ISBN 978 1 84813 992 3. “Debunking Economics – The Naked Emperor Dethroned?” (Revised and Expanded Edition) by Steve Keen was published by Zed Books in 2011 (from an original 2001 edition). Reading this book is continuation of a journey we started with Ha-Joon Chang’s “Bad Samaritans” and continued up until “The Spirit Level” by Richard Wilkinson & Kate Pickett. In this journey we asked one simple question: what if everything that was wrong about this world boiled down to economics? One of the best answers we have found was in “How Markets Fail” by John Cassidy. In essence Steve Keen has expanded Cassidy’s work into an entire Economics textbook. Sounds boring? You bet!
Yes, very boring. Now I have to lay my cards on the table and say that I studied Economics up until the age of 18 and have a British “Advanced” (A) Level qualification in it (top marks too!). Not only that but I have a Master Degree in Engineering that should qualify me to understand a great deal of the complicated Maths behind Economics. However, nothing will make you ready for this. The author even admits that most of what he is about to teach you simply is not taught to any Economics Graduate or Postgraduate. Hence what chance does the layman have? So, why bother?
Well I can best explain that with an example. In 2009 the then US President Barack Obama delivered a speech about why his administration had adopted Quantitative Easing instead of helping the American people directly. His response was thus:
“…although there are a lot of Americans who understandably think that government money would be better spent going to families and business instead of banks – ‘where’s our bailout?’ they ask – the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans…”
This was the received wisdom from the President’s economic advisers. Great. The only problem with this is that it isn’t true. Not only is it not true it is possible to mathematically demonstrate that the money would have been better spent directly into the economy. So why did the world’s top Economists give the wrong advice? Because they don’t know it is wrong. They assume it is true. It is true for them because it is the dogma that Neoclassical Economists teach at University. It is the orthodoxy of the religion and beyond question. Steve Keen questions that orthodoxy and finds it wrong at nearly every turn. Keen often uses a phrase attributed to Henry Mencken to describe this:
“Explanations exist; they have existed for all time; there is always a well-known solution to every human problem – neat, plausible, and wrong.”
Those who lived long enough in Britain to recall the years under Margaret Thatcher’s premiership may remember an experiment called “Monetarism”. The then government attempted to control inflation by throttling the money supply. Great theory. The problem was it didn’t work. It was just that – a theory. To this day the use of Quantitative Easing is used by the British Government in attempt to boost economic growth. They try it again and again at enormous cost. And again and again it doesn’t work. There is no reality-check to the exercise because it is based upon a myth. And myths abound in neoclassical economics. The myths perpetuate because of ideology.
The situation is so bad that Keen concludes thus:
“…economics is too important to leave to the economists.”
How is the author qualified to say this? Well he predicted the 2008 financial breakdown as far back as 2005 and had built a model to predict it as long ago as 1995. Sure he is an iconoclast. The streets are full of “end of the worlders” – what makes him different? He received the Revere Award from the Real World Economics Review for being the economist who most cogently warned of the crisis and his work is most likely to prevent future crisis. This basically means that other Economists rate his work as being world-leading. He understands as much as any Economists as to WHY markets fail. When he writes a book we should probably read it. But who is listening?
Apparently few people who matter. He describes it like this:
“As anyone who has tried to banter with an advocate of some esoteric religion knows, there is no point trying to debate fundamental beliefs with a zealot.”
Modern neoclassical economics is a belief-system like any religion. Many of Keen’s “zealots” interpret his book as:
“…just a left-wing diatribe against rational economics”
However for Keen this is not an issue of right versus left; it is right versus wrong.
“…if economics is to become less of a religion and more of a science, then the foundations of economics should be torn down and replaced.”
