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.
Professor Steve Keen argues that incorporating complexity science and chaos theory can create better economic models that reflect real-world dynamics.
Keen critiques neoclassical economics for its flawed assumptions about aggregated preferences, highlighting its disconnect from true economic behavior.
The understanding of private debt dynamics is essential for addressing financial instability, as rising debt levels can trigger economic crises.
Deep dives
Understanding Economy Through Complexity Science
An effective understanding of the economy can be developed by using a limited number of critical variables rather than focusing on individual agents, as suggested by Professor Steve Keen. By applying concepts from complexity science and chaos theory, it's possible to create a model that accurately reflects economic dynamics, including cycles of booms and busts. This approach challenges the traditional neoclassical view of the economy as being in a constant state of equilibrium. Instead, Keen argues for building a non-equilibrium model that better represents the fluid nature of economic interactions.
Critique of Neoclassical Economics
Keen critiques neoclassical economics for its reliance on subjective value assumptions and aggregation errors, which lead to significant contradictions within the theory. He points out that the assumption of aggregating individual preferences into a market demand curve is fundamentally flawed and demonstrates how neoclassical economists tend to overlook these issues. This results in a disconnection from the actual mechanisms of economic behavior, as illustrated by historical mistakes in the theory that have gone unaddressed. Such aggregation errors render neoclassical economics a 'degenerate research program' that fails to resolve its internal contradictions.
The Role of Debt and Financial Instability
Keen emphasizes the importance of understanding private debt dynamics and its relationship with economic crises, drawing on Hyman Minsky's financial instability hypothesis. He describes a cyclical model where rising levels of private debt can lead to financial booms followed by busts, particularly highlighting how capitalists may borrow excessively during periods of growth. As debt accumulates, it can lead to decreased income shares for workers, creating a disproportionate distribution of wealth. This cycle culminates in crises that are exacerbated by existing debt levels and economic conditions, reinforcing the need for effective monitoring of debt in economic policy.
Differences between Neoclassical and Post-Keynesian Economics
The dialogue distinguishes between neoclassical and post-Keynesian economics, particularly the latter's empirically driven, pragmatic approach. While neoclassical economics tends to ignore monetary factors and fixate on theoretical utility maximization, post-Keynesians advocate for a more realistic analysis that incorporates financial variables and institutions into the economic model. Keen explains that post-Keynesians accept that risk cannot merely be simplified to uncertainty and rely on empirical observations to inform their theories. This stands in contrast to neoclassical reliance on a priori assumptions, which often leads to unrealistic conclusions.
Implications of a Complex Systems Perspective
From Keen's perspective, policymakers should not only focus on traditional economic indicators such as employment and inflation rates but also include private debt and credit creation into their frameworks. He argues that allowing banks to operate without adequate regulation can lead to asset bubbles and financial crises. A complex systems view of economics recognizes the interrelatedness of various economic factors and the necessity for adaptive government interventions during economic cycles. This approach ultimately calls for a shift in economic thinking to include complex dynamics rather than relying solely on equilibrium models.
Steve Keen is an Economist and Honorary Professor at University College London and is currently lecturing at the University of Amsterdam.
In this episode, Steve explains the differences between neoclassical and post-Keynesian economics before discussing how concepts from complexity science and chaos theory can be used to develop economic models that actually factor in booms and busts.
