The Debunking of Economics: A Review of the Work of Steve Keen et al

The Debunking of ‘Economics’ by Steve Keen: A Critical Review

By James M. Craven/Omahkohkiaaiipooyii

To be Presented at the World Association for Political Economy (WAPE) Conference, May 28-31, 2010, Suzhou, China

In a somewhat remarkable book, Steve Keen starts out right away to explain how he was led into his odyssey, and now mission, of “debunking Economics”. By the generic term “Economics” he means not only “mainstream” or neoclassical Economics, but also some of the writings labeled “heterodox” as well[i]. His quarrel is primarily with unchallenged dogma, “traditional habits of thought and expression”, and all conventional structures that act like straight-jackets. His target is also “how economics is taught” at the undergraduate level[ii].

Keen notes that he was “schooled” (his word “indoctrinated”) in the traditions of the Keynesian-Neoclassical synthesis some thirty years ago. He also notes that as the global economy has moved more towards the textbook conditions assumed by neoclassical theory (relative to fifty years ago) with more deregulation, privatization, abolition of tariffs and quotas, more market-based exchange rates and reduced roles of governments, and, despite the dominance and applications of Neoclassical theory in neoliberal policies, the world has grown more, not less as the theory would predict, unequal, unstable and inefficient. His opening argument and attack goes like this:

“Though economists have long believed that their theory constitutes ‘a body of generalizations whose substantial accuracy and importance are open to question only to the ignorant or the perverse’ (Robbins 1932), for over a century economists have shown that economic theory is replete with logical consistencies, specious assumptions, errant notions and predictions contrary to empirical data.…Virtually every aspect of conventional economic theory is unsound; virtually every economic policy recommendation is just as likely to do general harm as it is to lead to the general good. Far from holding the intellectual high ground, economics rests on foundations of quicksand. If economics were truly a science, then the dominant school of thought in economics would long ago have disappeared from view” [1][iii]

Keen says that the catalyst for him to begin to question the prevailing neoclassical dogma, and to see it as dangerous dogma and ideology, was a basic “logical” contradiction in microeconomic theory pointed out to him by a lecturer in a first-year Microeconomics course. That contradiction was simple yet glaring and unaddressed. Neoclassical theory says that combinations of any sort (unions, monopolies) reduce social welfare, and, that without them, people would be paid proportionately to their respective productive contributions (MRPs) to total output and society. But, if one simply abolished only one form of combination and not the other; the other would dominate government and society and reduce net social welfare. Thus a “paradox”: that only abolishing both, or retaining both (checks-and-balances), but not abolishing only one of the two, would add to net social welfare and markets doing what markets are supposed to do. No second-best or marginal improvement, solution[iv] would occur with the abolition of at least one but not both of these combination forms.

This statement by Steve Keen of what lead him to begin to question, and then later actively debunk, the economics[v] in which he had been schooled and has extensively taught, was for me revealing. It was a simple logical paradox, or internal contradiction, in the internal logic of the theory, not some fundamental and glaring contradictions between the predictions and palliatives of orthodox Neoclassical theory versus the ugly realities lived by the masses and covered-up by “mainstream” theory, that led Keen to begin to rebel. He has set about not to debate hard-core fundamentalists, the neoclassical and neoliberal “true believers” of academia and policy circles, but to offer alternative perspectives and paradigms on the issues that are typically problematic for the orthodoxy and that they refuse to hear, debate, question or open themselves to questions about. His focus, for non-economists as well as economists and political economists, is primarily on the internal contradictions in some of the core axioms, postulates, assumptions, hypotheses, mathematical expositions and even epistemology of Neoclassical orthodoxy.

