The introductory chapter of Debunking Economics is titled "No More Mr Nice Guy" and Keen's is not a delicate surgical attack but a rolling artillery barrage, targeting first the foundations of the edifice of neoclassical economics, then various parts of the superstructure that might somehow be standing after that.
The opening chapters attack the fundamental assumptions of supply and demand curves. Chapter two considers demand curves, focusing on the unrealistic assumptions used to aggregate utility by going from individual preferences to social ones. The Sonnenshein-Mantel-Debreu conditions are effectively a reductio ad absurdum, showing that the standard approach only works with a single consumer and one commodity, but traditional economics demonstrates their necessity and then continues unchecked. Turning to supply curves, Keen presents arguments due to Sraffa that, rather than facing costs that increase with output, firms mostly face falling marginal costs. This destroys the basis for calculations of output and employment.
Chapter four analyses a mathematical flaw in the standard argument against monopolies (often used to justify opposition to large firms). Following Sraffa, chapter five argues that labour is not just another commodity, and in particular that wages do not reflect contributions to productivity. This undermines models of the labour market that have been used to oppose minimum wage laws. And, looking back to a debate in the 1960s, chapter six explains how the rate of profit is not just the marginal productivity of capital: "there is no consistent relationship between factor productivity and factor incomes".
Chapter seven turns philosophical. Its primary target is the idea that the assumptions of a theory don't matter provided that it works, carried to a bizarre extreme in Milton Friedman's claim that the less realistic the assumptions of a model are the better. (Keen also throws in a bit of Lakatos here and, as a distraction, a half-endorsement of Bohm's ideas about quantum mechanics.) I think it's clear that economic theory is far from being so successful that its flaws can be ignored, but I also think that this is important, as those parts with significant practical successes need to be marked for salvage.
Chapter eight focuses on the failure of neoclassical economics to take time into account, through its insistence on equilibrium analysis. Keen argues for a fully dynamic economics, using tools such as differential equations and not just linear algebra.
Chapter nine tackles Say's Law, that there has to be a balance between supply and demand, and its modern reworking as Walras' Law, that "the sum of all notional excess demands is zero". Here Keen takes a historical approach, presenting critiques by Keynes and Marx (channeled by Keynes).
Turning to the pricing of financial assets, chapter ten is an attack on the Efficient Market Hypothesis. This is followed by a chapter on alternative approaches to modelling markets and breakdowns: fractal models, the inefficient markets hypothesis of Haugen, and the financial instability hypothesis of Minsky.
Chapter twelve elaborates on some of the mathematical failings of neoclassical economics, but argues that the problem with economics is not mathematics but rather bad or inappropriate mathematics.
In something of a digression, Keen spends a chapter describing Marx's labor theory of value and the contortions Marxists have gone through in trying to defend it; he argues that Marxist economics is much stronger without it.
A final chapter looks at some of the alternatives to neoclassical economics: Austrian economics, Post-Keynesian economics, Sraffian economics, complexity theory, and evolutionary economics. Keen provides brief summaries of these, with explanations of how they differ from the mainstream and evaluations of their strengths and weaknesses. None of these are in a position to "take over" economics by themselves, but all are likely to contribute something to its reinvention.
There are problems with economics that Keen doesn't address at all. My major concerns, for example, have always been with its attempts to subsume politics — at worst to make the world work like its models — and its poor connection to economic history and the other social sciences. As an analysis of the failures of economic theory on its own ground, however, Debunking Economics presents a more fundamental critique. It leaves neoclassical economics seeming less like Newtonian physics and more like Aristotelian natural philosophy dressed up with mathematics.
Keen's summary of standard economics accurately reflects the introductory textbooks I have read. And the applied economics I have read does seem overly reliant on static linear tools such as multiple regression. But Keen also assures us that key assumptions made in undergraduate texts are not significantly relaxed in more advanced research, and it's hard for an outsider to judge how accurate that claim is. Surely there have to be many more economists using differential equations and other forms of dynamic analysis than Keen suggests. And I've always assumed that someone, somewhere, has to be using supercomputers to run huge multi-agent simulations of the economy, avoiding the siren call of spuriously simple algebraic analysis by explicitly modelling the circulation of money in the equivalent of climatologists' Global Circulation Models.
One attractive feature of Debunking Economics is Keen's clear presentation using simple and straightforward language. He is pleasantly informal — with amusing chapter titles and sometimes pithy language — and much more readable than most economics textbooks, but this doesn't come at the expense of clarity or accuracy. And unlike some critics from the fringes of academia, he's neither self-aggrandizing nor in the grip of any kind of persecution complex, keeping his attention on ideas rather than on personalities.
Keen explicitly targets two audiences with Debunking Economics. One consists of policy makers and others concerned about "the common good", who need to understand the limits of economics to avoid being bamboozled by economists. The other consists of students of economics, who Keen sees as the key to reform of the discipline. It won't appeal to anti-intellectual opponents of economics, but for anyone else seeking a critical overview of the discipline Debunking Economics is highly recommended.
Note: Steve Keen came to my attention for his prediction and analysis of the 2008 financial crash. The theory behind this is only touched on in Debunking Economics, but readers interested in current events should look at his "Debtwatch" blog.
March 2009
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