Steve Keen, Debunking
Economics: The Naked Emperor of the Social Sciences
Keen gives a good HET account of some pendulum swings in economics and of the tendency for various theories to live on in the face of significant problems, because of practical problems with falsificationism. He objects that the tendency has been to ride with the theory that presents the ‘most scientific’ image, if not the most detailed empirical evidence. He further objects that neoclassical economists don’t examine the Lakatosion hard core of their beliefs. In large part, his claim is that economists have used bad mathematics to produce bad economics. While written in the critical tradition of Wheelwright and Stilwell, Keen’s aspiration, however, is to a more rigorous application of mathematics to economics and what he offers is more a critique of neoclassical sins of commission (in faulty formal analysis) than a critique of sins of omission regarding political or ethical themes. He is just as keen to show inconsistencies in Marx.
HET tends to proceed by action and reaction (as with Keynes in reaction to the Great Depression, and Friedman in reaction to the growth of the welfare state). Keen’s reaction is rather more amorphous – he wishes to react to a crisis which he concedes most professional economists don’t know they face. He writes with clarity and simplicity and offers himself as a voice of the coming revolution the profession needs to have. The economics he wants to debunk is orthodox static equilibrium analysis. While its origins may be understandable – given the mathematics available at the time – his argument is that it is now inexcusable to allow outdated and erroneous ideas to live on. In a paraphrase of Wheelwright, the problem lies in what universities teach. Students arrive. They must be taught. Orthodoxy is all that most economists know, and it is therefore what they teach. The mathematics required to model complex dynamic processes is now much more advanced and available however, and it is to chaos theory and the like that economic theory must now turn to cleanse itself. Economists must give up the notion that the end result of a dynamic process is a static equilibrium. Such obsession with equilibrium has imposed enormous costs on economics, and must now be left behind. Within chaos theory (the new Holy Grail) equilibrium is not where the action is, but merely tells you where the model will never be. Economists should give up treating as stationary an entity which is forever changing.
Keen offers an unusual combination of HET and mathematics, and well conveys a mathematical critique to a non-mathematical readership. His concern is with both the evolution of theory and the ideological constraints which make it so difficult for economists to escape their past. In part, Keen’s concern is with inconsistencies in orthodox theory (as revealed by conventional mathematics) and in part, with the failure of economic theory to evolve – in its treatment of disequilibrium and dynamics – in ways made possible by newer mathematical techniques (chaos theory).
Keen’s critique is nothing if not bold and pervasive. In the macro context he debunks the notion that the end point of a dynamic process is a static equilibrium and ultimately objects that macroeconomics may be counterproductive (p. 212). In microeconomics, he debunks the theory of perfect competition and the concept of ‘an’ equilibrium wage rate, and he contends that microeconomics is mis-directed. Parts of his critique have been foretold by others eg Herbert Simon’s condemnation that the orthodox textbooks are “a scandal” in terms of their treatment of cost curves, Dobb’s objection that efficiency and equity concepts are not as separable as orthodoxy maintains, Thurow’s objection to the orthodox economics of the labour market and to the inadequacies of microeconomics as a foundation for macroeconomics (p. 126), Hielbronner’s complaint that ideology lies at the root of disagreement and disability in economics, and Sen’s comments regarding the irrationality of the economic definition of the rational (p52).
For Keen the inconsistencies and deficiencies he identifies mean that neoclassical orthodox economics is no longer a progressive scientific research program (p. 148) but one in crisis and in need of reconstruction around a focus of disequilibrium, dynamics, complexity and chaos. His objection is not to the excessive use of mathematics – and putative excessive formalism and sterility of economic theory – but to the insufficient and inadequate use of mathematics. Accordingly he argues that neoclassical economics is replete with logical inconsistencies and predictive failures. His sense of ‘crisis’ in economics is distilled from the unpopularity of economists, from falling enrolments and from the prospect that the Russian transition and the SE Asian crisis may have been made worse by economists (p. 3; a point also argued by James Galbraith and others).
To leap from this to what he terms the “current parlours state of dangerous irrelevance” of economics (p. 10) is quite a jump however – especially given recent surges in environmental economics, economics of law, and an unprecedented boom in the US economy – and one which will be seen by his critics as a logical inconsistency within his own work. To dismiss the healthy state of the US economy as “coincidence” (p. 213) will not seem all-persuasive to many. Similarly, in discussing Sraffa, he tabulates 1952 data in elaborating points about how most firms actually behave. While institutional history and distribution of income clearly do matter, and while (to add an example) Becker’s 1990 advice that the best Soviet transition is a rapid transition may indeed now look ill considered, much else in Becker’s ‘economics of life’ has become grist to the orthodox mill and the claims of “imperialist” economics are not generally in retreat. There is an obvious gap between Keen’s conclusion that virtually any economic policy recommendation is as likely to be harmful as helpful (p4) on the one hand, and the orthodox profession’s still confident assertion of economics as imperialist science, on the other hand. That yawning gap is a schism rather than a mere gully.
Will the profession pay heed? In respect of dynamics, disequilibrium, complexity and chaos theory, active groups within the profession are already hard at it. With respect to Keen’s strictures about demand and supply curves, the result is less assured.
Given Keen’s bold claim that virtually everything economists believe is wrong, and his conclusion that virtually any policy recommendation in economics is as likely to be harmful as helpful, Keen may paradoxically have ensured that his voice will be heard only by the converted, leaving the orthodox establishment to believe that this is an irrelevant and extravagant exercise in political economy. In point of fact Keen works hard to develop a critique of orthodoxy on its own terms, and he writes thoughtfully and well in an attempt to force even detractors to critically re-appraise the role of various assumptions in economic theory. The fact remains, however, that capitalism and market de-regulation have established a new found dominance in the world at just the time that Keen contends that its underlying theory stands revealed as disastrously inadequate.
Given also his empathic point that ideology has held back the recognition of truth in economics, an historian of thought might have been expected to wonder whether a less confrontationist and all pervasive attack on orthodoxy might have attracted more readers and borne more fruit. “Hasten more slowly” just might have been the name of this particular disequilibrium dynamic, more especially since his critics will consider that after establishing certain possibilities Keen tends to treat those possibilities as proofs (p. 122).
L A Duhs
School of Economics
The University of Queensland