Steve Keen’s DEBUNKING ECONOMICS EXTRACTS - SIZE MATTERS - WHY I DID SEE “IT” COMING GLENN LAUREN MOORE, BARBARA WESTERVELD EPOG_10 OCTOBER 2014 SUMMARY – SIZE MATTERS Focus: Neoclassical Theory of the Firm. Main idea: The competitive environment, revenue and costs of real firms are nothing like those presented by the neoclassical school of thought. SUMMARY – SIZE MATTERS Issue Competitive Environment Firms’ Behaviour Supply curve Neoclassical Economics The norm, perfect competition “allows” profit maximising behaviour (producing at MC = P). Imperfect competition is an exception. Work is efficient - no waste, welfare is maximised. Don’t respond to anything except MR=P=MC. Perfect competition: price takers, perfect info,homogenous product, free entry/ exit, firms’ action do not affect the market,etc Upward sloping, from profit maximising firm producing at P=MC, independent of demand or anything else. Steve Keen Does not exist due to simple mathematical mistake. All firms operate under imperfect competition. With correct math, neoclassical perfect competition is the same as monopoly. Production involves waste, does not maximize welfare. Complete opposite, especially that a single firm can change the market price and firms do react to each other’s behaviour. NC supply curve does not exist, as this supply curve exists if, and only if, price equals marginal cost. Firms do not produce at P=MC. “A supply curve that is independent of the demand curve can’t be drawn.” -> Supply also depends on demand conditions! Empirical research finds real firms set price well above marginal cost: they charge a markup, often cost-plus pricing; compare fellow post-Keynesian Alfred Eichner, who also argued for markup pricing. (Also Kalecki). SUMMARY – SIZE MATTERS Demand curve Horizontal for the firm, downward sloping for In reality: Snake. the industry market. Mathematically impossible to be downward sloping for market and horizontal for firm- problem of assuming small values are 0 and then universalising 0. Small values matter size matters! Labour Homogenous, variable cost, supplied by household’s trade off between optimization of utility and work, only source of change in MC (from changing the ratio of variable inputs to the fixed inputs). Not explicit in the paper , but we would assume: Labour = not homogenous, determined by social contracts particularly bargaining power, not the only variable cost,not only cost to firm, but source of demand/purchasing of firm’s output etc SUMMARY– SIZE MATTERS Accuracy and Generalisation Methodology Some values that are very small are treated as zero It may be useful to do so to examine the fact but NOT to generalise to larger matters. When applying it to large issues, something extremely small CANNOT be treated as zero. Rationality/methodological individualism = optimization behaviour Not possible. Firms can’t/don’t have time for complicate calculus. Marshallian equilibrium models Flawed mathematics (e.g. equating small values to 0) No empirics – nothing based on the real world Proof by contradiction: many of their counterarguments contradict their initial assumptions >e.g Stigler’s convergence Consistent mathematics Empirics - maths and models based on real data! Economic history/work of other economists (Keynes,Minsky(includes Schumpeter, Fisher),Marx,Goodwin) SUMMARY- WHY I DID SEE “IT” COMING Focus: Neoclassical microeconomic-based equilibrium and “representative agent” models can in no way capture the destabilizing nature of finance and finance-dominated capitalism. Main idea: We live in a dynamically monetised, debt-based, cyclical, financially unstable capitalist world. Models that reflect this inherent nature must replace the unrealistic models. SUMMARY- WHY I DID SEE “IT” COMING Issue Neoclassical Economics General model Non-monetary, equilibrium-fixated, of capitalism uncertainty-free, institutionally barren and hyper-rational individualbased reductionist Steve Keen Strictly monetary, inherently cyclical, embedded in time with a fundamentally unknowable future, institution-rich and holistic, considering interactions of industrial capitalists, bankers, workers and the state/government. Uses a combination of Keynes,Minsky(includes Schumpeter, Fisher),Marx, Goodwin. Minsky, 1982: “The abstract model of the neoclassical synthesis cannot generate instability. When the neoclassical synthesis is constructed, capital assets, financing arrangements that center around banks and money creation, constraints imposed by liabilities, and the problems associated with knowledge about uncertain futures are all assumed away. For economists and policy-makers to do better we have to abandon the neoclassical synthesis.” EVALUATION/CRITICISM ● The work contributes greatly to the critical evaluation of neoclassical economics by