Debunking Economics: Overview & Opening Notes

I have been reading Steve Keen’s Debunking Economics, and thought I’d do a chapter by chapter guide to highlight the main concepts (and also help me to understand them fully). I’m about half way through at the moment, but so far I’m really enjoying it. I’ll offer a review-esque opening, with a few broad observations that struck me when reading the book.

First, dismissals of Keen as a crank or ideologue are misplaced. Keen’s tone thought the book is civil, technocratic and as ideology free as you will get. He spends part of chapter 4 arguing that monopolies are probably more efficient than neoclassical economists make them out to be, and incorporates insights from a plethora of economists across the political spectrum. His references reveal a broad depth of knowledge, both of the foundations of neoclassicism, the recent developments, and of practices and methods in other sciences. I may be wrong, but I doubt many of his detractors have as broad a knowledge of the literature as he does (after all, if you broadly accept neoclassicism, you’re less likely to root through its foundations).

Second, a peculiar recurrence throughout the book is how often these holes in economic theory were discovered – accidentally, or otherwise – by neoclassical economists themselves. It is relatively well known that Solow expressed distaste at the widespread used of his RBC models, and Hicks repudiated his IS/LM interpretation of Keynes. But it was also a neoclassical economist, William Gorman, who showed that a market demand curve, derived from neoclassical principles, can have any shape at all. Furthermore, some of the primary evidence for endogenous money came from Kydland and Prescott, and no less than neoclassicism’s founders, Jevons and Walras, expressed significant doubts over the usefulness of equilibrium theory, particularly if technology enabled economists to use more complex methods (as it has). If economists want to attack Keen, they must too question the work of many in their own ‘camp’, including some highly celebrated figures.

Third, I expect skeptics have a ready list of rebuttals to heterodox thinkers in general, and perhaps specific ones to Keen, perhaps to the extent that they do not deem his book worthy of their time. I can say with confidence that Keen has almost definitely addressed your objections in the book, as it is revised from his version 10 years ago and he has spent a lot of time since then debating his critics. I haven’t finished the book so I can’t be sure, but it may well be true that Keen doesn’t address every single development at the frontier of economics. But it is also true that none of these models reliably predicted – or can yet model – the crisis we’ve just experienced, whilst Keen’s did. Keen’s model is also a lot more simple than the convoluted mess of assumptions you’re generally presented with during a more advanced DSGE paper – bear in mind simplicity, rather than predictive power, was the reason Ptolemaic astronomy was abandoned.

If any neoclassical economists are thinking of buying Keen’s book, or at least following this guide, then Arnold Kling’s ‘review‘ of Keen’s book offers a fantastic demonstration of how not to approach reading it. Kling meanders off at the beginning about how deregulation didn’t cause the crisis (I won’t address that here, but suffice to say Kling appears to think regulation is a dial we can turn up and down).

Kling goes on to assert that what he admits are ‘unrealistically stringent’ conditions required for downward sloping demand curves are ‘uninteresting’, and that having a benevolant dictator redistribute resources prior to trade (seriously) is not ‘unrealistically stringent’. He says he is too dense to grasp that there is no supply curve unless perfect competition rules, but from his lack of engagement with the issue it’s plain he just doesn’t want to try. Kling also demonstrates why it is important to abandon the idea that the economy is a battle between the state and private actors before one can engage in purely technocratic arguments such as the ones put forth by Keen.

If you are a laymen and therefore worried the book will go over your head, I wouldn’t worry too much. The first two substantial chapters (3 & 4) are on the demand and supply curves respectively, and are the hardest to understand. The complexity then steadily declines – by the time time Keen gets onto talking about his own models, anyone with a cursory knowledge of economics should be following him fully. Keen avoids maths and alerts readers before he indulges in some of the more technical arguments, giving them an opportunity to skip the section, but not to the detriment of the book as whole.

I have some criticisms of this book. The first is that Keen would do better to acknowledge that not all economists are market fundamentalists, and that many of the conclusions of neoclassical economics are fairly moderate and at odds with what the public often sees. Whilst he doesn’t exactly paint all economists as Friedmanites, he does misrepresent the average political viewpoint, at least in my experience.

Secondly, Keen’s efforts to keep his book accessible are possibly stretched too far when his discussion necessitates mathematical equations. Writing something like ‘the rate of change of unemployment plus the level of investment’ is just as likely to confuse non mathematicians as writing the equations themselves, and will probably take some mathematicians with it on the way. I think a degree of maths is inevitable, and some equations would help communicate the ideas effectively.