Marxians and Marxists:

Professor Keen’s analysis often appears to me, to be more “Marxian” than Marxist[vi]. His analytical scope and depth appears somewhat detached from grass-roots politics, struggles and issues. He is heavy on theory and light on real-world case studies; light on empirical data on real-world conditions; light on real-world lives and struggles in this book but not in other venues he writes on. Interestingly, there is not even mention of the word “imperialism” –not even listed in the index of the book. He goes into and has some attraction to, chaos-complexity theory attracted partly by the more realistic, non-linear and morphogenetic models, involving positive feedback loops and non-linear differential equations (as opposed to the first and second-order linear differential equations and morphostatic models of neoclassical economics that are often learned, in condensed and inadequate courses of mathematics for economists) that more realistically model real-world systems of natural as well as social phenomena.[vii]

Why has Neoclassical Orthodoxy Survived Critique So Long?
As to why this contradiction-riddled neoclassical orthodoxy has dominated and survived so long in academia, among economists who refuse to look into the bankrupt foundations of their dogma, Keen has not much to say. He says these academics are generally “well intentioned” and yet generally ignorant of any other paradigms along with much of the history of economic thought and analysis. He says that these academics, who are true believers in their dogma, typically blame alleged governmental misunderstandings and misapplications of their dogma in government policies, and not their own dogma and dogma-based advice, for present-day global crises. He does not use openly, but hints at, words or concepts like opportunism, cowardice, Faustian Bargains, careerism, willful blindness, depraved indifference, academic prostitution, or cognitive dissonance to explain why this mainstream neoclassical orthodoxy has survived so long and stayed relatively unchallenged by those trained in it and who carry it on uncritically. In short he has little to say about economics as rhetoric and ideology or class interests.
Keen wrote these essays, compiled together to form this book, for non-economists as well as economists. Throughout the book, he first presents the details of the conventional constructs of neoclassical theory before debunking them. Again, his focus, according to him, is on the internal contradictions, the logical disconnects or contradictions, that are internal to the theory. He does not spend much time on the rhetorical intentions and system-preserving roles of neoclassical economics. He does not spend much time on the predictions of neoclassical economics versus the ugly realities they are designed to avoid, obscure, cover-up or dress it up. Keen states explicitly that his book is not about “Left versus Right” but “Right versus Wrong” and states boldly:

“However the critiques of this book are not based on politics but on logic. No political position—left, right or middle—should be based on foundations which can be easily shown to be illogical. Yet much of conventional economic theory is illogical. Those who occupy the center stage of politics should find a firmer foundation for their politics than an illogical economic theory. The same comment, of course, applies to those at the left-wing end of the political spectrum, who base their support for radical change on conventional Marxian economics. As I argue in Chapter 13, conventional Marxism is replete with logical errors as is neoclassical economics.”[viii]
Steve Keen’s Overall Approach to Critique of Neoclassical Economics
Keen picks apart aspects of neoclassical economics piece by piece in each chapter. He does not deal with neoclassical economics as a coherent meta-theory or meta-paradigm founded on core meta-postulates or axioms[ix]. He considers the theoretical edifice of neoclassical economics to be too riddled with internal contradictions and lack of overall coherence to constitute, as some have argued, a comprehensive and internally coherent whole, albeit bankrupt, theoretical system. He does note that neoclassical economics sets up this abstract, “ideal” and tautological world where “everything tends to the best in the best of all worlds”. Neoclassicals then, evaluates each set of policy prescriptions and effects not empirically, in terms of how closely, and with what consequences, they achieve their stated objectives, but how closely they move towards the abstract and ideals models of reality they so forcefully assert as the ideals to which policies should strive. He writes:
“Economists would contend that these changes have made the world a better place, not because some economists have verified that the changes have been beneficial, but because the changes have made the real world look more like the hypothetical world of the economic textbook…But this confidence in reform begs the question—is the hypothetical world of the text book ‘actually’ a better place than the real world with all its distortions? This is only possible if the economic theory that describes the economist’s ideal world is internally consistent. If the theory is internally inconsistent—if it requires impossible conditions to function—then the economic ideal may be an entirely useless guide to how the real world actually works, let alone to how it might be improved. Economic reform could produce a manifestly worse system than the one which it alters. “[x]
Part One of this book is on the foundations of neoclassical economics that need to be explained to non-economists before being debunked. The first three chapters of Part One take on the traditional model, the “blades” (supply and demand) of the scissors” of Alfred Marshall and others. Chapter two, on the “Calculus of Hedonism” shows that individuals are far more than self-interested hedonists and ultra-individualists and that society is far more than the mere sum of the individuals in it as postulated by neoclassical theory and conservatives in general. Society, the macro, cannot be effectively modeled, understood or transformed in the aggregate by merely summing up or aggregating the micro behaviors of all the individuals that make up the macro. Different individuals, driven to maximize total utility from given resources, will evaluate the utility gained of say a banana, subjectively and differently. A change in the distribution of income that took income from one person and transferred it to another could result, in a different level of social welfare thus impairing the aggregation of various individual or interpersonal utility functions (to form market demand curves) without cornerstone assumptions that: a) all people have identical (homothetic) tastes; b) those tastes are affine and do not change as income changes. Thus a downward sloping demand curve for one person and one commodity only may be possible; but a market demand curve is extremely problematic (likely is jagged and slopes every which way).

