Prof. Steven Keen

Debunking Economics is a critique on mainstream economics ideas and tools of analysis. The book is a critical analysis of mainstream economics, arguing that many of its core theories are flawed, internally inconsistent, and lack empirical support. Prof. Keen challenges fundamental concepts like supply and demand curves, the theory of the firm, and the efficient-market hypothesis, suggesting they oversimplify the complexities of the real world. It is an interesting read even for non-economists. Prof. Keen uses a clear presentation using simple and straightforward language.  

Prof. Keen goes into the assumptions, methodology and contradictions of neoclassical economics in some detail, debunking key aspects of the dogma and showing not only when they contradict reality but also when they are logically inconsistent and contradictory.

The author challenges the fundamental assumptions of supply and demand curves.

He criticizes the unrealistic assumptions used to aggregate utility by going from individual preferences to social ones. The standard approach only works with a single consumer and one commodity, but traditional economics demonstrates their necessity and then continues unchecked.

On supply curves, Prof. Keen argues that rather than facing costs that increase with output, firms mostly face falling marginal costs. This means that there is no ‘supply curve’ as mainstream economists define it. This destroys the basis for calculations of output and employment. Prof. Keen points out that many core concepts in mainstream economics lack empirical support, citing examples like the demand curve and the theory of the firm.

As an example, he points to the theory of perfect competition which assumes that while the demand curve for the market as a whole is downward sloping, an individual firm in perfect competition is so small that it cannot affect the market price and, consequently, faces a horizontal demand curve. In other words, economics breaks the laws of mathematics.

Prof. Keen shows the unscientific nature of economics by looking at the notion of diminishing marginal costs required to produce a downward slopping supply curve. He presents a summary of the empirical evidence which contradicts this key assumption of economics. How has economics handled this consistent evidence accumulated over many decades? By ignoring it.

This speaks volumes for the way that economics handles contrary evidence to accepted beliefs. Not that this should come as a surprise, given that the notion was originally invented to ensure that neoclassical economics did not suggest that the economy would become dominated by big business (that this was precisely what was happening in the real economy at the time was considered irrelevant).

The book also analyses a mathematical flaw in the standard argument against monopolies (often used to justify opposition to large firms). The book questions the conventional theory of the firm, arguing that monopolies can play a beneficial role in the economy.

On production function, Prof. Keen explains that without energy, nothing can be produced, and yet energy is ignored in the ‘production functions’ used by mathematical modellers from all schools of economics—and not just the dominant Neoclassicals. Moreover, the noted author contends that labour is not just another commodity, and in particular that wages do not reflect contributions to productivity. On the marginal productivity of capital, the noted author thinks that there is no consistent relationship between factor productivity and factor incomes.

Many of the socio-economic concerns are hard to reflect in mainstream economic analysis even if economists could be bothered to include them as the assumptions and methodology exclude such concerns. Critics argue that rather than being a science, economics is little more than an ideology whose main aim is to justify and rationalise the existing system. Keen’s book is a contribution to making economics “less of a religion and more of a science” by tearing up “the foundations of economics” and, as such, it should be essential reading for all.

Prof. Keen also thinks that much of the theory focuses on static analysis rather than dynamic analysis. Even though, the frontiers of the discipline have started using dynamic exposition and tools of analysis, they remain an extension rather than the original core. Prof. Keen argues for a fully dynamic economics, using tools such as differential equations and not just linear algebra. The noted author argues that the problem with economics is not mathematics but rather inappropriate mathematics.

As Prof. Keen argues, neoclassical economics is based on a “dynamically irrelevant and factually incorrect instantaneous static snap-shot” of the real capitalist economy.  Equilibrium analysis simply presents an unreal picture of the real world. Economics treats a dynamic system as a static one, building models rooted in the concept of equilibrium when a non-equilibrium analysis makes obvious sense. It is not only the real world that has suffered, so has economics:

“This obsession with equilibrium has imposed enormous costs on economics … unreal assumptions are needed to maintain conditions under which there will be a unique, ‘optimal’ equilibrium … If you believe you can use unreality to model reality, then eventually your grip on reality itself can become tenuous.” (p. 177)

The book also emphasizes the role of debt and financial instability in economic crises, challenging the efficient-market hypothesis that assumes markets are inherently stable. Prof. Keen does not entertain the idea of deregulating financial markets by believing in Efficient Market Hypothesis. Prof. Keen writes that financial markets show endogenous instability, result in bad investment as well as reducing the overall level of investment as investors will not fund investments which are not predicted to have a sufficiently high rate of return. All of which has a large and negative impact on the real economy.

The author also explicates some of the alternatives to neoclassical economics: Austrian economics, Post-Keynesian economics, complexity theory, and evolutionary economics. Prof. Keen thinks that collectively, these approaches offer more nuanced and realistic approaches to understanding the economy.  

Overall, ‘Debunking Economics’ provides a rigorous and accessible critique of mainstream economics, highlighting its flaws and offering alternative perspectives that may be more useful for understanding and addressing the challenges facing the global economy.

However, to be fair, exceptions to the law of demand have been duly acknowledged in the literature in the case of Giffen and Veblen goods. Furthermore, the literature has incorporated dynamic as well as stochastic analysis, albeit with limited success. However, the issue is to bring in complexity in aggregate analysis. Micro and partial equilibrium models may incorporate richness, but the problem comes in aggregation.

It is a general and common problem in mathematical modelling of complex reality. Some authors take the approach of only criticizing as bystanders. Prof. Keen, goes beyond criticism and offers some recommendations as well.

He had developed a software and tools of analysis to incorporate complexity in economic modelling. His approach is critical, yet constructive.

Rather than throwing baby with the bath tub, he offers a solution to move forward by taking stock of what we have and improving mathematics and analysis.