lines, and had a more ‘flexible’ approach to employment. Such an approach required that firms could rely on the competence of the average worker, and over the course of the US industrial revolution state education increased substantially, reaching something approximating a fully public system at around the same time as England, even though England was much later in its development phase. Both strategies successfully industrialised their countries; both presented different needs from a policy perspective. But using a single model to inform policy in these two countries would clearly be a mistake.

A similar contrast can be seen with Denmark and Japan. Historically, Japan has had a policy of lifelong employment, which means a majority of workers are, well, employed for life (the model may be waning due to the effects of the lost decade, but it was robust during Japan’s impressive industrialisation period). What would be the effect of restrictions on hiring and firing with such a model? It’s highly unlikely there would be much effect; in fact, the model itself is partly based on such regulations. But what if similar restrictions were applied to Denmark’s dynamic ‘flexicurity‘ model, in which hiring and firing is incredibly easy but there are strong social safety nets? I expect it would cause a lot of problems for employers and employees alike, as Danish firm’s strategies are built around being able to gain and shed workers quickly. On top of that, the safety net makes workers more willing to accept such treatment, as well as having obvious humanitarian attractions.

Again, though these two models are different – almost diametrically opposed, in fact – both have coped with recessions relatively well (in terms of unemployment). The countries simply have different institutions that operate under different mechanics, and no model could capture both (feel free to read that as a challenge). Despite this, Japan has recently enacted some ‘neoliberal’ reforms, perhaps based on the mistaken belief that they need to ‘free up’ the ‘underlying’ mechanics of the economy. Time will tell whether or not this was a smart move.

The Scandinavian Ideal

Apart from labour markets, there is another good example of interdependent institutions, laws and culture: the oft-cited Sweden. Both free marketeers and leftists like to hold Sweden up as an example of their ideas in action. “Look at the vast redistribution, unions and public goods!” Is the cry of the leftists. Meanwhile, the rightists will assert that beneath such institutions lies a relatively light touch, ‘neoliberal’ regulatory structure. In any many ways both are right; but in many more ways they are both wrong. Both approaches take the economy of Sweden and suggest that due to X, Y or Z policy, it is the way to go. But neither appreciate how the institutions identified by both fit together.

Sweden is historically a high-trust society and as such regulation is relatively simple. Even contract law is far less complex than that you will find in the UK or the States. Many businesses do something akin to ‘self regulation,’ reporting their own data to government agencies. Similarly, while it is questionable whether the generous welfare state is a cause of the trust, it is not unreasonable to suggest that the two are complementary. Furthermore, as in the case of Denmark, generous safety nets go well with light regulation in terms of dynamism. The approach has serious attractions, but only if the two institutions are combined: furthermore, it may well be the case that trust is a necessary condition for both of these institutions in the first place. Once more it is clear that certain historical circumstances have given rise to a specific set of ‘optimal’ policies that could not be applied elsewhere.

So if we take data points from between such disparate countries, is it really meaningful to try and ‘adjust’ them for this type of difference? What we are studying are economies with very different underlying mechanics. To aggregate over them and take the average result is to reduce the data to meaninglessness. What is needed is a historical, institutional perspective that understands how different aspects of the economy fit together, and how the economy fits into the background of politics, history, culture (not to mention to environment – for example, on an island country, even a corner shop can be a monopoly).

What is best for an economy will depend on initial conditions and current institutions. These institutions are not ‘artificial’ impositions on the underlying economy; they are inevitable political decisions which have been born out of specific historical context, and hopefully fit the culture of the nation in question. It would be at best costly and destructive, and at worst basically impossible, to uproot these institutions in search of some ideal. As such, any discussion of economic policy must proceed based on acknowledgment of the mechanics created by different institutions.

Much of what I’m saying isn’t new at all. In fairness, most empirical economic papers are careful about announcing they have found surefire causal links. And there might be new techniques in econometrics that attempt to deal with the problems in the methodology I outlined above. Furthermore, I am not suggesting economists are not at all concerned with institutions or history: development economists and Industrial Organisation economists speak of them frequently. Nevertheless, I believe the institutional considerations I described above create a clear methodological problem for large amount of economic theory, particularly macro.