Keen also takes on the utilitarianism of Jeremy Bentham that is central to neoclassical economics: a) that all human behavior, ultimately, and subjectively for each unique individual, comes down to maximization of pleasure and minimization of pain; b) that there is no such thing as society or community—only aggregates or a simple sum of individuals that remain individuals—any “social interests” or social utility functions, are manifested by adding up individual interests and utility functions. These constructs undermine other constructs of neoclassical economics that are uncritically taught: supposed social indifference maps from individual indifference maps; Giffin goods[xi]; market demand curves as mere “horizontal summations” of individual demand curves; general equilibrium; budget constraint line (income) independent of tastes (indifference curves); contours of individual indifference curves cannot intersect (except supposed social indifference curves); human behavior driven by motives other than utility maximization and pain minimization[xii] ) Keen then takes on, the central postulates of consumer welfare theory.[xiii] He also shows how consumer theory and indifference maps are used to attempt to explain any aspect of human behavior related to consumption—“one-size-fits-all”.

Neoclassical Focus on Consumption and Exchange and not Production
Since its inception in the 1870s, neoclassical theory was founded on patently absurd postulates and axioms along with and necessary for, its shift in focus from trans-disciplinary political economy (contradictions and laws of motion of systems) to the isolated or atomistic “representative” individual as the focus of “pure economics”. When each has been shown to be absurd on its face, the response by neoclassical theory and theorists was not to look for a new theory modeling and predicting aspects of human behavior, but always the response is to search for even more restrictive conditions under which the established theory “might” hold: from perfect to bounded rationality; from perfect to bounded information; from maximization (of total utility and total profit) to satisficing; from unique individuals and their unique but given “homothetic” (identical) and “affine”(unchanging) preferences, to the “socially representative” individual standing in for “all” of society[xiv].

And of course this “socially representative” individual, standing in for all individuals, has no history, context, social class, age, gender, ethnicity, religion or ideology to “clutter-up” the analysis. Keen also notes that if neoclassical theory were to incorporate social class, then at the first- approximation level, perhaps the assumption of the “representative individual” (of most people of a given social class) might be easier to take and work with as incomes and tastes, within social classes, vary much less than between social classes[xv].

Keen shows how an indeterminate, non-continuous and jagged market demand curve, with portions showing a direct, rather than inverse, relationship between price per unit and quantity demanded per unit of time, can lead to multiple-point-intersections between market demand and the supply curves thus leading to multiple potential “equilibriums”. Other objections to neoclassical theory on consumer welfare include: non-evolutionary ways in which consumer behavior is handled; consumer split personalities (maximizing utility and also ethically obeying contracts); irrational definition of rational (takes extensive time and processing power of calculate comparative utilities among myriad combinations of two goods when it would be rational to simply follow habitual rules of thumb); ignorance of and ignoring ethical and other factors in complex human behavior and motives; refusal to consider how behaviors, welfare and peer pressures of others affect individual decisions and behaviors (examined in an area called network economics).