The Economics profession and its academics are on trial here. Their profession is in disrepute; can the rotten edifice be defended at all? Is it even a profession? Surely a ‘high-priesthood’ is a more apt description given the author’s fondness for describing their work in purely religious overtones. So what is the meat and potatoes of the argument? Well it is complicated and no review could really nail it down. This book is well over 450 pages long so I’ll be brief: neoclassical economist believe that the free market can self-stabilise and maximise welfare for the largest number of people. This is based upon a number of assumptions and mathematical tricks that fail to stand the test of reality. Their’s is not the creed of reality-based economics. In fact they ignore reality. The less real the theory the more ‘real’ it is for the neoclassicalist. Keen debunks this entirely using their own assumptions against them:
“A redistribution of income that favours the poor over the rich cannot be formally opposed by economics theory – in fact, economic theory requires such a redistribution before it can even derive a market demand curve!”
In short: everything you were told about economics is probably wrong. The Supply and Demand curve method of fixing market price is likely a fiction. How firms maximise profit is completely unlike the method described by economists. All this can be proven not only empirically but also mathematically. The assumptions we have all been taught to accept as “given” are highly suspect. Take any premise of the neoclassical religion and it can be turned on its head. This lead to one classic sarcastic comment from Galbraith that goes:
“…the poor don’t work hard enough because they are paid too much, and the rich don’t work hard enough because they aren’t paid enough.”
Sounds familiar? Economic theory has become whatever serves the interest of people with power. It suits them to maintain their position at the expense of the less fortunate. Hence economic theory is built around the need to preserve privilege no matter how damaging it can be demonstrated to be in the real world. This form of Capitalism is damaging our economy because it has nothing to do with maximising the welfare of the majority, it is designed to maximise the wealth of a minority, and they are paying the bills, so they get the economics that suits them.
“…inequality which is so much a characteristic of modern society reflects power rather than justice. This is one of the many instances where unsound economic theory makes economists the champions of policies which, if anything, undermine the economic foundations of modern society.”
Keynes was able to write as much back in 1936:
“…it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.”
Quite. So deeply ingrained is the orthodoxy that it leads to what Keen describes as a “bizarre vision of a market economy” when neoclassical economic models predict full employment yet millions are out of work; therefore the economists didn’t assume their models were wrong, no, instead they claimed that the unemployed wanted more leisure time hence gave up their jobs voluntarily. We kid you not. (Just go and see pages 263 and 264 of the paperback copy of this book.)
So what is really going on in the world? Anyone with their feet firmly in reality will conclude what most unconventional economists have concluded: capitalism is inherently unstable. Anyone using that assumption can see disaster approaching in an environment where the dominant ideology results in the removal of the support mechanisms designed to stabilise an unstable system. The warnings were all there but since they didn’t come from neoclassical economists those warning didn’t exist for the high-priesthood. Hence, for them, the crash could not have been predicted. They are in a prison of their own ideology and they cannot see daylight.
Their economic models dismiss the activities of the Financial Markets. For them credit and debt are no factor in the economy despite this being demonstrably not so. Post-2008 the neoclassical economists tinkered with their models to try and duplicate what went wrong. However their models are fundamentally flawed. As soon as the good times roll back in they will assume it is all down to their infinite wisdom and they will abandon the explanations for why the big crash happened. They will quickly forget the lessons they learnt and their models will quickly dispense with the tweaks that modelled reality. Hence the failure in basic understanding means their models are useless in preventing the next crash. Indeed, their models are useless for running an economy in the long run. They might as well model the motions of planets whilst ignoring the laws of gravity. The man with the broken wristwatch has the right time twice a day.
The instability of capitalism is not caused by “big Government” – this instability can be demonstrated in the historical record going way back before BIG Government ever existed. Financial crashes don’t happen because of Government intervention, they happen due to a lack of due care and diligence of public officials in charge of stopping this sort of nonsense happening. Somebody was asleep at the wheel in a universe where the economists argue there is no need for a wheel let alone a driver. In the world of reality-economics you will need a wheel, and a driver, and a proper understanding of debt, money-creation, market risks and uncertainty. We do NOT know the future. So the present is unstable.