But these are minor points. The book is a comprehensive and constructive critique of mainstream economics, coupled with a positive vision for a model of capitalism put forward by Keen himself, and deserves to be read by anybody. Neoclassicals who assume Keen is wrong have nothing to lose, and will gain a deeper understanding of their own models and confidence in them despite the decades of criticisms. Those who question neoclassicism will find their arguments strengthened substantially.

Discussion of the chapter on demand curves to follow.


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  1. #1 by Dan on June 21, 2012 - 10:51 am

    I’ve got the old version, published in 2001, and it’s striking how consistent Keen is with his analysis, and how his predictions bear out his discussion. For instance on page 256 he says that ” there is little doubt that economic theory has been complicit in encouraging America’s investing public to once again delude itself into a crisis”. Unsurprisingly, i suppose, for a Minskyan/ post Keynesian, He uses the same metrics: private and corporate debt to output, and inflation. He says that he thinks that the US government would mitigate the fallout from the stock market bubble, which is pretty much true. His final sentence of that chapter is mostly wrong, though: “what appears more likely for post-Internet America is a drawn out recession like that experienced by Japan since its bubble economy collapsed in 1990”. Overall he’s clearly far more prescient than any neoclassical and it’s no fluke, since it’s based on a clear theoretical perspective.

    • #2 by Unlearningecon on June 21, 2012 - 11:36 am

      When you talk to neoclassicals about Keen’s predictions, they merely assert that he was lucky, but I just don’t see how that can apply when he has the mechanics so right. Scott Sumner’s defense is particularly amusing: “the EMH says that people who get it right are just lucky, so those who predicted the crisis are just lucky.”

      Yes, OK Scott.

  2. #3 by Ben on June 21, 2012 - 2:14 pm

    I’m taking a course on Economic Crisis right now and we started with this book. I liked it a lot but I agree absolutely with your point about the lack of math, especially because towards the end of the book his writing tended to get a little convoluted.

    As to his characterizations of the mainstream, I think his criticisms are fairly correct. His point is that New Keynesians may be adapting their models to more correctly analyze the economy, but that these are just ad hoc corrections to models that are flawed at their core.

    • #4 by Unlearningecon on June 21, 2012 - 6:41 pm

      I’m not talking about models, just political beliefs. Generally neoclassicism concludes that we must take further measures to protect the environment; have government provision of natural monopolies (utilities, railroads), health & education; regulate banking, monopolies & oligopolies. Evidence suggests most economists lean left.

      I still think the way neoclassicism is set up biases political debate and has implicit value judgments that tend to lean right. But economists themselves are not all free market nutters.

  3. #5 by James Kroeger on June 21, 2012 - 2:49 pm

    …Jevons and Walras, expressed significant doubts over the usefulness of equilibrium theory…

    I also have grave doubts about the ultimate usefulness of the equilibrium basis for economic analysis. I cannot think of a cogent reason why any economist would have a ‘natural’ interest in whether or not an economy happens to be in equilibrium or not at a given point in time.

    There is nothing inherently good or moral or even positive about economies that are in equilibrium, for as Keynes pointed out, an economy can be in equilibrium even when its resources are profoundly underutilized.

    What every economist should care about is whether or not an economy is fully employing all of its available resources to satisfy human wants and/or whether or not it is employing resources in a way that optimizes various kinds of efficiencies and/or whether or not an ordered list of competing economic ‘priorities’ can be justified by rational argument.

    What is it about the economics ‘profession’ that makes it so difficult for economists to question ‘old ways of looking at things’, or even to revisit and reconsider ideas rejected by previous generations of economists? Do they want to be scientists, or don’t they?

    • #6 by Unlearningecon on June 21, 2012 - 6:45 pm

      Absolutely agree about equilibrium versus full employment, James.

      What is it about the economics ‘profession’ that makes it so difficult for economists to question ‘old ways of looking at things’, or even to revisit and reconsider ideas rejected by previous generations of economists? Do they want to be scientists, or don’t they?

      I don’t know! It’s incredibly odd, but studying economics instills a certain level of cognitive dissonance in you that causes you to discard challenges to the core theories. Maybe it’s the way the theories are effectively just asserted as true, and as ‘economics’ rather than a theory. Maybe it’s because professors dismissively reference common criticisms in such a manner when they teach you. In any case, it’s highly pervasive – I’ve seen it in myself, friends and of course in many famous economists, even heterodox ones (Keynes, of course, never fully escaped the grasp of neoclassical theory and he didn’t even have much formal training in it).

