on 1 November 2011
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.
on 12 October 2011
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.
on 18 November 2011
... 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.
on 29 October 2011
As a writer on strategy myself, I think this is the most interesting book that I've read in the last decade - and I've read a heck of a lot in that decade. It is not just the economics, but also the politics of what is going on.
There are a number of 'so whats', but the first important one for the private investor is that our central bankers and economic advisors are generally from the neo-classical school of economics, whose assumptions are, as Steve Keen shows, fundamentally flawed and whose theory demonstrably does not work empirically. What this means is that the people at the top of the economic shop don't know what their doing. And what is worse, they don't know that they don't know what they're doing. They are in a state of, as they say in coaching, unconscious incompetence.
Although difficult in places - and admittedly so, because the subject is difficult - Debunking Economics is nevertheless an excellent book, hugely thought provoking, and a 'must read' for any one who's interested in the Western politico-economic model, warts and all.
on 10 March 2012
In fact, if you are a conventional neoclassical economist - one of the ones that got us into this mess, in other words - you should take your blood pressure pills. Steve Keen carves his way through your jungle of bad, misapplied and out of date mathematics in a way that even I, a very non-mathematical historical writer, could cope with. He's funny, he's clear, he's logical and he completely destroys any claims mainstream economists have to guide real world economic policy. Of course, they've done a good demolition job of that themselves, but still it's nice to see it all laid out with such devastating clarity.
Don't worry about the maths, by the way - he tells you where you could skip scary bits and when you might need a large jolt of coffee. There are places where I even laughed out loud, although Marx on value is just rather sad.
It's not easy to understand such a complicated social phenomenon as our present global economy, but this makes a vital start. If you have anything to do with economics or finance, you must read this book.
on 23 October 2011
I've been reading economics for over 20 years and the more I read the more difficult the subject seems to get. One despairs at times as to whether one knows anything. Largely because so much economics is compartmentalised - like books on individual human diseases.
Steve Keen's book is a tour de force in getting a handle on the big picture of core issues which underwrite economics if you think the conventional account limited or unsatisfactory - does supply and demand work, for example.
At towards 500 pages of often intricate argument, it's hardly a light read. But the subject is not a light one or ever going to be easy to comprehend. I'm not sure I could get far with this book at all without a substantial economics background.
Keen says his book is really two. One examining the deficiencies of conventional economics and another laying out different perspectives.
It will take me a long time to do full justice to everything in Debunking Economics. In fact, you might as well put all other books aside for the duration if you are setting out to understand the economy as a whole.
Steve Keen is a blinking hero of economics in my eyes! Not many of them around are there? Most 'economists' appear to be in the pay of one or another commercial interest.
I was looking forward to getting this book and at first all went well but I then found myself having problems as the economics began. Eventually I ploughed through it. It wasn't that it was particularly difficult, it was just so tedious. To be fair to the author he did sign-post this, explaining that it was necessary to include because this was what he was debunking.
However, it gets better and as this is an important book it is worthwhile not giving up. Economics is a social science, which means it is not really a science at all. The old joke that if you put three economists in a room you will end up with three different economic theories may no longer be true because neo-classical economics now seems to have become generally accepted as orthodoxy. Unfortunately, it also seems to be fundamentally wrong.
If this was post-modern literary theory then it wouldn't matter much unless you were a post-modern literary theorist, but this is economics and it has seeped into the wider culture. It is being used to manage the current economic crisis; it is seeping into business and it especially influences public policy. For all its faults, capitalism is now the only game in town and how that game is played and what rules are used to play it affects us all.
on 2 January 2016
Steve Keen is a virtuoso economist who takes the Keynsian / Austrian economics debacle and resets it into a real world functionality based in actual observations, not crass economic theory. It is 'Theory' (currently the apalling Keynsian) that has made us all guinea pigs in this gigantic economic experiment for the last 80 years ... and is probably the reason you are buying his book in the first place ...
So ... the book is unmatched in it's contemporary interpretation of real economics, and Keen may be seen as the new Guru of economics in the coming Bankster storms.
However ... DON'T buy the Kindle version ... It comes with NO diagrams, charts or graphs! ... and Keen has the unadulterated gall to suggest that the deliberate elimination of these in the Kindle addition is a BENEFIT !! ... Trying to read text explanations in an un-illustrated format is like driving blindfold, and detracts massively from the reading experience.
It baffles me that other reviewers don't comment - perhaps they are predominantly into paper versions ... which Keen then suggests I purchase "if I want the Charts and Diagrams". The idea I need to buy two copies of a work just to have a complete copy seems trite ... and also appears to add significantly to the author's revenues perhaps ? ... In fairness he also says I can download the Charts free as a pdf ... but I sooo love having to swap between two Apps continuously just to complete my reading delectation !
Note: the charts in the pdf are un-numbered and nearly impossible to relate to the text ... perhaps it's becuase I'm not as intelligent as an Economist to be able to do this ... or indeed ... to even read a book without being so flummoxed and distracted by those liney-graphiccy things on the same page .. that I suffer spontaneous dyslexia and lose all rationale ...
Boy ... I hope Keen reads this review and then personally apologises by shouting down to me from the window in his Ivory Tower ...
DON'T BUY THE KINDLE VERSION !
"Economics is extremely useful as a form of employment for economists" - Galbraith.
This book is not an easy read but Keen really knows his stuff. He demonstrates that there are exceptions to Galbraith's Rule - some economists actually know what they're talking about. Not all of them live in a royal nudist colony.
As Keen says in his "Preface to the First Edition":
"Why has economics persisted with a theory which has comprehensively been shown to be unsound? Why, despite the destructive impact of economic policies, does economics continue to be the toolkit which politicians and bureaucrats apply to almost all social and economic issues?"
I also particularly liked his pertinent observations on probability theory.
There is hope for a science of Economics yet. A science that can actually help people instead of hindering them.
on 20 September 2012
Coz' if they cannot do that, in as plain language and logic as those in which Steve Keen leads his assault on mainstream economic theory, then that theory is not only irrelevant to policy-making, but outright harmful to it, and therefore to us all.
At times, I could not believe my eyes when I read the book.
I sure hope that someone comes with that explanation soon ...