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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.
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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.
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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.
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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.
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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.
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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.
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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.
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on 26 May 2012
This is a difficult book to read at some points, but overall well worth the effort. There is a fair amount of mathematics and abstract economic theory involved in many parts of it and i struggled to understand some of those parts and frankly skipped through others. It could do with being a lot shorter and more focused on the core argument rather than going through so many theoretical and mathematical proofs of why standard economic theory is wrong, when a simple look at the historical record to present on its own is enough to show standard economic theory is empirically wildly wrong.

However the parts of the book that i could understand and did care about were well worth it. Keen argues that Keynes and Fisher and other post Great Depression economists were completely misinterpreted by the majority of economists. While Keynes and Fisher saw capitalism as an inherently unstable system which was prone to cyclical booms and busts and required strict government regulation to work to the advantage of the majority, the majority of economists have tried to pretend that a completely deregulated capitalist system tends towards constant equilibrium or balance.

He goes on to point out that in trying to predict the future of an economy there are simply too many variables and too many unpredictable developments for any calculated risks to be taken - what we're dealing with isn't risk (calculable) but uncertainty (incalculable).

The core of his argument (backed up with plenty of real world examples and figures) is that most economic growth is based on credit (which is also debt on the other side of the coin) - credit provided by private banks to businesses and individuals, with most money also the result of private banks providing it as credit (loans/mortgages etc). Without strict regulation banks start lending carelessly, without worrying about whether they've been repaid, during economic booms caused by the gradual expansion of credit. Frauds ('ponzi schemes') develop under cover of the boom. Then when everyone realises many loans have been made which the debtors can never repay and that there has been fraud, there's a bust and banks stop giving out loans, leading to a credit crunch.

If inflation is allowed to stay relatively high this leads to only a short-lived recession since inflation reduces the value of money and so of debts too, making debts shrink to manageable sizes.

If inflation is kept low (as economic orthodoxy would demand) the debts remain high and the recession becomes a depression as in the Great Depression and the current one.

The only other way to get out of a depression is to forgive all debts, especially as the debtors can't repay them anyway (a 'Jubilee' based on the ancient Babylonian festivals which included debt forgiveness).

Unlike most economics, this all makes sense and fits in with real world events. The only reason I don't give the book 5 stars instead of four is that it's too long and includes too many mathematical and theoretical exercises which will put off many readers and made the book longer and more difficult to read than it needs to be.
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on 5 January 2012
This book is academic and you have to be really interested in the subject.
That said, I've enjoyed dipping in and out of it and savouring the fine wisdom of Professor Keen. This book contains new thinking, so new that it even seems bizarre.People who are looking for new solutions to old problems will see the sense of it.I would encourage any person who is concerned about the global financial crisis to read it. Professor Keen is the financial messiah for the 21st century.
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on 30 October 2011
Steve Keen's "Debunking Economics" is a thorough and most challenging document in the ongoing struggle to understand the limitations of modern social science and economics in particular. It deserves a most careful reading and comparison with other credible studies of economics listed below.

It is similar to, but much longer than Hill and Myatt's "The Economics Anti-Textbook" in that they both follow the main topics of undergraduate textbooks (micro only in EAT). Hill and Myatt present the orthodox textbook economic positions clearly, succinctly and sufficiently to understand their eclectic critique. By comparison, for the depth and extent of Keen critique I doubt his summaries of the orthodoxy will truly be understood by the non-economically trained general reader, and therefore his critique might also not be fully appreciated: One still needs to study an economics textbook to understand Keen's critique.

But what a critique it is! Eminiently clear and precise it is hard to find fault with it.

Taken overall, Keen's is the far more comprehensive, deeper, more integrated, and more cogent critique. Both are helpful to grasp the weakness of positivist economics with its false and fictional 'value free' status (concealed value judgements abound in every choice made in every textbook!) and the urgency of the need to radically revise it, as mentioned above, for truth sake and the public interest. One question: Does the self-referencing throughout the text help or hinder the argument?

Perhaps a second, shorter simpler version for the general public (say between 50-250pp with a catchy title like "The Market Mechanism: Why it doesn't work and what does." might penetrate the mass media, and then the public consciousness more directly and lead the policy elites to take note of the larger work. What is most needed is a radical re-examination of economics (and social science altogether) to see how we can improve it, both for the sake of truth and the common good (after all economics like politics is a practical knowledge).

But, I would like to recommend a book that penetrates more deeply into the political and economic philosophy behind the modern "science" of economics by examining Hobbes, Locke, Smith, Marshall, Keynes, Hayek, Myrdal, and Rational Expectations Economics partly in the light of Aristotle.

That book is "Deductive Irrationality. A Commonsense Critique of Economic Rationalism" 073911624X) by Stephen McCarthy and David Kehl based on the teaching and writings of Dr. Richard W. Staveley here in Brisbane, Australia from the 1960s to the end of the last century.

Together, Deductive Irrationality and Debunking Economics are complementary and deserve assiduous study as part of the renovation of the social sciences.

Other books of interest reviewing economics include:

1. Deductive Irrationality.A Commonsense Critique of Economic Rationalism
2. The Economics Anti-Textbook by Rod Hill and Tony Myatt;
3. The Skeptical Economist by J. Aldred;
4. Economics for the Rest of Us by Moshe Adler;
5. How Markets Fail by John Cassidy;
6. Animal Spirits by George Akerloff and Robert Schiller.

It is indeed an exciting time to think through the meaning of economics and consider what must eventually come after the failure of positivist social science.

Happy reading!
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