Simplifying Complexity The dynamics of financial instability
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Dec 9, 2024 
Steve Keen, an accomplished economist and Honorary Professor at University College London, delves into the failures of neoclassical economics versus post-Keynesian thought. He emphasizes how complexity science and chaos theory can illuminate economic cycles of booms and busts. Keen critiques the flawed aggregation in neoclassical models and argues for integrating private debt into frameworks. He champions multi-agent modeling and government intervention in financial systems to foster stability and prevent crises, making a compelling case for rethinking economic dynamics.
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Neoclassical Economics and Aggregation Issues
- Neoclassical economics relies on a priori logic and struggles with aggregation issues, similar to the Pythagorean school's initial rejection of irrational numbers.
- These aggregation errors, like the Sonnenschein-Mantel-Debreu theorem, reveal the difficulty of deriving market demand curves from individual preferences.
Ad Hoc Assumptions in Neoclassical Economics
- Neoclassical economists often make ad hoc assumptions to overcome contradictions, like assuming a benevolent central authority redistributing wealth.
- These assumptions, though unrealistic, become core tenets, hindering the paradigm's evolution, unlike in physical sciences.
Post-Keynesian Economics: Pragmatism and Empiricism
- Post-Keynesian economics, diverging from mainstream thought after Keynes, emphasizes pragmatism and empirical data.
- It acknowledges uncertainty, uses realistic production functions, and focuses on the role of money, unlike neoclassical macroeconomics.