Review of Steve Keen's Talk at the Uni

I am now finally back in Glasgow, ready for yet another exciting semester at the University. Classes don’t start until Monday, but that doesn’t stop societies to hold events and guest lectures. One of these was the visit from Steve Keen, the Australian controversial economist routed in the post-keynesian tradition.

I wasn’t too familiar with his works beforehand and I really enjoyed learning a bit more of his approach to economics. Some of the data usage, especially his simulation program MINSKY was beyond me, though. Nevertheless I found some interesting points in his talk.

He’s a heterodox economist, very fond of attacking the neoclassical consensus, which is also his focus. For instance he made a splendid explanation for how certain models used in conventional micro economics (Perfect Competition; Indifference curves;  Demand Curve Aggregation) are not only unrealistic but also internally incoherent. This was refreshing, as was his pounding away at the “Money Neutrality” idea in macro. Neoclassical economics normally argue that money is neutral in transactions going on in the economy, i.e. money is the common denominator of heterogeneous goods and services simplifying exchange of these goods and services, but that it doesn’t impact the transaction itself. However, it also argues that money is just a number, and what matters is the ratio between the values of goods. The prime example is, if the money supply would double overnight and everyone suddenly would have twice the amount of money they had yesterday, neoclassicals say this won’t affect the economy because prices would also double, maintaining relative prices as they were before. This is one of the reason they see inflation as harmless. 

That is of course mistaken, as money supply increases doesn't happen that way; they flow through the economy from bank lending and (artificial) credit expansion, where some groups access those new money before other groups do – also, as Keen pointed out, we consume predominantly out of habit, habits used to certain numbers for certain goods. Even if I suddenly have access to twice as much money on paper, I might still hesitate before buying goods of twice its “normal” price, regardless of the rational approach such an action would entail. 

On the disappointing side was more profound issues in the approach to economics. There was a comment from the audience saying that economics is unscientific when it uses a priori axioms, suggesting its methodology should mirror the hard sciences. Surprisingly, Keen agreed, and added that he doesn’t view economics as a science – rather a discipline. Perhaps a mere tautology, but it is ironic to the point of laughter, when he ten minutes earlier praised the usage of mathematics in economics. 

That’s funny, Professor: see, mathematics is a science that solely uses a priori axioms, just like geometry or logic. Demote a science on the basis of incorrect methodology is an adequate critique, but then it should be held consistently, even to "your own" sciences.  

I don't think Keen is actually placing these disciplines in the same category of “unscientific academia” as economics, but that's what his comment yesterday implied. On the contrary, and this is a point over which Austrians and Neoclassicals fight, you have to use a priori axioms in economics, or else you’re fumbling in the dark. The Economy is us. We are always changing, reacting to new conditions and information. Thus, contrary events can occur simultaneously. If you disregards a priori axioms and only rely on data collection like in the hard sciences, you might have instances where these events cancel out, or even produce a reverse effect, leading the scientist to mindless conclusions. Since economics involve people's actions, which are prone to change at whims and desires, we cannot simply observe data and draw conclusions from those, such as a biologist would. Keen's claim is nonsense. 

That leads me to the second disappointment in Keen’s approach. He’s firmly dedicated on using data, putting into his MINSKY simulation, yielding predictions and explanation of how the economy would work given certain inputs. Again mistaken on his own grounds; people are not “chess men you move on a board”, (to quote the Keynes vs Hayek rap video), "their dreams and desires ignored". Believing that you can map every event in future economic conditions smells of the same convictions Hayek viciously attacked in his Nobel Lecture Pretense of Knowledge in 1974. I thought we were past that...

Murphy and Callahan, back in 2001 when Murphy was still at NYU, added several striking critiques to Keen’s work in their review, for instance about labour economics. Keen does an excellent job taking down the labour theory of value, then turns around and constructs a “real price theory of value”, falling in the same Marxian trap of ignoring the subjectivity of costs.

Overall I must admit I was glad to finally get a taste of his work. After running into his name now and then does yield some interest in a person. Though I'm far from convinced. He has several methodological as well as logical flaws to account for.

A great way to start the semester – I really hope for more occasions to discuss the essence of economics.