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The
economic irrationalists
Have our mainstream economists lost the
plot? Are their theories intellectually flawed, indeed are they nothing but
bunkum? DAVID MYTON talks to an author who thinks so
IT’S no more Mr Nice
Guy for Steve Keen. He’s had it up to here with conventional economics and
he’s talking tough. Words like “flawed”, “illogical” and “irrational” are
used as he mounts his attack on the proponents of the dominant
market-driven ideology.
But invective and
polemic are not the only weapons in his armoury. In a new book, Debunking
Economics. The Naked Emperor of the Social Sciences, Keen mounts a
strong economic argument against economic orthodoxy.
Over 324 pages and
using all that stuff economists love – charts, graphs, tables etc - he
examines the rise of neoclassical economics, probes its internal
inconsistencies, analyses its performance, and posits alternatives (while
doing en passant a demolition job on Marxism).
Keen, a senior lecturer
in economics and finance at the University of Western Sydney, has written a
book that will annoy many, but please the growing band of commentators who
smell something rotten in the state of market.
A major argument is
directed against the “price is set by supply and demand” credo, which
suggests a smooth, downward-sloping demand curve and a smooth
upward-sloping supply curve, and used by economists to argue against
intervention in the market. But, says Keen, the market demand curve can’t
be smooth – at best it’s jagged, going up and down with price – while the
supply “curve” is at best a horizontal line which probably slopes down
rather than up.
Put these two together,
says Keen, and the arguments economists make against intervention in the
market, trade unions, fiscal policy, collapse. And that’s not all – Keen
argues that their analysis of the labour market is unsound, their theory of
finance has encouraged a wave of dangerous speculation, and their theory of
income distribution is flawed.
Conscious that he might
be dismissed as a ranting marginalised lefty, Keen says his arguments are
not based on politics, but on logic. He says no political position – left,
right or centre – should be based on foundations “which can easily be shown
to be illogical”.
“The market economy is
a far more complex and difficult creature than economic theory teaches,”
Keen told Campus Review. “There’s no such thing as a perfect society
and yet economists are pushing us to believe that a perfect society is one
of all market and zero government.
“If there is an ideal
it’s in the middle; it’s not at either extreme: neither socialist at one
end or totally free market at the other.”
The “ideal”, if such a
thing exists, would look something like Keynesianism, with its base in
complex systems analysis and focused on dynamic interactions.
“What neoclassical
economists abstract from is interactions,” says Keen. “They make everything
an additive rather than a multiplicative process, which means they ignore
the interactions between people and simply look at the isolated individuals.
But in fact it’s the interactions that make us human. By ignoring those
interactions they diminish the possibility for those actions to occur and
things fall apart.”
What is needed is an
economics that appreciates the societal complexities “instead of ignoring
them as the free-marketeers do, or riding over the top of them as the
Marxists do”.
Economics does not
reside in a theoretical cornucopia – it has practical outcomes.
“We can see [the
consequences] of mainstream economics in rising unemployment and massive
inequality in income. A social worker earns about $35,000 a year and
someone in the money market makes 20 times that – if we ask ourselves who
adds value, it’s the social worker, not the person playing the markets,”
says Keen.
“There is a fallacious
belief that we can predict the future and people who fall for that line, or
sell themselves on that line, like the dot coms, end up accumulating
massive debts with failed ventures and the rest of us have to carry the
can.”
Also, he says, there is
the pressure people feel daily because of the insecurity of their jobs as
corporations accumulate debt then downsize.
“By following this
market-driven line we have made our economy more fragile. We feel that
fragility in our daily lives. It’s more extreme than it ever was.”
Keen says he is not
anti-capitalism. But he argues that in the transition from the feudal world
to the modern, economists contended that the order of the market – Adam
Smith’s “invisible hand” – should replace the pre-ordained religious order.
“There was an
ideological component to their arguments that was justifiable in fighting
against a feudal ideology, but they then get sucked into believing that
this ideology actually describes the real world.
“The reality is that
the market doesn’t work in equilibrium and that’s the thing that economists
can’t comprehend. They are stuck in a 19th century mathematical world,
where everything works in equilibrium and they can’t cope with anything
other than that.”
Equilibrium, he says,
has become a religion – “anything which is non market is not as good as
anything which is market, therefore every move we make towards market will
make us better, so it’s an ideology not a reality.”
Market economics, Keen
argues, is built on Benthamite utilitarianism, yet everyone except
economists no longer takes that seriously.
“Someone like
[influential Canadian author and intellectual] John Ralston Saul won’t even
give utilitarianism the time of day. The neo-classicals work mainly in a
linear world, in which your utility plus my utility equals social utility,
and they ignore the fact that what happens to you affects me and visa
versa.”
So what would Keen’s
society look like?
“What it wouldn’t look
like is either central planning or 100 per cent market. There is a role for
social redistribution of income. There is a role for guidelines as to how
much inequality can be allowed to occur.
“You need a combination
of the market dynamism which will give you innovation, but a social
structure that will give you cohesion and limit the extent to which
inequalities of wealth can accumulate.”
At present, the major
mainstream parties all accept the neo-liberal ideology. Keen blames this on
the “meme” – a mental concept that reproduces itself, leading to thinking
in a way that sustains the mental process.
“The neo-classical idea
has infected people’s minds. When you analyse something as complex as a
capitalist system, it’s no wonder people lean on a crutch like that to try
to understand it. Once they have got it in their head, they are locked into
it.”
Keen says the so-called
economic rationalists have usurped the word “rational”.
“That word applies to
reasoned intelligent thought to a problem, but there is nothing intelligent
about neo-classical economics,” he says.
“They have stolen the
word rational and we have to reclaim it – that’s why I like the term market
fundamentalist, because it puts a religious emphasis on their beliefs.”
Steve Keen, Debunking Economics: The Naked
Emperor of the Social Sciences, Pluto Press-Zed Books, $38.95, ISBN 1 86403 070 4
Well, is Steve Keen
right? Or is there more to neo-classical economics than his analysis would
suggest? Have your say at our new discussion site, TALK SHOP. To
participate, just click on the Talk Shop button at the top of your screen
See also
www.debunking-economics.com and
www.stevekeen.net
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