Steve Keen: A Manifesto

Re-clothing the emperor

What is essentially a follow up to his evisceration of the neoclassical school, chronicled in Debunking Economics, Steve Keen in his latest book, The New Economics: A Manifesto, suggests ways in which neoclassical emperors stripped naked by their own logical fallacies and empirical delusions can be re-clothed in a way befitting of the environmental, monetary and energy challenges of the 21st century.

Keen rejects both the Thatcherite notion that there is no alternative to the neoclassical model of building everything up from the micro, and the prevailing orthodoxy which says that it’s the behaviour of atomized individuals that determine the structure of the economy.

In the book, Keen has shown a clear way to think about the economy that involves the abandonment of mainstream economics without abandoning thinking about the economy.

For Keen, the neoclassical school is not only superfluous with respect to the challenges society is faced with in the coming decades, but because it omits banks, debt and money from its modelling of capitalist society, it is also an anathema.

“We don’t need anything in neoclassical economics, just like astronomers don’t need anything from Ptolemy and the crazy vision that the earth is the centre of the universe”, says Keen.

The economist argues that it is no longer sufficient to criticise neoclassical economics, but to build an alternative macroeconomic paradigm about how the economy functions.

In the biggest chapter in the book, Money Matters, the economist explains that there is a tool for an expansion of an alternative approach to macroeconomics that allows for dynamic monetary modelling and how and why the neoclassical’s have been wrong to argue against this.

The Barter Myth

In the notes of the book, Keen references the late, great, David Graeber about the Barter Myth whose starting point is Adam Smith. In The Wealth of Nations, Smith says that the defining feature of humanity is the propensity to truck and barter which is the basis of a version of society unconditionally accepted by neoclassical economists.

But as both anthropological studies and Graeber’s own research show, no society in history has ever functioned using barter.

By citing Graeber, therefore, Keen is able to debunk both the neoclassical’s mythical model of how money came about and the notion that their money illusion is the dominant ideology in society.

Keen says that key to maintaining this illusion is the idea that anybody who worries about the actual nominal value of anything is being deceived and what actually matters is real value. This implies that the role played by banks is irrelevant.

But as Keen explains:

“Banks create money by lending out more than they get back in repayments. So bank loans create money. Equally on the government side, a government deficit creates money which means that both lending and deficits add to aggregate demand. If you’re trying to analyse aggregate demand but don’t have either of those mechanisms in your model, you’re not going to understand how it’s created.”

Keen continues:

“Since in the case of credit, new bank loans generate about 20 per cent of demand in the economy and can go negative, you can’t have a negative rate of turnover of money, but you can have negative credit. The volatility of credit by far dominates macroeconomics. By leaving out money and the creation of money, the neoclassical’s are omitting the most important thing that drives the economy.”

Beyond reform

As an intellectual ‘outsider’ who rejects the prevailing neoclassical orthodoxy, Keen acknowledges that the contradictions within the system are such that any attempt to reform the discipline is an exercise in futility.

“I’m conceding defeat on that front. I don’t think you reform it, I think you abolish it”, says Keen.

The economist notes that he is trying to help persuade scientists to break with professional courtesy by criticising establishment neoclassical ‘insiders’ who don’t want to rock the boat and whose vision of the economy is about as accurate as Ptolemy’s model of the universe was.

It’s precisely these kinds of highly inaccurate models and visions from ‘insiders’ that, historically, have led to paradigm shifts or revolutions instigated by ‘outsiders’.

“When you look at the work of Thomas Kuhn on what he called the structure of scientific revolutions”, says Keen, “you get an anomaly which the dominant paradigm can’t explain, struggles over indefinitely and finally, a new paradigm comes along and replaces it. And often that comes from outside the discipline.”

It is within this context that Keen is hoping to elevate the importance of System Dynamics as an alternative intellectual paradigm, while trying to persuade physicists and engineers to also become part of it and, as Keen puts it, “basically boot the economists out of the universities.”

Keen points out that the views of leading economic decision-makers within the discipline remain entrenched:

“The average intellectual is so committed to their own way of thinking, their own framework, that they simply try to reprocess shocking events through the lens of that paradigm”, says Keen.

Fiddling while Rome burns

In this way, problems are often compounded, as the Minsky Moment, for example, famously illustrates. Following the 2008 economic crisis, economist, Hyman Minsky, claimed that it wasn’t the science of the economics that was the underlying problem that led to the crash, but rather, some of the concepts. The economics, he said, needed to be fiddled with so what was built would look more like a legitimate science rather than less.

Keen implies that it’s precisely this kind of complacency within the discipline that makes it dangerous:

“The mainstream neoclassical economist is one of, if not the, most dangerous persons on this planet, even more so when looking at the work on climate change which could lead to the collapse of capitalism and maybe even the collapse of human civilization”, says Keen.

The economist cites a September, 2020 paper, by the Nobel Prize winner, William Nordhaus’ to illustrate that Nordhaus’s modelling is not only based on the false assumption that capitalism could cope with any environmental shocks, including climate change, but that it also incorrectly assumed an interchangeable relationship between geographically specific income levels and temperatures, and that variations in climate and income in space occur over time.

“When a guy who’s got the imprimatur of a professor at Yale and ends up getting a bloody Nobel Prize for it says that, and then is advising people on climate change on the assumption that the roof will protect you from climate change and that climate change is no worse than changing the temperature between New York and Florida, that is criminally negligent, frankly”, says Keen.

The economist notes that there are lawyers who are currently in the process of developing a crime of ecocide against ‘criminally negligent’ economists like Nordhaus.

Keen says that, paradoxically, it’s the neoliberal global north that is more likely to be negatively impacted by climate change because it has a much longer, less robust and more fragile supply chain system for the essentials of life compared to its counterpart in the south.

Looking ahead, the advice Keen gives to university students and young teenagers alike who are interested in economics, is to learn the growing discipline of System Dynamics which can be applied in a wide range of fields.

“It involves engineering concepts rather than the waffle of economics”, says Keen.

The economist also advises that students avoid enrolling at economics faculties, thus enabling them to die out on their own.

“A dozen years after the financial crisis”, says Keen, “they’re still using the same stupid models to not predict the future. So go and just study something else. Go and do System Dynamics and apply it to economics. Let the economists rot on their own vine.”