The Case for Pluralism in Economics: An Evening with Steve Keen
by Ken Gibb
In certain respects, there should be wider support for pluralism in academic economics (i.e. the wider use of non neo-classical ideas such as old and new institutional economics, Austrian economics, post-Keynesianism, behavioural economics, evolutionary economics, strategic decision-making, etc). On the one hand there is the negative case made by the failure of the mainstream macro orthodoxy to predict or in any sense be ready for the GFC and subsequent long recession. From a more positive perspective, no-one in economics should be in favour of monopoly and instead welcome the possibility of new insights and innovation from whatever source. But there are powerful forces of resistance to change. It is in this context that the bottom-up upsurge in interest in pluralising the undergraduate economics curriculum in North America, Europe and parts of the UK is so welcome.
Steve Keen, author of Debunking Economics and predictor of the GFC, gave a lecture on Tuesday evening at the University of Glasgow invited by the student-led real world economics society. Keen is no shrinking violet and is nothing if not provocative – but he backs it up with a careful series of arguments that draw their criticisms of mainstream neo-classical economics from a range of theoretical and empirical critiques that speak to Post-Keynesian economics, Minsky’s work on financial instability, institutional economics and of course the role of banking and private debt.
I have been to a lot of events in recent months, mainly referendum-related, so it was nice to get back to economics especially this kind of more fundamental analysis. The first striking thing about the evening was Keen’s capacity – he spoke for an hour and three quarters and was consistently engaging, intelligent and entertaining.
Keen went through his fundamental macro debt argument (and his ongoing dispute with Krugman concerning whether bank debt creates demand or simply redistributes wealth between lenders and borrowers) and used his own dynamic systems open software (called ‘Minsky’) to illustrate his point. This also allowed him to attack the failure of the conventional macroeconomics profession to see the looming crisis and subsequent recession that he had for many years been anticipating. Keen then went on to attack the conventional microeconomics of utility maximisation, particularly the axioms underlying Samuelson’s revealed preference estimation of consumer demand and the broader problem of aggregating market demand from the sum of individual demands (the difficulty he argued arose from the heterogeneity in tastes and preferences).
He has evidently developed and continues to modify a polished and substantial lecture or set of talks based around his book and subsequent research. His presentational style and multi dimensional AV was very impressive – including running his model in real time to demonstrate his arguments, referring to key literature, showing a clip of an embarrassing own goal (which made sense in context) and engaging directly with his audience throughout.
I read Debunking Economics a few years back and was struck by its challenging core ideas, particularly how the house price:mortgage debt question relates to his ideas about private debt and the aforementioned critique of microeconomic fundamentals. While he is quite critical of behavioural economics in his book, I was interested to hear him say that he believed the alternative to the rational choice modelling he sought to unpick was in fact through the habit and custom and implicitly the bounded rationality inherent to contemporary thinking from (old) institutional economics. His critique of the completeness theorem of Samuelson’s revealed preference theorem (that there are just too many combinations of bundles of goods to choose from to do so in a deterministic optimal way as suggested by the model) and the consequent satisficing solution he put in it place did sound a lot like behavioural heuristic solutions to cognitive problems to me. His fundamental point was that the evidence of empirical regularities (such as demand falling after prices increase for a specific good) does not warrant a dodgy or false theory.
And what about the economics curriculum revolution? There is a strong group at Glasgow, judging by the composition of the large audience at the lecture. and, The undergraduate programme in Glasgow does now incorporate a chunk of Post-Keynesian economics, Keen’s analysis and an element of this broader set of heterodox perspectives – admittedly within what remains a fundamentally mainstream economics degree. I did this degree in the 1980s and we did include an honours core course on methodology which featured Shackle and Austrian economics ideas but it was still overall a strongly orthodox programme.
While it is welcome that students and some staff are challenging the mainstream we cannot underestimate the strength of the orthodoxy and the career and academy dominance of the mainstream neo-classical worldview. Keen concluded tonight that his fears for another financial crisis, premised on historically high levels of private debt right now, might as one consequence shock economists into revising their approaches, but it is high price to pay!
This is all not just about micro theory or monetary macroeconomics. Alex Marsh and I have been looking through the housing economics literature to see to what extent that group of applied economists predicted or expected what happened after 2006 in the USA and after 2007 elsewhere. Not only is there not much evidence that the mainstream was in any way prepared (other than an unresolved debate about housing bubbles and one or two honourable exceptions), the post-mortem afterwards has not taken us much further forward. Partly this is because many of these economists are the very same folk who study the macro and financial markets but also are located in the same neo-classical schools.
We recorded the Keen lecture and we will shortly put a version of it on the Policy Scotland website (http://policyscotland.gla.ac.uk).