going into the details of its theories and mathematical reasoning. ● The models are extremely useful, to what extent do complicated models fight power structures, profit motive etc, which lead to the excessive, destabilising debt in the first place? Must debt be destabilising? ● It does not explain the link between dominance of neoclassical economics and lack of/narrowness of critical thinking, intellectual stimulation/curiosity, narrowness of education systems and epistemology ● For better understanding the flaws of neoclassical economics, a comparable discussion of comparable length and quality of heterodox schools would be extremely useful ● The material is difficult to understand for the non-economically trained reader, thus his critique might also not be fully appreciated as one must study an economics textbook to fully understand and test Keen's critique. DISCUSSION (1) : NEOCLASSICAL HEGEMONY ● Great Recession has again shown the serious flaws of neoclassical economics, but it did not imply the bankruptcy of it. Neoclassical economics is still the mainstream in economic research, teaching and policy. ● We need a radical re-examination of economics (all schools) and social science altogether for the sake of representing reality, practical knowledge and the common good. An influential socio-political consensus on this is lacking. ● Economics as a social science has been subject to a sort of divide and conquer - schools of thought are divided and the one with the most potential for political manipulation has conquered the others->brings us back to power structures and class interests. ● The upcoming movements for Pluralism in economic teaching aim for changes in the economic education system, that is currently characterized by a non-critical, mathematized, neoclassical homogeneity. What is the aim of economic pluralism? Explaining economies to maintain stability, GDP growth, employment - what about change? ● Danger of focus on pledging allegiance to a specific school of thought-> should be on selecting the framework that can best deal with the economic problem at hand - eg. building on Minsky for financial markets, building on Marxist imperialism/dependency theories for “developed”/“developing” countries gap ● How does neoclassical economics maintain its dominance? And how can or should it be challenged? Does it have any value at all? DISCUSSION (2) : REINVENTING ECONOMICS ● ‘Mainstream economics in recent years has abandoned the original topics of economics such as ethics, morals, and on the contrary became somewhat lost in the refuge of analytical-technical apparatus. But mathematics is also only a language. Should the focus of our attention change just because we start to use this different language?’ (Tomas Sedlacek) ● Iron curtain separating ethics and morality from economics on the whole-> linked to wider decadence of ethics and morality in social values - what do we value today as a society? Intellectual curiosity, creativity, evaluation of society replaced by consumerism, materialism, strive for a narrow notion of competitive “success” which sidelines ethics and morality. ● ‘The very statement, that economics should be a positive science (value free and stating what is and not what should be) is a normative statement (a statement that carries a subjective judgement, stating how things should be). It obviously does not describe the way economics is, but the way those who say it want it to be.’ (ibid.) ● The economic issues that researchers and policy makers in this globalized world deal with are inseparable from political and social, but also technical, issues that all convey ethical problems and challenges. To be able to contribute to finding answers to these topics, economists should not be afraid of studying what should be and should search for the connection with other fields of knowledge. ● What should economics be about and what should it measure? SUGGESTIONS FOR BROADER “ECONOMIC” KNOWLEDGE “The master-economist must possess a rare combination of gifts .... He must be mathematician, historian, statesman, philosopher -- in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man's nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.” (Keynes) Tomas Sedlacek David Graeber David Harvey Alan Watts Giovanni Arrighi Slavoj Žižek Antonio Gramsci Samir Amin Karl Polanyi Eric Hobsbawm Amartya Sen Ha-Joon Chang OTHER INTERESTING ATTEMPTS Similar attempts exist: 1. Deductive Irrationality.A Commonsense Critique of Economic Rationalism by Stephen McCarthy and David Kehl 2. The Economics Anti-Textbook by Rod Hill and Tony Myatt; 3. The Skeptical Economist by J. Aldred; 4. Economics for the Rest of Us by Moshe Adler; 5. How Markets Fail by John Cassidy; 6. Animal Spirits by George Akerloff and Robert Schiller. END THANK YOU!