Critique (ii)

Mainstream economic theory is ‘delusional’ and ‘crap’ according to Professor Steve Keen, and other economists have referred to their ‘disgraced profession’.

Fantastic economics and the fantasy economy

by Daryl Champion

Julian Assange of Wikileaks notoriety is not the only Australian who’s stuck pins in an effigy of packaged reality. While Assange’s specialty is the dark universe of politics and the abuse of power by governments, his compatriot, Steve Keen, has caused disconcerting and largely unwelcome if less sensational waves in the parallel world of economics. Keen, however, deserves as much attention as Assange since politics and economics do go hand-in-hand, as American filmmaker Charles Ferguson amply demonstrates in his documentary on the financial crisis, Inside Job (see my review of Inside Job on page 132).

Keen, an associate professor of economics and finance at the University of Western Sydney, is foremost among a small number of economists and financial market commentators who are internationally recognised for having accurately and publicly anticipated the 2008 global financial crisis (or “the Great Recession”) and that, contrary to what politicians, financial services industry professionals and economists would have us believe, is not yet over. But Keen goes further than maintaining the crisis is not over: his analysis of empirical data dating from the Great Depression concludes the worst of the crisis is still ahead of us. Now, that is a sobering thought.

It is no wonder that Keen, like Assange, is not appreciated for drawing attention to inconvenient evidence that “business (and politics) as usual” is the wrong way to proceed. It explains why the recipient of the inaugural Revere Award for Economics is barely known outside his profession, even though he won the award with more than twice the votes than second-placed Nuriel Roubini, a professor of economics at New York University, who has received something approaching popular recognition and is often the only one named when mainstream commentators, such as the Guardian’s economics editor Larry Elliott, refer to “the few economists to predict the crash”.

Much is dependent on what is meant by business as usual. The concept assumes a more literal interpretation in the economic context, and revolves
around the central pillar of mainstream, neoclassical economic theory, which

presumes national economies exercise an inherent tendency to a stable equilibrium. This supposed dynamic is a theoretical presumption that has attained the status of dogma – or a “fetish” Keen announces in one article – and it underpins all the edifices of political–economic decision making and policy formation. Keen, who identifies with the Post-Keynesian school of economics, has for long publicly pooh-poohed what is clearly a misguided faith in economic equilibrium, and he’s on record as proclaiming neoclassical economic theory is “delusional” and “crap”.

Neoclassical economic theory is not labelled “mainstream” for no reason: it is the dominant form of economic thinking that is practiced and applied virtually universally and is taught at schools, colleges and universities everywhere. If not for such ubiquity, the belief in balancing and counterbalancing economic forces and a plethora of other presumptions, such as the irrelevance of credit and debt, might be limited in their scope to continually nourish the conditions of crisis.

The scale of practice and acceptance of neoclassical economics was illustrated by Keen during a late-2009 conference presentation in Canberra when he stated “the question” should not be why he saw the crisis coming, but, rather, why so many other apparently learned economists did not. He then went on to cite that only around “three dozen” economists out of a profession of some twenty thousand can legitimately claim to have predicted the crisis. Keen’s question was designed to drive home the point that mainstream economists employing patently flawed premises were, and still are, incapable of accurate economic modelling. Sounding a note of self-chastisement on behalf of their fraternity, Keens’ fellow Post-Keynesian academic economists at the University of Missouri, Kansas City, last July referred to “our disgraced profession”.

Economists, however, are not the only professionals to be tarnished by the financial crisis, which brings us to the topic of bankers.

No discussion of financial crisis is complete without mention of the role of
bankers, and certainly Keen has something to say about them as well. He has
been known to go on primetime Australian mainstream television and declare "Fantastic economics and the fantasy economy" continues in a popup window.