Debunking Economics - Revised and Expanded Edition: The Naked Emperor Dethroned? [Paperback]

 

 

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Read this book. Simply put, Keen's book should be required reading for economists, investors, and bankers, and most especially for central bankers. It should also be read by economics students, to street-proof them against neo-classical economics doctrine. The neo-classical synthesis has for some decades been so dominant that it is presented as fact, and most students will never even hear that there are alternative schools of economic thought. It is high time for people to realise that neo-classical economics is not a useful simplification, but rather, it is an irrealist dogma that is wrong root and branch, a dogma that has led and continues to lead to profound mistakes in outlook and policy guidance.

A crucial part of the book explains that the root of both the Great Depression of the 1930s and the crisis we are in today is a result of the fact that aggregate demand in the macro-economy is composed of income plus the change in debt. Prof. Keen explains (as has long been understood in specialist circles, and every central banker knows) that when banks make loans, they are actually creating new money, not merely redistributing money from depositors to borrowers. When too many loans are issued and a debt mountain gets too great (as it has recently throughout the OECD, driven by enormous quantities of "Ponzi debt", i.e. debt-money created by banks by loaning to each other and to non-bank financial companies for speculative investment in asset bubbles), then private citizens, as well as governments, begin "deleveraging" en masse, i.e. paying down debt instead of spending on consumption or investment in real-economy infrastructure. As a result, the economy goes into a tailspin. The only way to get out of this mess is either to default on much of the accumulated debt, or to endure lower standards of living and a depressed economy for a decade or so, as the debtor class (the great majority) attempts to pay down debt, to the benefit of the creditor class.

The latter is the strategy government leaders are knowingly or unknowingly following -- they are doing everything they can to protect the creditor class at the expense of the debtor class. We are facing a decade of higher taxes, lower government services, deferred investments in crucial new infrastructure (e.g. clean energy systems), and a lower standard of living, all in an effort to pay off debts many of which should never have been incurred: derivatives-trading bets on rising asset bubbles created by leveraged hedge funds and mortgage speculators, among others, debts which were (and are again being, as I write this) transferred onto the shoulders of taxpayers via bank bail-outs when the bets went sour. Yet simply shuffling debt from the books of derivatives-trading banks onto the public Treasury is proving to be insufficient. The debt bubble hanging over the entire OECD is just too big. The banks offloaded so much debt onto sovereigns that several sovereigns now are tottering into insolvency, which in turn threatens the same banks that have been dumping their bad loans onto the sovereigns, since much of the money owed by sovereigns is owed to those same banks! Yes, we are being ripped off, at the grandest possible scale. The trouble is that systemic risk occasioned by excessive accumulated debt isn't lessened by squeezing the debt-balloon in one place, only to have the bubble re-appear in another part of the systemic debt balloon; systemic risk from our vast private plus public over-indebtedness can be lessened only by letting air out of the balloon. What is really needed is some kind of debt jubilee -- a write-down, a cancellation of a large fraction of our collective debts, so that money can once again get spent on real-economy goods and services and much-needed real infrastructure investments, rather than rewarding the shareholders and managers of banks for their incompetence and irresponsibility.

As Keen's book explains, the trouble is that policy-makers and their neo-classically trained economist-advisors have a very hard time seeing this, because according to neo-classical economics, long-lasting recessions and depressions are impossible; the maths of their model do not allow for depressions. The economy is assumed never to move far from equilibrium and to be quickly self-correcting, and debt is simply ignored, left out of the model. This is complete nonsense. Prof. Keen explains in detail why and how it is nonsense, and how and why debt matters. That is why this book should be required reading for bankers, especially central bankers: they are continuing to make policy mistakes based on a fundamental misunderstanding of the nature of the economy, because they've all been indoctrinated into the neo-classical school, and few if any of them appear to genuinely understand the importance of accumulated debt (and its relationship to aggregate demand) in the economy they are supposed to be managing.

Prof. Keen's book thoroughly debunks what sadly has become the mainstream branch of economics since the mid-1970s. Neo-classical economics is a laughably unrealistic and mathematically provably incorrect static model of an imaginary economy whose assumptions and results bear no comfortable relationship with the real economy at all. The book explains in detail the mistakes at the root of this intellectual cult, a cult that has underlain the broad thrust of policy for decades and brought us to the macro-economic impasse we are in now. I think Keen's book may be the seminal work that sounds the death-knell for the neo-classical synthesis, and the emergence into public consciousness of competing schools, above all the realist, data-driven post-Keynesian economic modelling that Prof. Keen himself is working on, and key results of which are outlined in the later chapters of the book. (However, the latest Rijksbank Nobel Memorial Prize in Economics was once again allocated to a pair of neo-classical economists: the high priests of the neo-classical order will not give up their faith merely because it's been clearly and indisputably shown to be nonsense and to have paved the way for fantastic debt mountains, Wall Street mega-swindles and ongoing crises.

Those who manage our economies, ostensibly in the public interest, need to understand the issues outlined in Debunking Economics, as a first step to acquiring the economic literacy needed to understand that we (well: they, on our behalf) must re-write the rules of finance, and banking in particular, to make speculative lending by banks on paper assets illegal. Otherwise we will eventually exit the current asset-price-bubble driven debt crisis only to start the game over, and soon enter a new cycle of over-indebtedness and financial mega-fraud. Hopefully, developing a prescription for a new set of banking and financial laws will be the subject of future work by non-neoclassical economists.