Keen has his own (incomplete) model that he has used to model recent events. It takes into account all the factors that control our economy. When you strip away the ideology and the dogma you are left with a model that seems to work. If we don’t end up using reality-based economics then:
“The US economy in particular is likely to be trapped in a never-ending sequence of ‘double-dips’, just as Japan has been for the last two decades.”
So we are doomed to forever bump along the bottom? Is this the end of growth? Keen doesn’t entertain Green Economics and he only once briefly mentions the concept of a steady-state economy. At least he has heard of the idea if only to mention it in passing and recommends we read “The Limits to Growth“. A good starting point but it is an entire field of economics that has its very own explanations as to why our economies are sick and bumping along the bottom. At the end of the book Keen writes about the various alternative models to neoclassical economics but never mentions the concept limits to growth again. Clearly it would expand his knowledge of economics a great deal if he actually studied this area as deeply as all the others. Maybe he considers it to be too obscure or so outside the mainstream as to not worth bothering with? This cannot be so. Maybe he is trapped inside his own ideological ivory tower. If so he still has a long journey ahead. His models will predict the return to growth on an assumption of infinite resources. It will be the missing piece of the puzzle that conventional economics ignores: what goes up must come down. Keen ignores it too. As good as they are, Keen’s economic models will not work in the long term.
So what is Keen’s medicine for such a sick economy? A debt jubilee. No seriously! Yes, you would think it might be more profound but there is something to his argument. However he is a realist. In all his models he predicts the right cause of action is the one that hurts the banks. Hence he predicts that the “right” course of action will never be taken. We don’t hurt the banks. Are political classes are all hoping to get a job in one when they leave power.
So we live in a reality where Banks will be bailed out – not because it is the best policy for the economy – but because it is the best policy for the banks. Banks make money out of creating debt:
“Banks [..] have an innate desire to create as much debt as possible – which is why it is unwise to leave the level of debt creation up to the financial sector.”
The financial sector is unstable. It will pursue debt until it destroys the economy. What have they to lose? They are too big to fail. So what if you don’t need the money? You can always spend it on the stock market…
Economics has failed us. It is an extension of the ideology that runs all our lives:
“…this dilemma has a lot to do with one of the basic notions of economics, the belief that society is no more than the sum of its parts.”
Although Keen may not have realised it he has hit the nail on the head with this last statement. He is talking about a mathematical theory but this concept extends out into the structure of our economy inside our local communities too. Margaret Thatcher once said “there is no such thing as society” only a collection of self-serving individuals. It was her neoclassical belief that we didn’t have to worry about how society because our welfare would be maximised by the selfish behaviour of individuals. Is this right? Most of us would feel that this is wrong. It is wrong in economics and it is wrong in the real world.
Our communities are so much MORE than the sum of their parts. We achieve more together than we do alone. Yet the dominant economic paradigm since the 1970’s has taught us to ignore one another. This paradigm has reached the end of it life. It has no future but it is in a very safe place. It has all the power in the world and if it didn’t it would simply print the money it needed to buy it. If we are to realise the power within our communities we do not need the ideology of the left or right, we do not need big or small government, no; all we need are each other and the belief that WE have the power to remake economics into a model that serves everyone.
I cannot recommend Steve Keens book as an easy ready. Most of it is gibberish. However he has well defined the nuts and bolts of the problem. There are better works out there that will be easier to read, for example “How Markets Fail” by John Cassidy is an obvious choice. However Cassidy’s work is more closely aimed at Financial failure rather than the failure of economic orthodoxy. Only Keen has got right under the skin of the beast to show us its true colours. It is such a shame that Keen lacks the ability to explain the economics to the layman. He tries but he fails precisely because he refuses to use mathematical formulas and graphs. He harbours a strange belief that these makes it more difficult. It is a mistake.
If this book could be boiled down to half its size, and the central theorems explained in terms a layman could digest, then it would supply an important contribution to our understanding of how our world works…
If we don’t understand how it works, how it fails, we can never remake it anew.