On the death of financialised capitalism: Steve Keen and Monthly Review.
| Author | Blackwater, Bill |
| Position | Features |
There's a passage in Lila, Robert Pirsig's follow-up to Zen and the Art of Motorcycle Maintenance, where the author talks about how, once your mind becomes trained to notice something, you can suddenly spot it everywhere. As soon as you buy a car, for instance, 'you may be amazed at how the highways fill up with other people driving the same model. Because you now value this model more you now see more of it' (1992, 391).
I was reminded of this recently after first reading about the Australian economics professor, Steve Keen. Until then, the only Steve Kean I was aware of was the benighted former manager of Blackburn Rovers. I came across the other Steve Keen when reading about the role of the banks in destabilising the economy. Suddenly, I was seeing his name everywhere. At a Q&A at the LSE in April 2012, the host, Newsnight economics editor Paul Mason, remarked that the Steve Keen fan club seemed to have turned out in force. As the event was broadcast on Radio 4, it's a fair bet the fan club will have gained even more members in the UK.
Keen's main claim to fame rests on having been one of the handful of economists Who Saw It Coming - 'It' being the financial crash of 2008. This isn't merely self-promotion on his part; in 2009 an authoritative study found that Keen was one of only a dozen professional economists who had accurately predicted the crash. He also topped a poll of readers of the journal Real-World Economics Review to name the economist who had given clearest warning of the crash, and whose work would be most valuable in preventing another (Real-World Economics Review, 2010).
Worryingly, Keen is now predicting that Britain is due, not just for a prolonged doubledip recession, but for another sharp crash, comparable in magnitude to what happened in 2008. As he put it in his interview with Paul Mason: 'The level of debt England's taken on is breathtaking. I thought America was bad when it had a total private debt ratio of 300 per cent of GDP. Even the Treasury's figures here have you at 450 per cent of GDP.' All of which leads him to conclude that the UK is heading for another credit crunch 'that probably will be of the same scale as Lehman Brothers.' It's worth seeking out the Radio 4 podcast just to hear the note of dismayed incredulity in Mason's voice when he responds: 'Again? In Britain?' (BBC, 2012).
But however much we might not like to hear what he has to say, Steve Keen is clearly a man we ought all to be listening to extremely carefully. Earlier this year Keen's reputation was boosted further by a spat with Paul Krugman, nobel laureate and doyen of the US liberal intelligentsia, in which the Australian was judged by many to come out on top. In an April 2012 blog post for the New York Times, Krugman attacked Keen's understanding of macro-economic models, before declaring 'I'm done with this conversation' (Krugman, 2012). To many observers - not least those of Krugman's own readers who commented on his blog - it was Krugman's understanding which was at fault. Meanwhile, the way in which Krugman slunk out of the exchange was considered to give Keen a victory.
From Debunking Economics...
First published in 2001, Keen's Debunking Economics was republished in 2011, in an extensively revised edition that comments in detail on the crash and what to do in response. At its heart is an iconoclastic attack on the entire foundations of neo-classical economics. What makes this so powerful is the way Keen repeatedly goes back to the sources of orthodox theories, to lay bare the absurd assumptions underlying them and the way in which their authors frequently disown the uses to which they are put.
Let's take as an example a centrepiece of neo-classical economics, the 'law of demand'. This purports to demonstrate that, deterministically, there is an inverse relationship between price and demand across the economy - that when the price of a good goes down, the social demand for that good goes up, and vice versa. Keen shows how a handful of neo-classical economists, when making the attempt to prove this theory formally, actually found that it does not stack up: because the prices of goods are affected by the demand for them, because people's tastes and spending patterns vary with their income, and because changes in demand for goods affect people's income in different ways, a rise or fall in the price of a good cannot be said to lead to an automatic reduction or increase in demand for it across the economy. But, Keen shows, these economists have all sought to bury this finding, performing intellectual contortions in the attempt to patch up the theory. In a move Keen shows to be endemic among neo-classical economists, these theorists first identified certain conditions under which the law would hold, then assumed that these actually applied in the real world. But just consider those conditions: in effect, the law of demand only holds in an economy in which there is just one commodity and one consumer! (Keen, 2011, 55)
The absurdities relating to this theory do not end there. One of the impulses behind attempts to establish theoretical foundations for this law was the desire to prove that a free market economy necessarily maximises social welfare. That is, the law of demand is based on the idea of the individual as a reliably utility-maximising economic agent, scaled up to the level of society as a whole. The basic idea is that if an individual can be said to always make choices about how to spend their money which maximises their welfare, then so will the total consumption choices in society generate the maximum possible welfare for all individuals in aggregate.
It is here that Keen's presentation of intellectual contortions is most spectacular. Not least, readers are treated to an extraordinary argument published in 1956 by Paul Samuelson, one of the most influential economists of the second half of the twentieth century. Having conceded that treating the economy as one single consumer was 'not very realistic', Samuelson first reasoned that, 'Since blood is thicker than water', families could be regarded as individual consumers, before making the truly astonishing leap - that the same argument could apply to the whole of society, if it acted as one big family, and continually reallocated income between its members so their consumption preferences always maximised total welfare. As Keen comments: 'Did he even live in the United States?' (Keen, 2011, 62)
And it gets better. In his Microeconomic Theory, the leading textbook for postgraduate economics programmes for the past 20 years, Andreu Mas-Colell concedes there remains a stubborn problem with attempts to prove that the consumption choices in a market economy necessarily maximise social welfare. In order to translate the welfare implications of consumption choices for different individuals into a common, interchangeable measure of social welfare (and thus help to collapse society into a single consumer), one must use an index which represents social attitudes towards the benefit individuals can gain from the different baskets of commodities they can purchase. The problem is that the actual distribution of wealth in society affects these attitudes, and there is no way of guaranteeing that this would correspond to a system which would maximise social welfare. In order to fix this problem, Mas-Colell assumes the existence of a benevolent dictator, blessed with perfect knowledge, who, immediately prior to the birth of the market system, assigns to everyone the optimum distribution of wealth (Keen, 2011, 59). And this is at the heart of the economics on which neo-liberalism is based!
... to debunking neo-liberalism
These are not just abstruse theoretical matters, of interest only...
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