Must admit that I missed the publication of the first edition in 2000, but I am certainly pleased to have picked up the second edition. This book is remarkable on several counts.
Firstly, it is an accurate, and quite objective, review of the state of neo-classical economics. At every turn the author backs up his observations and provides a clear analysis of the fundamental problems faced by the 'body of knowledge' taught to A level and under-graduate students. I really can't take exception to any of his points - they are well argued and patently true. His debunking of representative agent models, whilst not the most difficult thing in the world to carry out, is firmly based on logic and as mathematical in nature as the reprehensible models he rubbishes. Job done.
Secondly, it is a cogent argument for why disequilibrium models must form the foundation of economic's 'body of knowledge'. The exact form of those models can certainly be debated, but at the very least we must move away from pretending that a capitalist economy is, at any time, in equilibrium! The ease with which Steve Keen develops a working model of capitalism and its inherent instability should be sufficient to convince any rational person (so that excludes neo-classical economists).
Thirdly, it's simply a good read! Even when Steve Keen moves into "I told you so" mode, he's funny - when was the last time you read a humorous economics text (and I don't include Freakanomics in that set)?
Finally, it's refreshing to see Marx, Sraffa, Schumpeter, Keynes and Minsky portrayed in the kind light that they richly deserve - Keen is an excellent advocate for these 'sensible thinkers' and I thank him for this. The text's bibliography is worth the price of the book alone!
All in all, a great text which will probably get ignored or marginalised. At any rate, Steve, you get my vote for the clearest thinking economist since Minsky et al. I look forward to your next work.

... but all the evidence around you says that their medicine isn't working, this book explains why.

For years and years, I've wanted to learn enough about economics to be able to take on those who say that markets are always efficient, that government is always bad, that regulation is always bad, and that the system we have is the best possible. This book gives you the ammunition to do that.

It shows that the foundations of neoclassical economics are a good deal less solid than its practitioners' self confidence. To be frank, I was actually pretty shocked at what he reveals about the huge self-contradictions, illogic and flakymathematics underpinning the economic conventional wisdom. I'm not the most distinguished scientist in the world, but with a Cambridge PhD in Theoretical Chemistry I hope I can appreciate how good science is *supposed* to work, and what Keen reveals shows that neoclassical economics is closer to a cargo cult than a science. The words "Seriously?!", "You're kidding?" and "No way!" emerged from my lips somewhat frequently when reading. One of the things Keen points out is that frequently the problems have been known for decades and ignored by the mainstream economic community; often the problems were pointed out by the theories' original authors themselves.

Many of the charges he levels would not be heinous sins in themselves: there's nothing wrong with making simplifying assumptions in a model, or favouring linear models over more complex ones *provided* you are fully aware of and honest about the simplification, *and* you test your theory against the evidence. If your model agrees with the facts and has predictive power then you are entitled to claim that the bits of reality that you simplified don't actually matter that much. Unfortunately self-contradictory assumptions are more of a problem, even more so if you don't realise you're making them. Economics, like epidemiology, is the kind of science that one cannot ethically test directly (not that people didn't have a damn good try in South America), but the evidence in the wreckage of the global economy at the moment, and in the track record of numerous disastrous interventions by the World Bank and the IMF, tends to show that the dubious foundations of neoclassical models are not salvaged by enormous power to predict reality.

One of the charges levelled at mainstream economics since the crash is that it had been over-obsessed with elaborate mathematical modelling at the expense of trying to explain observed behaviour. Keen shows that there is nothing wrong with mathematics in economics, and that modern techniques that are routinely used elsewhere in science but have yet to penetrate the economic profession can shed much light on macroeconomic complexity. It's just that the mainstream has been preoccupied with building ever-more elaborate models using ancient techniques dubiously applied to dodgy and self-contradictory assumptions, which must make it one of the longest bouts of mental masturbation in history.

It's not always an easy read, and slightly ranty in places but it is full of the pithy insights and clear thinking that typify the best writing.

One of the best things I learned from the book was a point made by Minsky in the 1950s. Since we've had depressions, then a valid macroeconomic theory must have a depression as one of its possible states. Neoclassical theories, with their unwarranted assumption that the market is always near and tending to equilibrium, fail this test.

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4.0 out of 5 stars Oh Im Brilliant Me
Humility, even if feigned, is a virtue, something Steve cannot be accused of.
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5.0 out of 5 stars A Comprehensive Assault on Neoclassical Economics
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Published 1 month ago by Ronald Stuart

4.0 out of 5 stars Fact and fiction
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Published 1 month ago by Lucille Dassenaieke

5.0 out of 5 stars Debunking Economics is a comprehensive critique of textbook economics.
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Published 3 months ago by Brisbane reader

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5.0 out of 5 stars Best book on economics I've ever read
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Published 4 months ago by Mike Newland

5.0 out of 5 stars No better well rounded book on economics!
I received my copy today, but had to start my review after only a few pages in.

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Published 4 months ago by JK

5.0 out of 5 stars Google DebtWatch -
Professor of Economics Steve Keen is the most important Economic thinker working today - Private debt will never be the same -

Published 4 months ago by cries and whispers

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