This is because institutional considerations are a good reason that social scientists should be even more concerned about assumptions and real world mechanics than the physical sciences, and therefore that economists should be highly concerned with the historical, institutional and legal context of the economies they are studying. Such considerations are another nail in the coffin of Milton Friedman’s methodology, which posits that abstract models based on “unrealistic” assumptions are the appropriate approach to economic theory. Such an approach cannot even begin to comprehend institutional differences, and as such, applying any one theory – or group of theories – to every economy is bound to cause problems.

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‘The Market?’ Which Market? Alternative Theories of Demand and Supply

Is it really feasible that there can be a single theory of ‘the market’ that encapsulates everything from tomatoes to CEOs to houses? Engineers do not think they can apply the same theory to every fluid, and similarly, it is not unreasonable to suggest markets might function very differently depending on what is being bought and sold. In this post, I’ll set out a couple of alternative interpretations of supply and demand for different markets. I developed these alternative approaches based on some well known real world observations.

A few caveats:

(1) I am not interested in deriving these schedules ‘rigorously’ from arbitrary axioms about individual behaviour. Such an approach is unnecessary as phenomena may be emergent, and it always seems to run into problems.

(2) These models should really only be interpreted as working for individual markets on a small scale, as large scale feedback effects render this type of analysis irrelevant.

(3) I am aware that there is no such thing as a demand or supply ‘curve’ in reality. Perhaps the fact that I feel the need to reduce everything to intersecting lines is a testament to how much neoclassical economics has polluted my thought. I am undecided as to whether I regard the supply-demand framework as a useful tool that can be adapted in certain circumstances, or as something that needs to be done away with entirely. I’m sure heterodox readers can give me many reasons demand-supply as a concept is not worth keeping. In any case, I regard these examples as interesting, and at the very least they are a good way to take economists on on their own turf.

(4) Finally, I apologise for my drawings, which were constructed on MS Paint.

Asset Markets

It is an observed reality that asset prices and demand are often positively related, since in many cases an asset is purchased for no other reason than selling it later on at a higher price. Price increases can act a signal for later price increases, and the opposite is also true. Hence, we will posit a positively sloped demand curve for this model. This relationship will also be exponential: at low prices, the effects will be relatively small ,but as prices spiral , the effect will get larger and larger. Since the supply of assets is relatively inelastic (in the case of land, perfectly inelastic), the supply curve will be a steep upward sloping line.asset-market

From the diagram constructed based on the observations above, we can deduce a few interesting mechanics. First, there large number of demand-supply combinations for which there is no equilibrium. If demand is to the left of the supply schedule, supply will always exceed demand and prices will fall to zero. The most likely cause of this is simply that a company or industry is not performing well, although tight monetary policy could also do it. If the demand curve is to the right of the supply schedule, demand will always exceed supply and price will spiral upward indefinitely. This could be due to excessive credit expansion or misplaced expectations.

However, between these two extremes there is a potential ‘golden zone’ for which equilibria exist. In this zone I have drawn two potential demand curves: D2, which just touches the supply curve, and hence has one potential equilibria; and D3, the likes of which would be more common and would have two equilibria. The two lower equilbria, e1 and e2, are not stable. Any drop in price will result in excess supply that will drive prices down the schedule. An upward increase in price from e1 or e2 will result in excess demand that will continue to increase price in a spiral. In the case of e2, it will propel the market up to the one stable equilibrium: e3. If the price increases, supply will exceed demand and it will quickly fall back to e3. If it decreases, demand will exceed supply, the price will rise and the market will again tend toward e3.

The volatile behaviour displayed by most outcomes in this model is in accordance with much real world experience in the stock market, from the downward spiral of Facebook to the internet stock bubble and other frequent historical experiences. But what about e3? Is it the case that certain firms or industries exhibit relatively high, consistent returns? In fact, relatively stable share prices do exist for some firms and industries: ones that are rarely hit by volatility. Insurance, transport and many consumption goods are all stable industries. Obviously this doesn’t protect them completely: firms, industries or the market as a whole may exhibit relative tranquility before something knocks them over the precipice.

