I watched the ABC’s 7.30 Report yesterday (8.10.08), in which Steve Keen, Professor of economics at the University of Western Sydney, was interviewed about his views on the present global financial crisis. This reminded me of a book I read about four years ago by Steve Keen: Debunking Economics. The Naked Emperor of the Social Sciences. Pluto Press 2001. I read it very carefully from beginning to end, making numerous annotations, but had forgotten most of it.
I recommend the book strongly to anybody who is interested in economics, but particularly to those who believe that they have all the answers about the economy, without being blessed with the necessary background knowledge.
Steve Keen wrote the book to correct the misleading teaching of economics at universities. According to him (p.5), many students do only introductory courses in economics and then take their wisdom into their careers as managers, politicians etc. “They might learn, for example. that ‘externalities’ reduce the efficiency of the market mechanism. However, they will not learn that the ‘proof’ that markets are efficient is itself flawed. One needs an understanding of quite difficult areas of mathematics to realize the intellectual weaknesses of economics. ” However, Keen does not target economics in general, but the mainstream ‘neoclassical economics’.
A few quotes from the book:
p.2: “Economists blame these crises on particular economic policy failings by the relevant governments… Yet many non-economists harbour the suspicion that perhaps these crises were in some sense caused by following the advice of economists” This perspective was recently supported by none other than Joseph Stiglitz, a renowned economist, Chief Economist and Vice-President of the World Bank (he gives the examples of the collapse of the Russian economy after rapid privatization, and the Asian crisis, where the IMF’s enforcement of austerity seriously worsened a crisis which had been initiated by the international capital markets).
p.4: “Virtually every aspect of conventional economic theory is intellectually unsound; virtually every economic policy recommendation is just as likely to do general harm as it is to lead to the general good”.
p.7:”though weather forecasts are sometimes incorrect, overall meteorologists have an enviable record of accurate prediction” whereas the economic record is tragically bad.
p.8:”the intellectual discipline of economics shows no tendency to reform itself.”
p.11: the book’s message, that the economic mantra (“individuals should pursue their own interests and leave society’s overall interests to the market”) is wrong, is not new. Many books have made the same point in the past. What is new about this book is that it makes that point using economic theory itself.
Keen ‘debunks’ almost every assumption of neoclassical economics, including equilibrium assumptions. For each argument, he goes back to the basics, such as Jeremy Bentham’s utilitarianism, which really is at the basis of neoclassical economics with its claim that human behaviour is the product of innate drives to seek pleasure and avoid pain.
Of particular interest in the context of the present financial crisis is his detailed discussion of causes of crashes, e.g., those responsible for the Great Depression (the economic guru of the time, Irving Fisher, was dead sure that stock markets had permanently stabilized just weeks before the crash, an assumption based on his equilibrium theory, later distilled into the efficient markets hypothesis. He personally lost $100 million in the crash. He changed his ideas incorporating nonequilibrium assumptions. When the crash was over, people happily returned to his efficient market hypothesis, although it had been proven wrong).
I leave it at that and, again, recommend the book.
See also: http://knol.google.com/k/klaus-rohde/free-markets-and-free-trade-ecology-and/xk923bc3gp4/25#