I was fortunate enough to be able to attend Steven Keen’s talk “Canada’s Debt Bubble” on June 28th , 2012 (recorded in full here) The session was jointly sponsored by the new Ontario office of the CCPA, the Progressive Economics Forum and Ryerson University…and what a talk it was!! I immediately purchased Steven’s book Debunking Economics and read it all weekend.
Much of the book is a revelatory tour de force for those who’ve experienced pure neoclassical economics at university. As many readers of this blog are hopefully aware, what’s taught as economics today in English speaking universities is actually only one school of economics, the neo-classical school. It teaches that for markets there is a demand and a supply curve and they tend towards the equilibrium point where the two curves meet. Neo-classicals argue that this is the case for individual products but also for the economy as a whole. All other things being equal the economy will lead to full employment, low inflation and strong economic growth. The reason we find ourselves empirically in other states is due to “external shocks” generally blamed on government interference.
Much of the book is spent delivering crushing blows to the basic tenants taught in university micro and macro economics. Keen shows again and again how each one has been critically undermined, usually by neo-classical economists themselves and usually decades ago. Upward sloping demand curve for the economy…wrong, downward slopping supply curve…wrong, monopoly control less efficient than competitive firms…wrong and on and on.
Anyone who has taken these courses, or is going to, will find the book riveting and deeply disturbing. Neo-classical economists are the ones running our central banks, figuring out how to drive economic growth, trying to solve the crisis in Europe. (Well we at the CCPA are trying to figure these things out as well, but we have less sway) Essentially, economics as it is being taught in english-speaking universities hasn’t been updated since the 30s. Imagine if this were the case with the sciences…we’d still be listening to music on records (They are those circular plastic things you find at garage sales)!
How could most major institutions and economist have completely missed the run up to the biggest crisis since the great depression? It is one of Keen’s ongoing criticisms. That is if you want to build a theory of economics, it had better have predictive and explanatory power. As such, it had better have a state where it is in depression and it had better otherwise oscillate between growth and recession. Keen attempts to build such a model not on a neo-classical equilibrium basis which has no such states, but instead on an system that, not unlike population models in biology, can oscillate between various states (high unemployment, low unemployment etc).
In building this better model, Keen includes debt as an important part of the equation of aggregate demand. For neo-classicals aggregate demand = GDP. For Keen aggregate demand can be further influenced by how fast debt in the economy is accumulating. For neo-classicals, the aggregate level of debt in an economy is irrelevant. For Keen, one cannot understand what happened in 2007-8 without including debt in economic models. Over the past two decades, it has been debt that has been driving aggregate demand. This debt isn’t the productive kind that fuels investment, it is rather the unproductive kind that merely drives up asset prices, in the 1990s of internet stocks and in the 2000s of housing prices.
Keen’s model even predicts widening income inequality as the interest being paid on ever larger debt is taken out of the wages bill.
For those of you who want a quick overview I encourage you to watch the lecture that contains Canadian specific data. I hope to follow up on Keen’s variables and track their Canadian versions in the future. For those who want to whole enchilada, and if you’re interested in economics as an academic discipline, you should buy the book. It is definitely worth it.