The Neoclassical “Law” of Supply: Sraffa Redux
Chapter Three, “The Price of Everything and the Value of Nothing” continues his critique of neoclassical supply and demand. Where Chapter Two showed that market demand curves cannot be derived from horizontally summing up individual demand curves, and that the market demand curves cannot, logically, be smooth, continuous, non-jagged and downward sloping functions consistently showing “The Law of Demand”(quantity demanded per unit of time as an inverse function of price per unit), the same applies with the neoclassical supply curves showing “The Law of Supply” (quantity supplied per unit of time as a consistent, smooth, continuous and non-jagged direct function of price per unit). Keen argues that in classical economics, in which price was a function of costs of production, a static version of which, yields a more accurate flat or even downward-sloping supply curve as in some cases unit costs fall with scale. Why? Because according to Keen, factories are designed, industrially engineered, to avoid some of the problems like diminishing returns, increasing marginal opportunity costs, diminishing marginal productivity, etc, that neoclassical economists assume must inexorably follow with increasing production. Keen argues that factories are routinely built with significant excess capacity and are designed for efficiencies at low or high rates of capacity utilization; only products like oil that are not produced (but are refined) in factories may obey the “law of diminishing marginal productivity”, the real focus, of pure economics[xvi].

Keen argues, employing the analysis of Sraffa that horizontally summing up upward-sloping marginal costs curves of individual firms to produce an upward-sloping market supply curve is as flawed as summing up individual demand curves to form a smooth downward-sloping demand curve.[xvii]

Sraffa attacked two particular cornerstone axioms of neoclassical theory and showed that they were mutually contradictory: 1) in the short run, if at least one factor of production is “fixed” then supply and demand functions cannot be independent of each other and thus any notions of a predictable partial equilibrium are impossible as every point on the supply curve would be associated with a different demand curve; 2) on the other hand, under any circumstances in which supply and demand could be treated as independent of each other, it would be impossible for any factor of production to be fixed and hence marginal costs would be constant and average costs falling.
The theory of diminishing returns that the classical school presented was not a theory of price determination but that of determination of income distribution and rent based on progressive uses of poorer and poorer quality of fixed land. Keen argues that the classical notion of diminishing marginal returns was misapplied by the Neoclassicals. In their models based on a competitive economy, in which all inputs and outputs were homogeneous, and no firm was large enough to affect market price, the use of diminishing quality of inputs to explain diminishing returns, contradicted the assumption of homogeneous quality of inputs, and thus it was necessary, to postulate, that going beyond some optimal ratio of “variable” to “fixed” factors of production was the source of diminishing marginal returns.” According to Sraffa, only if an industry is treated in the broadest possible ways, say agriculture and the role of land, can some factor be treated as “fixed” in the short-run; but that would contradict the postulate of independence of (or no co-determinacy between) supply and demand or the postulate that static partial equilibrium, in separate and individual markets, in isolation from other markets, can be determined and predicted[xviii].
There are other implications from Sraffa’s work. The majority of cases, where unused capacity is maintained and consolidated, to avoid the problem of a fixed factor of production being crowded by a variable one, and thus diminishing returns, the classical model of costs determining price and demand determining quantity sold is likely to be more accurate according to Keen and Sraffa. Also, the total profit maximizing level of output is no longer where MC = MR[xix].