We can draw a few policy conclusions from this framework. There is scope for a central bank to reduce or increase the liquidity of the system in order to try and knock the market into the ‘golden zone.’ The effects of an FTT are indeterminant, which is actually the only conclusion I can garner from the available evidence. However, the primary conclusion I would come to – which admittedly doesn’t flow completely from the model – is that due to the level of volatility, the trading day could be be extremely limited, or trade could be cut off if prices are rising or falling too fast. This way the price spirals can be curbed while the central bank adjust liquidity, and investors and funds adjust their positions, trying to shift the demand curve back into the golden zone (though I am willing to admit the last part verges on a spurious level of precision).

Labour Markets

Another market that would be expected to diverge strongly from the ‘norm’ would be the labour market. Many aspects of labour make it different to other markets: it is required to subsist; it cannot be separated from a person; it is difficult to determine the productivity of potential applicants, or even present workers; time spent in work is related to leisure time. Below I’ll outline two alternative approaches (that are also somewhat compatible).

A more comprehensive approach to labour supply, which takes into account the need for subsistence, has been provided by Robert Prasch (whose book, which inspired this post, is recommended). His approach is illustrated in the diagram below:

labour-supply

This can be seen as an adaption of the typical ‘backward bending‘ labour supply curve found in economics textbooks. The subsistence frontier shows the total pay required to subsist at various wage levels, whether that is interpreted as literal subsistence or a conventional and socially acceptable level of income. Obviously, the higher the wage, the fewer hours required to work to reach subsistence.

Equilibrium C is unstable as either side of it creates a wage spiral toward the next equilibrium. If the wage decreases, the labour supply will be forthcoming as workers seek subsistence level pay. At Wu they hit the limit of how long they can work and give up, settling for a ‘poverty trap’ wage at D. If the wage increases above C, wages become less necessary for subsistence and workers will withdraw their labour while remaining on the subsistence frontier. Once the subsistence frontier becomes a distant memory and wages are high enough, workers will be willing to devote more time to work in order to purchase more goods and services.

The highest equilibrium, A, is also unstable. Should the wage deviate upward, there will be a resultant upward spiral as demand always exceeds supply. Should it be reduced or capped, the wages will settle down toward a lower level. This is consistent with the observed behaviour of CEO, footballer and celebrity pay in recent decades, which shot up when marginal tax rates were significantly reduced (and a direct cap on footballer’s wages was lifted).

Clearly, a couple of evil communist interventions can be proposed based on this framework. The first is a minimum wage at or above Wc to boost the market into the desirable area. The second is steeply progressive taxation above Wa to prevent pay from spiraling  Such interventions would help to enhance labour market stability, equality and reduce poverty.

I have also constructed an alternative model of the labour market. My model is shown in the diagram below and illustrates what a labour curve might look if we included the assumption of the ‘conventional’ working day/week which characterises so many people’s lives. This may be enforced legally, by social norms, or by the power of capital of labour. Whatever the cause, it is an undeniable empirical reality.

Labour

This model of labour supply could perhaps be interpreted as an elaboration or magnification of the zone between Ws and Wh on the S-shaped labour supply diagram: that is, what happens once wages reach an acceptable level. In fact, I adapted the model from one found in Arthur Lewis’ 1972 paper (p. 10) on unlimited labour, which focuses on a wage given at a conventional level. This is compatible with the above diagram.

However, I don’t wish to stretch the comparisons, as this model can also be thought of in isolation. The point is that a worker will accept work at any ‘reasonable wage’ up to a certain amount of hours – I have suggested 40, which is the norm in most developed countries. After this point the time they have normalised as leisure time is far more valuable and they expect to be paid more at an increasing rate. Eventually, they reach the physical limit of work and the effective wage must be infinite to induce labour. There are multiple equilibria if the demand curve crosses the feasible wage zone, but only one if it moves beyond it.

