Tuesday, 4 September 2012

Debunking Keen

Australian economist Steve Keen visits New Zealand this week, which for some reason has some of my readers excited.

Like several others outside the mainstream, Keen famously predicted the 20o7 crash—but as others have said Keen has successfully predicted 6 of the last 2 recessions. And his penchant for predictions was confounded soon afterwards with his premature prediction of the collapse of the Australian housing market.

Mr Keen made a bet with Macquarie Group interest rate strategist Rory Robertson after claiming that house prices would dive by 40% when the GFC was at its worst.
Fortunately his predictions didn’t eventuate, and now Mr Keen will deliver on his promise to walk 224km from Canberra to the top of Australia’s highest mountain, Mt Kosciuszko. It remains to be seen whether he will wear a t-shirt saying “I was hopelessly wrong on home prices! Ask me how.”

He did.

Keen is right to criticise neoclassical economics—the mainstream economics taught at universities based on third-rate maths and second-rate models of human behaviour—but while he can very good at explaining why things don’t work as the mainstream theories say they do, he is very bad at the opposite. And he is also very good at creating straw men to rail against. Hence, about Keen's book Debunking Economics Arnold Kling wrote:

I agree with his view that heterodox economists have something to offer, particularly in the area of macroeconomics. His discussion of a debt bubble and Minsky reminds me that PSST* includes the word "sustainable" for a reason. Patterns of specialization and trade that depend on ever-increasing debt loads are not sustainable. I think that Keen would agree with that one. But I also think that patterns of trade that depend on the government spending money it does not have are equally unsustainable. I do not get the sense that Keen is on board with that one.
    If I were a zero-tolerance reader, I would have put the book down at page 7…

But if he had, he would have missed seeing Keen, an alleged economist, railing against laws of supply and demand.

Sinclair Davidson’s review was more direct:

Keen has drawn several conclusions by the end of his book. These are as follows: Neoclassical economics should not and cannot be used for public policy purposes. This is because neoclassical economics is theoretically and logically inconsistent. Even if neoclassical economics were not wrong, the underlying conditions required for its application could never be met in reality. Keen oversteps the boundary of knowledge, however, when he also argues that market solutions to societal problems are likely to reduce human welfare, and that society is greater than the sum of its parts. Keen either lacks understanding of economics, or how economists actually go about their art, or— more likely— is somewhat disingenuous. All in all, Keen has done an excellent hatchet job. Most of this hatchet job occurs through misrepresentation…
    To be blunt, Debunking Economics is yet another tome dressed up in academic respectability that preaches left-wing views and opinion. It must be considered as one of many books critical of ‘economic rationalism.’ This is most unfortunate and disappointing. Keen is capable of better. The issues he raises are important and should be discussed. Keen, however, has given up the argument, as he indicates in the first chapter, ‘No More Mr Nice Guy.’ It is not good enough to argue that economics is wrong because hooligans protest outside Nike stores and the World Bank. Something is wrong with how undergraduate economics is taught. The quality of economic analysis in Australia is poor. It is too easy to be seduced into empty slogans and dogma. But that does not mean that the dogma is wrong.
Keen believes that markets do not work well. It is possible that they don’t work well relative to a mathematical ideal, but do they work in practice? Consider a simple thought experiment: Take an economy and arbitrarily divide it into two pieces. Allow the market to operate in one piece, and government to run the economy in the other piece. Fast forward by fifty years and observe what has happened. It turns out that West Germany and South Korea prospered relative to East Germany and North Korea when this experiment was actually conducted. If market economics is wrong, Keen needs to explain this ‘anomaly’.
Keen’s book will get the attention it deserves, on average. Those who are already predisposed to his views will quote it [and interview him on state radio]. Those who are not so predisposed will not read it. To that extent, Keen has not contributed to a debate, but rather to a tirade

Keen is rightly concerned about what undergraduates are taught, but what he proposes is little better, or even different. He rails against modelling and over-mathematicisation—but works himself on mathematical models. He opposes economic forecasting, but bases his own reputation on the forecasts he so frequently issues.  He is rightly engaged about unsustainable debt-to-GDP-ratios, but wrongly concerned about the deleveraging necessary to reduce debt, and quite wrong about deflation—for which falling prices are actually the antidote.  He criticises central banks for allowing the unsustainable expansion of credit by fractional reserve banks, yet like all so-called "Post-Keynesians" lets the central bank itself off completely off the hook.  He attacks economists who base their theories on failed ideology and inadequate theories of human behaviour, yet bases his own on Marx’s wholly unsound and thoroughly debunked labour theory of value.

Still, if you insist on paying through the nose to hear him talk, why not take along a couple of curly questions along with you.

* * * *

* Patterns of Sustainable Specialization and Trade


  1. On what's wrong with Keen see Anti-Dismal here and here and TVHE here and here.

  2. Or, if you'd prefer to hear and ask him questions for free...

    He is putting on a free talk at the University of Auckland Business School this Friday. It will begin at 6pm, in Lecture Theatre 4 (OGGB4), on level zero.

    If you would like further information, please contact the Economics Group: uoaecongroup@gmail.com

  3. Steve Keen's criticism of neoclassical economics of its heavily use of math is correct. It doesn't mean that the math is useless. Mainstream Economics is largely based on what Objectivists called primary of consciousness. They start with an idea in their head and then try to reconstruct the real world accordingly. It should be the other way round. Start with reality (data), and then try to construct or discover empirical laws from there and that is primary of existence. Math is not the problem. The methods and assumptions by economists is the problems.

  4. Steve Keen said...
    greater than the sum of its parts

    That's correct. This is complex system theory in its application to economics. Spontaneous order of Hayek is a phenomena that arises from interactions of many units in the whole system itself (network theory and system feed-back are at the core & heart of this mechanism), which is larger than the sum of each units on their own if they don't interact. This is why predicting a precise time of when an economic event may take place is mostly inaccurate, including the types of predictions that Steve Keen (including mainstream economics) had made.

    It is true, that Austrian economists anticipated the GFC, because they correctly pinpointed the causes, however they themselves cannot pinpoint exactly of when it is gong to take place. Peter Schiff predicted the recent crises but I think that the timing of his GFC prediction was coincidental.

    I think Peter Schiff predicted 2 years ago that the US economy will collapse by this time. That collapse hasn't happened yet. His anticipation that is correct that it is gong to happen, if the US doesn't change course now, but his timing is inaccurate, because in reality, complex system's dynamics' is hard or impossible to predict.

    I like some of Steve Keen's views but as PC has pointed he is inconsistent.

  5. "Steve Keen's criticism of neoclassical economics of its heavily use of math is correct."

    Two things: 1) econ doesn't make "heavy use of maths". The math used in 99% of econ is very simple stuff. 2) there are mistakes in Keen's argument about the maths, as noted by Matt Nolan at TVHE.

  6. http://www.youtube.com/watch?v=rGkmgnprrIU

    He touched on these issues in his free talk at UoA. They seem to be regular ideas in his bag of tricks.