If internal rising marginal costs do not constrain the production and profitability of an individual firm as neoclassical economics suggests, what are the constraints on the individual firm? According to Keen, who is often almost channeling Sraffa, the major constraints are those which neoclassical economics simply assumes away as not relevant: costs of transportation, information, marketing (a cost of distribution not production as assumed to try to rescue the rising marginal cost curve) and access; plus, acceptable market price and creditworthiness.
If Sraffa’s critique holds true, the whole edifice of neoclassical economics collapses. In neoclassical theory, real wages are taken as given by market forces so firms hire up to where the real wage equals the marginal revenue product of labor. Due to diminishing marginal productivity, the MRP falls as more labor-power is hired with the last worker hired where w = MRP. Since employment determines output, thus the market-given real wage determines output with the real-wage itself determined by worker willingness to forego leisure for income. If society seeks higher levels of output then this is only possible according to the mainstream theory if real wages fall and/or MRPs (Demand for labor-power) increase. If the output to employment relationship is relatively constant, then the neoclassical theory of output and employment determination collapses[xx].
The Neoclassical MC = MR Total Profit Maximization Rule
Keen also takes on the comparative statics and absence of time in the MC = MR total profit maximization rule. Costs and revenues vary over time as well as output levels changing at one point in time according to Keen[xxi]. The MC = MR rule holds time constant such that revenues and costs vary only with output levels and thus the gap between total revenue and costs is creates where MC = MR. But real business persons are interested in maximizing total profits over both time and quantity of output produced and sold; profit is both a function of quantity and the historical time during which it produces. Change in profit = (change in profit as a function of time x change in time) + (change in profit as a function of quantity x change in quantity).
Neoclassical theory deals only with a change in profit as a function of a change in quantity and thus the rule MC = MR and following the profit maximization rule, one would deliberately set this quantity to zero. Since one gets zero when multiplying any number by zero, this results in the second half of the overall profit formula (change in profit as a function of quantity x change in quantity) being zero. The neoclassical theory then, according to Keen, implies that profit will be maximized when the change in profit due to change in quantity is eliminated and change in profit due to changes in time is maximized. If the firm’s output is increasing over time, then the term change in quantity is positive, and then setting MC = MR results in zero multiplied by the positive change in quantity which is zero and a smaller increase in profit than if MR > MC. The economic rule of MC = MR is correct only if quantity never changes.[xxii] But the imperatives of effective competition, accumulation, market power and even survival of the firm dictate that the firm must grow and develop market power over time which means if it devotes all of its resources to maximizing total profits now, it will have no resources for investment for the future. Mainstream theory is trying to work out a profit maximization rule of ideal output for all time and no such rule is possible according to Keen. Where MC = MR or MC = Price, and where MC are constant, MC are well below average costs and thus losses are being sustained at MC = MR.
In real-world surveys of managers, note constant or falling MC and no empirical support for firms setting prices where MC = MR in the real world. Where higher prices may be necessary to increase quantities supplied per unit of time, due to supply inflexibilities, diminishing returns is not cited as the real reason or any significant factor as central to neoclassical theory on both the demand (diminishing marginal utility) and supply (diminishing marginal productivity) sides. The notions of smooth downward-sloping demand curves, aggregates of similar individual demand curves, or smooth upward-sloping supply curves, aggregates of similar individual supply curves, or the notion of independent supply and demand curves setting one unique equilibrium price and quantity in a market, Keen shows to be pure fiction—and worse.
Neoclassical Theory of the Firm and Monopolies
Chapter Four deals with inconsistencies in the neoclassical theory of the firm vis-à-vis monopolies[xxiii]. Mainstream theory, among all of the possible objections to monopolies, focuses only on the size of the monopoly relative to the market and the inefficiencies of restricting output levels for P > MR where MC = MR thus causing over-pricing, less output, loss of consumer and producer surpluses (deadweight losses) all relative to perfect competition. These essential differences between monopoly and pure competition in neoclassical theory are treated as simply the result of a deeply downward-sloping, overall inelastic MR curve, separate but derived from a down-ward-sloping demand curve under monopoly, versus a flat and perfectly elastic demand—and not separate MR curve—under pure competition[xxiv]. The implications, according to neoclassical theory, are that ‘perfectly’ competitive firms maximize social welfare, produce more output and at a lower price due to the features, constraints and competitive/survival imperatives of perfect competitors vs. monopolies. Perfect competition is also preferred as the only market structure in which market output and price are set where market supply and demand curves intersect as opposed to monopoly where MC = MR but MR < P and at lower output than under perfect competition.
Again Keen focuses again on aggregation problems in his critique of neoclassical theory on monopoly. He notes, in a note on “calculus 101 for economists: infinitesimals ain’t zero”, that the central assumption of perfect competition, that gives rise to the flat, zero-sloped, infinitely elastic P = MR = Demand curve is that no firm is large enough to affect market supply, each firm is small and does not react to the behaviors of other firms, and thus must face or take a market determined price as “given”. But aggregating the flat P = MR = Demand curves of individual firms will mathematically yield only a larger flat market P = MR = Demand curve not a smooth, downward-sloping, one; which means, partly, that firms do react to the behavior of others for market price to react (otherwise increases in output by one would have to be offset by proportional decreases in output by others as the neoclassical model confuses very small quantities with zero). The individual and market levels of neoclassical models are inconsistent.[xxv] The monopoly has produced where MC = MR, but the perfectly competitive firms wind up producing higher output some of which, at the industry or firm level, must be sold at losses where MC > MR due to infinitesimally small quantities being treated as zeros. The individual demand curve has to be downward sloping or else the market demand curve has to be flat as well.[xxvi] If the assumption that the individual perfect competitor has no effect on market price is relaxed, then the price and output levels for a perfectly competitive industry will be the same as for a monopoly according to Keen[xxvii].

