Steve Keen

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Debt watch and Debunking economics

Wikepedia (best summary we could find!) “is an Australian-born economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen’s thinking about economics include John Maynard Keynes, Karl Marx,Hyman Minsky, Piero Sraffa, Augusto Graziani, Joseph Alois Schumpeter, andFrançois Quesnay. Hyman Minsky’s Financial Instability Hypothesis forms the main basis of his major contribution to economics[1] which mainly concentrates on mathematical modeling and simulation of financial instability. He is also a notable critic of the Australian property bubble, as he sees it.

Keen was formerly an associate professor of economics at University of Western Sydney, until he applied for voluntary redundancy in 2013, due to the closure of the economics program at the university.[2] In autumn 2014 he became a professor and Head of the School of Economics, History and Politics at Kingston University in London. He is also a Fellow at the Centre for Policy Development.

 Financial instability and debt deflation

Most of Steve Keen’s recent work focuses on modeling Hyman Minsky’s financial instability hypothesis and Irving Fisher‘sdebt deflation.[3][4] The hypothesis predicts that an overly large debt to GDP ratio can cause deflation and depression. Here, the falling of the price level results in a continually rising real quantity of outstanding debt. Moreover, the continueddeleveraging of outstanding debts increases the rate of deflation. Thus, debt and deflation act on and react to one another, resulting in a debt-deflation spiral. The outcome is a depression. Steve Keen argues that the current global economic crisis is the result of too much debt.

Debunking Economics

Keen’s full-range critique of neoclassical economics is contained in his book Debunking Economics.[5] Keen presents a wide variety of critiques on neoclassical economic theory, and argues that they show neoclassical assumptions are fundamentally flawed. Keen claims that several neoclassical assumptions are empirically unsupported (that is, they are unsupported by observable and repeatable phenomena) nor are they desirable for society at large (that is, they do not necessarily produce either efficiency or equity for the majority). He argues that economists’ overall conclusions are very sensitive to small changes in these assumptions.

Keen has attempted to counter Marx’s theory (in his view Marx’s pre-1857 view, specifically) from a post-Keynesian perspective, by arguing that machines can add more product-value over their operational lifetime than the total value ofdepreciation charged during those asset lives. For example, the total value of sausages produced by a sausage machine over its useful life might be greater than the value of the machine. Depreciation, he implies, was the weak point in Marx’s social accounting system all along. Similar to John Roemer,[6] Keen argues that all factors of production can add new value to outputs. However he gives credit to Marx for contributing to the “financial instability hypothesis” of Hyman Minsky.[7]

Keen’s book closes with a survey of various schools of heterodox economics, concluding “None of these is at present strong enough or complete enough to declare itself a contender for the title of ‘the’ economic theory of the 21st century.” However, he argues that neoclassical economics is a degenerative research program, not generating new knowledge but growing a belt of protective auxiliary hypotheses to shield its core beliefs from critique. There is an accompanying web site which provides more detailed mathematical expositions.

Critique of neoclassical theory of the firm

Keen’s work (as opposed to his popularization) has also focused on refuting the neoclassical theory of the firm, which argues that firms will set marginal revenue equal to marginal cost. Keen notes that 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.

He cites Eiteman & Guthrie,[8] finding 89% of firms set prices above the level where marginal revenue is equal to marginal cost, as well as more recent work by Alan Blinder.[9]

Keen’s article on “profit maximization, industry structure, and competition”[10] has had counter-arguments by Paul Anglin.[11]

Minsky software project

Recently, Keen commissioned the development of a software package called Minsky for visually modelling national economies, in a way that is intended to be more accurate than mainstream macroeconomic models – which he contends do not properly include debt and banking. He envisages it being used for both educational and research purposes.

The first phase of the development was funded by an academic research grant, as is typical for academic research projects – but in February 2013 Keen launched a crowdfunding project on Kickstarter to allow members of the public to contribute towards taking MINSKY to the next level of development.[12] In the first 24 hours, this project raised approximately 15% of its funding target, and has since fully achieved its initial funding goal of $50,000.00.

Criticisms

Matthijs Krul[13] maintains that Keen, while broadly accurate in his criticism of the neoclassical synthesis, generally misrepresents Marx’s views in Debunking Economics and in earlier work when asserting that, in the production of commodities, machinery produces more value than it costs.[14]

Austrian-school economists Robert P. Murphy and Gene Callahan claim that Keen’s 2001 book “suffers from many of the very faults of which he accuses the mainstream”. They also claim that much of his work is “ideologically motivated even while criticising neoclassical economics for being ideological”. They praise his critique of perfect competition, and his chapter on dynamic vs static models, whilst they criticise his attempts at objective value theory and what they claim is his misrepresentation of the Austrian interpretation of Say’s law.

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