  4. #7 by Draco T Bastard (@DracoTBastard) on June 22, 2012 - 10:29 am

    bear in mind simplicity, rather than predictive power, was the reason Ptolemaic astrology was abandoned.

    Ptolemaic astronomy – astrology is a different beast.

    Writing something like ‘the rate of change of unemployment plus the level of investment’ is just as likely to confuse non mathematicians as writing the equations themselves, and will probably take some mathematicians with it on the way.

    Humankind doesn’t do maths to well and so explaining it in words can actually bring more people understanding than having an equation there.

    • #8 by Unlearningecon on June 22, 2012 - 10:45 am

      Whoops! Fixed.

      Well, maybe I’m wrong about the maths. But I found convoluted equations of words confusing, and they seemed to retain all the difficulty one would have with the equations themselves.

  5. #9 by Blue Aurora on June 23, 2012 - 5:49 am

    I’m skipping both the first edition and second edition of Debunking Economics in favour of what Steve Keen hopes to be his magnum opus: Finance and Economic Breakdown.

    I would like to see whether that becomes a classic work of scholarship, despite it’s uninspiring working title. While I do agree with Steve Keen on two certain points, I’ve yet to be totally won over by him.

    What would those “certain points” be? First, it would be that the econophysics project is interesting. Second, it would be that the econophysics project has hope of overthrowing the mainstream neoclassical orthodoxy. What did you make of Steve Keen’s remarks on the econophysics project in the second edition of Debunking Economics, Unlearningecon?

    P.S. Could you please respond to my last e-mail?

    • #10 by Unlearningecon on June 23, 2012 - 8:58 am

      I wondered where you’d gone!

      Yes it is not a great title but looks to be an interesting book. I have not yet reached that point – just started the third section. I will do a post on that part in this series, though, when I reach it.

  6. #11 by Mike Sax on June 25, 2012 - 9:40 pm

    Hey Unlearning! You said:

    “dismissals of Keen as a crank or ideologue are misplaced. Keen’s tone thought the book is civil, technocratic and as ideology free as you will get”

    I had this view of Keen at first too. I do find his criticisms of Krugman a little shrill and overdone. Maybe he’s right about IS-LM-all Post Keynesians think it’s basterdized Keynes though interestingly Keynes in his own lifetime didn’t crticize it on pragmatic grounds. Unfortunately Keynes died too young to shape the institutionalization of his ideas the way Freidman or Marx for that matter had the luxury of doing.

    But he really overdoes it by demanding the NY Times fire Krugman, etc.

    However I have come to realize that he has a lot to say and a lot to learn from. And thanks to him and the rest of the MMTers I’ve discovered Minsky-a great find.

    Appreciate you doing this on Keen’s book. I have it and will get to it as soon as I read the books in front of him on my reading list.

    • #12 by Unlearningecon on June 26, 2012 - 7:36 pm

      Yes, it’s a real shame that Keynes worked himself to death. Says something about his motivations though.

      When did Keen say the NYT should fire Krugman?

      PS good to have someone keeping an eye on Scott Sumner

  7. #13 by Mike Sax on June 25, 2012 - 9:45 pm

    Hicks though in all fairness never intended IS-LM to be anything other than ad hoc anyway which is why Lucas and company had such fun basing Keynesianism’s “ad hocness” in the 70s.

    It’s all relative I guess. Sumner relentlessly attacks IS-LM while lauding the exhange equation.

  8. #14 by Mike Sax on June 27, 2012 - 6:14 pm

    Incidentally Econ, Miles Kimball says he’s going to post a piece I wrote about his blog a few weeks ago which is cool-quite a few people read him I thnk

  9. #15 by Roman P. on June 30, 2012 - 10:22 am

    I have thoroughly enjoyed this book of Keen and my only regret is that I didn’t have it when I was studying microeconomics in university.
    On the other hand, I feel that this book needs a revised edition, with perhaps a clearer flow of ideas. As it stands now, Keen’s .ppt lections from his site convey economical ideas more effectively than the book itself. I admit that I wouldn’t grasp some points if I didn’t read the presentations afterwards. His chapter on demand curves is particularly messy. If I was in prof. Keen’s place, I’d split it three ways: (1) impossibility of individual utility maximization; (2) problem in aggregating demand curves, multiple equilibria possibility; (3) GE and SMD-conditions.

    • #16 by Unlearningecon on June 30, 2012 - 10:37 am

      I think you are right about the presentation of ideas. The book takes on a lot and seem to lack flow, repeating itself in many places.

  1. ‘Debunking Economics’, Part I: Demand Curves Can Have Any Shape « Unlearning Economics