Keen is well aware of the issue of economies of scale (present, according to Keen most in large firms or farms producing relatively homogenous products) and the issue of perfect competition being self-negating or self-imploding. No one goes into business to lose; they all dream of profits for power and power for profits. Big fish swallow small fish. Pure competition and its own survival imperatives dictate increasing product differentiation (real or imagined) leading to monopolistic competition and a slightly downward-sloping demand curve (some market power) and often, oligopoly and then monopoly—effective or actual. It is all very dialectical: negation of the negation, or, ultra-competition leads to anti-competition, which leads to more competition (among oligopolies) at higher levels with more at stake with more to lose. Size does matter, economies of scale do constitute serious barriers to entry and competition, the long-run supply curve assumes constant technology (a highly spurious assumption) and the only way that perfect competitors could exist in any long-run sense would be with an industry so huge that it could handle the huge number of very small firms that the perfect competition model requires. In answer to these reservations, the Neoclassicals retreat, again, to an attempted theory-saving assumption of constant returns to scale in which case size does not matter. According to Keen, when all these caveats are taken into account, the case for perfect competitors and against monopolies collapses with the exposed logical contradictions internal to the theory alone. But this should not be taken as an endorsement of monopolies, Keen notes, but each monopoly should be judged on a case-by-case basis he notes.

Neoclassical Marginal Productivity Theory
Keen finishes Part One, on the basics of neoclassical theory and its internal contradictions embodied in marginal productivity theory: “From each according to his contribution: why productivity doesn’t determine wages”[xxviii]. Keen takes exception—again—to the central notions of diminishing marginal productivity, smooth and continuous (downward-sloping) demand and (upward-sloping) supply curves horizontally summed from individual curves in his opening attack on neoclassical theory of labor-power markets. In neoclassical theory, “labor”, or actually “labor-power”, is treated as mere commodity, like an apple, subject to the same “laws”[xxix], and curves, of supply and demand, as an apple. But in labor-power markets, unlike other commodities like an apple, supply decisions are made by households while demand decisions are made by firms. According to Keen, this fact alone vitiates the usefulness of neoclassical marginal productivity theory in explaining wage determination, quantities of labor-power hired etc in the real world.

