Review of Steve Keen: Debunking Economics, , Economic Record 78(241), 245-6

As Steve Keen observes, this is far from the first book to attack the validity of economics, and it is unlikely to be the last. Similarly, this is not the first review of such a book, and surely not the last. Some points are more or less inevitable in such a review, so I will make them as briefly as possible before moving on. First, critiques are, by nature, stronger in attacking existing orthodoxy than in presenting alternatives. Secondly, most criticisms are not entirely new, and the proponents of orthodoxy usually have some sort of response. Third, the version of orthodoxy presented in a critique will almost always be a little out-of-date and something of a caricature. Keen's book will no doubt generate all of these responses, but it is, nonetheless, well worth reading.

Although he is not absolutely consistent on this point, Keen generally uses the term 'economics' to refer to the simplified version of neoclassical economics taught to first year undergraduates and the associated set of prejudices in favour of free-market economic policies. As Keen correctly observes, this is all the economics that most students ever get, in part because economics is provided as a service course for business and accounting students and in part because the difficult, abstract and apparently irrelevant nature of the material turns many students off the subject.

If asked, many of these students would no doubt say that the subject is 'too mathematical', and many critiques of mainstream economics reinforce such prejudices with cheap shots against mathematical methods. While effective with their target audience, such attacks are inevitably dismissed as the product of ignorance or intellectual envy by economists who have mastered mathematical methods.

To his credit, Keen avoids this easy line. At the risk of limiting his readership he presents his arguments in a form at least as rigorous as, and often more rigorous than, that of the introductory texts he is attacking.

Since Keen lists Fisher, Hicks, Samuelson, Solow and Stiglitz as mainstream economists who have to some extent distanced themselves from 'conventional economics' it seems reasonable to narrow the target further and to say that Keen's critique is aimed at what is commonly called the 'Chicago school'. Although by no means dominant among academic economists, it is fair to say that the ideas of the Chicago school inform the thinking of most of the 'market economists' who appear on our television screens.

The first part of the book consists of a series of arguments to the effect that the foundations of economics are intellectually unsound. Unfortunately, Keen leads off with his weakest punch, based on the observation that it is not, in general possible to derive an aggregate demand curve of the type presented in introductory textbooks. Keen gives a very clear exposition of the derivation of an individual demand curve and an intuitive demonstration of the point that individual demands can only be aggregated in the case of identical preferences of Gorman polar form.

This naturally leads up to the rhetorical question: So What? Keen answers this question with the claim that 'it matters because economists are trying to prove that a market economy necessarily maximises social welfare. If they can't prove that the market demand falls smoothly as price rises, they can't prove that the market maximises social welfare.'

This is simply wrong. The standard proof that the market maximises social welfare (more precisely, that, in the absence of externalities and so on, a competitive equilibrium is Pareto-optimal) is based on the general equilibrium theory of Arrow and Debreu. This theory does not rely on demand curves or representative agents. In fact, heterogeneity among agents increases the potential gains from trade and therefore the welfare benefits of a market economy.

Keen is on stronger ground with his observations on economies of scale and natural monopoly, a topic that is usually glossed over in introductory presentations of economics and has only recently begun to receive serious attention from mainstream economists. Keen observes that the unwillingness of the half-trained economists who formulate most public policy to accept notions of natural monopoly has led to absurdities such as the rollout of duplicate optical fibre cables to half the country with no service at all for the other half.

Keen draws the conclusion that 'The proper manner in which the issue of "monopoly versus competition" should be approached is on a case-by-case basis, where the merits of one form or the other of organising production can be dispassionately considered. The instinctive economic bias against monopoly should be replaced by something more intelligent'. This sensible conclusion is consistent with the views of the majority of mainstream economists who accept that the conditions for a competitive equilibrium are frequently violated in reality. As such it constitutes a useful corrective to some widespread prejudices, but scarcely a knockout blow for economics.

Keen also provides a critique, in two parts, of the marginal productivity theory of distribution. The discussion of labour markets will shake the faith of those whose knowledge of the subject begins and ends with J B Clark, but, apart from some polemical asides, is not that much different from that presented in mainstream labour economics texts (at least, those not overly influenced by Chicago)

. The chapter entitled 'The Holy War over Capital is a summary of the Cambridge capital controversy (naturally, from the UK side). As with the consumer aggregation problem, the rhetorical question 'So What' is asked, but not effectively answered. The fact that aggregates like 'capital' and 'profit' are not, in general, well-defined is, as Keen observes, a big problem for Marxism, but it is essentially irrelevant for neoclassical economics.

Keen follows up with chapters on methodology, the failure of attempts to produce a genuinely dynamic version of neoclassical economics and the Keynesian critique of Walrasian equilibrium theory. This is relatively well-trodden ground, and Keen gives a good summary of the standard critiques of orthodoxy.

Of more interest in the current economic environment is a pair of chapters on asset markets. The first is focused on Fisher's debt-deflation theory of depressions which, as Keen observes, has been neglected by comparison with his strictly neoclassical theory of interest. Keen also presents the ideas of Keynesian theorists of financial instability such as the late Hyman Minsky. On the other hand, recent mainstream work on asset market overshooting and price bubbles, such as that of Shiller, is not discussed.

While these ideas have been discussed for some time, they are given added force by the magnitude of the financial bubble in the United States that is still in the process of deflating. Although the economics profession has yet to digest this episode, it is difficult to see how the efficient markets hypothesis can survive the observation of ludicrous asset valuations being formed in the most sophisticated and well-developed financial markets the world has ever seen.

Finally, Keen turns his attention to possible alternatives. Classical Marxism gets short shrift mainly because of the labour theory of value, which Keen correctly regards as a dead end. He gives a brief but sympathetic exposition of the ideas of the Austrian, post-Keynesian, Sraffian, complexity-theoretic and evolutionary schools, but admits that 'none of these is at present strong enough or complete enough to declare itself a contender for the title of "the" economic theory of the 21st Century'.

Keen gives little attention to developments within the mainstream. During the last thirty years however, there have been important developments in such areas as modelling of hysteresis, theories of asymmetric information and the analysis of increasing returns to scale. These internal developments have done more to undermine the simplistic certitudes of the first-year textbooks than any external critique.

If we accept both Keen's view that mainstream economics is an emperor with no clothes and his assessment that there is, as yet, no adequate alternative, our prospects for understanding the issues that dominate much of our lives seem bleak. However, while Keen has made some important critical points, his claim to have 'debunked' economics seems premature. On the whole, the most promising response to the problems identified by Keen would seem to be the continued development of more sophisticated and realistic approaches to mainstream economics, and the cultivation of an openminded and skeptical view of the world, in which economic theories are seen as tools to aid understanding rather than as bodies of received revelation.


Keen, Steve (2001),'Debunking Economics: The Naked Emperor of the Social Sciences', Pluto Press, Annandale. ppxvi+336, RRP not stated.