There are a couple of conclusions we can draw from this model. The first is that a tax on labour will not alter the amount of labour supplied if the tax + the wage is within the ‘feasible wage zone.’ In fact, empirical evidence suggests the effect of income taxation on labour supply is negligible at most (though higher for women – perhaps this analysis only applies to primary earners). Second, an increase in demand need not increase wage inflation up to a certain point, provided there are labourers willing to work within a given wage range. Past this point, an increase in demand will cause a wage-price spiral. It’s harder to verify this point empirically, although it seems consistent with the frequently observed point that inflation isn’t a problem when unemployment is high (having said that, it’s by no means the only model that predicts this).

I think a pluralistic approach such as this would be interesting. It would not be wedded to any particular model, and the task of economists would be deciding which model to apply or devising alternative models to deal with a situation. In fairness, DSGE is characterised by this approach, so it would be unfair to suggest economists do not use it at all. Nevertheless, this calls into question the rigid supply-demand framework that pervades much policy discussion of price controls, taxation and various other ‘interventions,’ and the catch-all arguments made by some economists against them.

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The Fantasy of a Pure Market

The government/market dichotomy is pervasive in contemporary political and economic debate. Many decry proposed ‘interventions’ into capitalism on the grounds that they are costly, politically motivated interferences that are vulnerable to capture by special interests. They assert that the ‘free market system’ should be allowed to operate free from outside interference: redistribution, regulation or public provision.

At the heart of this view lies some sort of neutral laissez-faire state, beyond which any ‘intervention’ is deemed unnatural. The ideal minarchist libertarian state would enforce property rights and contracts, and prevent force, fraud and theft. People could own what they acquired through ‘voluntary’ exchange; they would be free to do what they wanted with their property. I find libertarians rarely explore their preferred institutions much deeper than this, and build many of their arguments on the distinction between ‘markets’ and ‘government.’ However, on close inspection, the boundary between the two becomes blurred.

Complications with the Libertarian ideal #1

The nature of property rights is not at all obvious. Generally, a property right is thought to be a relation between a  person and an object, one that is respected by other persons in society. Owning something means that one is free to do what one wants with the thing: trade it, destroy it, display it, consume it or give it away. It also means that nobody else can do the same without your consent. But such a simple relation cannot be uniformly applied to everything that might be considered ‘property.’ The nature of the object or concept in question changes how the property right is defined.

Property cannot be autonomous, because doing ‘what you want’ with something that is autonomous is deemed abusive. Ownership of children or other people is therefore deemed problematic. Even in the cases where libertarians approve of ownership of, and trade in children or slaves (yes, they do), they would surely limit what could be done with, or to, said persons while they were owned. Similar boundaries concerning ownership can be observed with animals. Here the ownership is not problematic in and of itself, but it is still not the case that one can do whatever one wants with an animal, which could easily be abusive.

Another issue arises when the very nature of something is that it is person specific and so cannot be given away or traded. Court cases, votes, identities and credit histories are not appropriate candidates for trade, because that contradicts their definition. If court cases could be traded, this would quickly undermine the legal system. A less extreme case is when something, though tradable and ownable, is deemed too important to be at the whims of the owner. Even those who approve of a market in organs would surely not approve of a rich man buying them all and putting them into a blast furnace.

Property is a human construct, and the fact is that many aspects of nature do not respect clearly defined property boundaries: seeds, air and water all flow freely across them. Hence, problems can arise from dumping waste into a river or emitting it into the air; or from seeds from certain plants being transferred across land boundaries; or from sound and light pollution. The ‘invasion’ of property with more clearly defined boundaries by things that do not respect them will inevitably result in legal conflicts. How these cases are resolved will help shape subsequent laws that develop.

Property is also subject to changes as technology and politics evolve. A relatively recent development is environmentally motivated property rights, used in an attempt to prevent pollution. Relevant decisions such as how many carbon/fishing permits are handed out, and how much they are sold for, impact the workings of the economy. Newer still is intellectual property. Consider the case of digital photographs – if one uploads a photo to the internet, has one released it for any use whatsoever? Do the limits depend more on the nature of the photo itself than whether one has supposedly ‘voluntarily’ released it? Or what if someone else took the photo? There is no easy answer to such questions.

Complications with the Libertarian ideal #2

The other side to the libertarian ideal is the liberty of contract. Contracts are mutually agreed on actions or exchanges subject to certain conditions, or payments, from each side. Surely, libertarians ask, everyone should be free to negotiate the terms of their own contracts, and the state should only enforce such ‘voluntary’ decisions?

Such a presumption obviously precludes the mentally ill, or children (who are also precluded from purchasing certain items). Where the boundary for these is defined is an open question, in a constant state of flux as new mental illnesses are discovered, or as children become more educated, or as populations age and older people must be included in such considerations.

However, even for mentally competent people, the fact is that discussing a contract for every good or service one receives would be highly costly and quite possibly computationally impossible (i.e. it would take more time than there is). So norms develop. You don’t sign a contract every time you go into a restaurant: you know the deal, and so do the workers and owners. Shops are expected to provide receipts so that people can keep track of their transactions. Many jobs – particularly low paid and or short term ones – do not involve contracts at all. These are implied contracts, and figuring out what exactly has been consented to – what it is reasonable to infer from observed behaviour – is incredibly tricky.

Even when one does sign a contract, it is impossible to foresee every eventuality that might occur, particularly with long term contracts. So contracts are almost always, necessarily, incomplete. Employment is the best example of this. If your boss asks you to get them a pen, do you retort ‘that wasn’t in the contract?’ Of course not: it’s simply a reasonable request given social norms, the nature of the job and so forth. On the contrary, if your boss asked you to strip, that would not be deemed reasonable in a court of law, despite it not necessarily being in the contract that such behaviour was not permitted (or even, perhaps, if it was in the contract but was not clearly stated or expected given the nature of the job).

Even beyond the nuances of property and contract law, there are additional laws such as immigration restrictions, limited liability, laws that define companies and protect shareholder’s interests, all of which many consider a fundamental part of capitalism. Furthermore, accepting the logic behind, say, limited liability, forces one to conclude that protecting people from their risks can be good for an economy, and similar arguments can be extended to consumer protection, get out clauses in contracts, and even safety nets. Decrying all such interventions is a pretty hard position to defend.

I could give endless examples. The fact is that defining property, contracts and the supposed ‘core’ of capitalism is neither straightforward nor simple, and inevitably involves value judgments and arbitrary decisions with winners and losers. The nature of capitalist – or any system’s – institutions depend on culture, demographics, income distribution (who can afford the best lawyers), the historical context upon which past laws were formed, and much more. And such decisions will inevitably have winners and losers and therefore will affect present and future patterns of production, distribution and exchange.

Whither Free Markets?

These complications put the idea that there is such a thing as a ‘free market’ in its place (there isn’t). However, there is a partial response I have seen: how ‘free’ a market is can be judged in a relative sense. A market that is more or less regulated can be judged as further from or closer to the idea, even if said ideal is unattainable or impractical. But whether or not something is within the minarchist ideal of property & contract law does not tell us how big an impact it has on an economy. For example, something as widespread as ownership of land, or decisions regarding employment contracts, would have enormous impacts on the economy. Decisions surrounding property and contract law are as significant as any other, perhaps more so. The relative ‘freedom’ of a market cannot be judged in such simplistic terms.

There is also the question of whether market freedom is defined by the amount of rules that are in place. Sports generally have rules, many sensible, some arbitrary, some confusing to many. But does it automatically follow that sports players are not as ‘free’ to play the game as they would be in absence of the laws? Laws such as limited liability mean an entrepreneur is more ‘free’ to start a business. The 1980s changes in anti-trust law made it less about sustaining competition and more about ‘consumer welfare,’ which gave rise to greater concentrations of market power and control over key variables such as price by corporations (prices are, in fact, not magic but often set by administrators). Are these markets more ‘free’ than ones characterised by a greater degree of choice and competition?

As a side note, I am aware of the existence of anarcho-capitalists, who advocate no laws whatsoever. In this case I’m not really sure what they’d classify somebody who owned land, and had absolute rights over that land, other than some form of government. The only response I’ve seen to this is the ridiculously naive argument that people/corporations would only use ‘reasonable’ measures to remove people from their property. In other words: everybody would obey some sort of libertarian ideal, despite it not being enforced.

I won’t draw any normative prescriptions from this framework here, but suffice to say I feel it takes the rug out from underneath a lot of libertarian arguments against ‘intervention.’  There is no neutral baseline against which we can judge said ‘interventions,’ and none are immune from value judgments, arbitrary decisions and difficult questions in a legal system with limited resources. None of this is to say that the specific cases I’ve identified aren’t up for debate, but that’s the point: libertarianism is in many ways an attempt to escape political questions and leave everything up to the market. But as I have shown, every law or social institution raises difficult questions that can only be resolved through political debate, through court cases and are dependent on various conditions that vary across time and space. The question becomes less about whether ‘market outcomes’ are inherently just, and more about debating just outcomes without being plagued by the arbitrary concept of ‘the market.’

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Debunking Economics: Closing Notes

This is my final post on Steve Keen’s Debunking Economics, just to close the series and give some thoughts on the book as a whole.

The main aim of blogging Keen’s book was really to provide a platform for people to discuss the numerous inconsistencies (whether purported or real) that have arisen in neoclassical economics over time. Generally a Google of Keen will, predictably, contain outright (often vitriolic) dismissals from economists, coupled with some cheer leading from those on his side. Rarely, in my experience, will you find much substantive discussion of his ideas. Hopefully I’ve communicated these ideas in a (relatively) digestible way, and they can now be discussed openly.

I would encourage people who have enjoyed the series to read the actual book. My presentation of each chapter was necessarily shortened, omitting certain prongs of criticism: discussions of the history of thought; numerical examples; plain leaving out certain parts (for example Keen’s firm simulation model and his discussion of Von Neumann on utility). For this reason, anyone truly interested in Keen’s criticisms should read the book first hand. However, I would not recommend it alone for anybody not already versed in some basic economics and mathematics. Keen does a good job of explaining the concepts he is going to critique, but the fact is that both explaining and ‘Debunking’ Economics perfectly in a single book is simply not possible.

There is a largely superficial criticism of Keen that you will see floating around (so superficial that I am loath to address it formally): that he claims to become sort of mathematical genius blessed with insights that economists have missed for 100+ years. Of course, this is nonsense – there is not a single area in the book where Keen claims outright originality. Every critique he channels was either first noticed, else fully elucidated by, another economist or academic (often neoclassical economists themselves). Keen’s book is a culmination of a century of criticisms, all of which have been swept under the rug or dismissed, often without due justification.

Keen’s approach of critiquing each area on the grounds of internal inconsistency certainly has both advantages and drawbacks. The main advantage is that the critiques are not interdependent, so even if one fails to hold then it can still be shown that there are significant flaws in neoclassicism. The main disadvantage with this approach is that it requires Keen to assume concepts he criticises elsewhere are actually sound. Such an approach is almost bound – by probability – to be hit and miss. Can we really hope to show that absolutely every facet of neoclassical economics is internally inconsistent? In my opinion, Keen’s quest to dismantle neoclassicism from every angle might at times leads him astray from the overall goal. (The approach also necessitates some repetition, and I felt that some of the chapters could have been better arranged – for example, chapters 11 and 15 could surely have been merged).

Nevertheless, the match must be scored to Keen overall. His approach is helpful insofar as it sheds some light into what can often be a ‘black box’ of assumptions and mechanics that comprise many neoclassical models. What is really needed now is for someone to build a ‘ground up’ critique that combines discussion of conceptual errors, contradictions, and empirical irrelevance. Keen does not really talk about conceptual errors, and only really discusses empirical evidence in his section on alternatives. For me, a sustained critique would reject key areas of neoclassicism on various grounds, building up a positive heterodox view based on alternatives along the way. But I understand that was not really Keen’s intent.

I’m sure I will be drawn back to commenting on Keen’s work in the future, hopefully because economists continue to pay attention to it, whether civil or not. But this post concludes my comments on Debunking Economics.

Update: some commenters seem to have interpreted this post as me ending the blog. That is not so! The blog existed for 6 months prior to this series and will continue after it.

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