For commodities other than labor-power, demand is determined by consumers (mostly from Households) on the basis of incomes and tastes, while supply is determined by costs of production. But labor-power is not strictly consumed but hired to produce other commodities for sale and labor-power is not supplied for “profit” or subject to diminishing returns. So in essence, the demand for labor-power is determined by producers while the supply of labor-power is determined by consumers of the commodities produced by labor (the utilization or consumption of labor-power in production). According to neoclassical theory, the supply of labor-power is determined by a trade-off between income and leisure coupled with an assumed disutility of all labor and progressive taxation effects.
Demand for labor-power, and the hiring of each marginal worker, is assumed to be a function of the contribution of that worker to total profits relative to the cost or wage of hiring that worker to produce. In a perfectly competitive labor-power market, each firm can hire as many workers as it wishes at a going real wage rate[xxx] and hires up to, but not beyond, the point where the wage paid is equal to the marginal revenue product or the market value of the output of that last worker when sold. But the “productive contributions” or marginal revenue products of successive workers hired fall due to diminishing marginal productivity and/times constant P = MR in perfect competition, and, more steeply in imperfect competition, due to diminishing marginal productivity of labor times diminishing marginal revenue of the increased output produced by increased labor-power hired. It is all nice and neat. Workers are paid according to their marginal contributions to production—no free ride but no exploitation. Inequalities in wages and salaries, and wealth, are simply due to inequalities in productive contributions to society that come from inequalities in skills, educations, experience and market values of commodities produced by different types of workers according to neoclassical theory. If workers want higher wages, they should find personal or individual ways (not through collective action) to increase their personal marginal productivities and/or find employment in industries that produce commodities that command higher marginal revenues.
With normal commodities, a budget constraint line can be drawn with just about any y-axis and x-axis intercepts as long as the slope of the line reflects relative price of the commodities represented by it. The point of optimality is where the budget constraint line is tangent to the highest indifference curve. But with labor-power, and the trade-off between income on the y-axis and leisure on the x-axis, the x-intercept is at 24 hours the maximum theoretical time available for leisure. Thus the maximum that the budget constraint line can do is pivot around the x-axis with steeper lines reflecting higher wages and higher y-axis intercepts or substitution effects of income substituted in lieu of leisure. Again individual supply curves are summed up to yield an upward-sloping labor-power supply curve showing wage rate (price per unit) on the y-axis and quantity of labor-power supplied per unit of time on the x-axis. This model is often employed to show the futility of minimum wage legislation, demand management or any forms of “interference” with supposed “free” markets for labor-power. Ultimately, “free markets” are supposed to set levels of unemployment, real wages, and distributions of income and will reflect both income-leisure preferences and productive contributions of individuals as well.

Here Keen notes four basic objections to the neoclassical theory. He argues that labor-power supply curves may well be 1) backward bending so that a fall in wage-rates may induce an increase in quantity supplied of labor-power; 2) when workers face powerful and organized employers, workers will not get fair wages unless they organize; 3) Sraffa’s problems with aggregation of individual supply and demand curves to form market curves apply even more to labor-power markets; 4) notions of workers “freely” choosing between work and leisure is fundamentally flawed.
The argument can be made that at low wage-rates, and thus at low income levels, the imperative to work, or to “substitute income for leisure” (substitution effect) is very high whereas it diminishes at higher wage rates where one can earn higher incomes and at reduced work hours, and, the disutility of labor and progressive taxation effects are likely to outweigh the substitution effects. Plus at low wage rates, the relatively shallow slope of the budget constraint line, is likely to be tangent to a lower level indifference curve at a point of low hours for leisure and relatively high hours to work, whereas at higher wage rates, the point of optimality is likely on a higher utility indifference curve at a point of higher leisure and relatively less work. All of these factors result in a labor-power supply curve that shows: a) substitution effect > income effect (upward-sloping) at low real wages; b) income, disutility of labor and progressive taxation effects > substitution effects (backward-bending) at high wages and salaries; c) indeterminate (relatively vertical) at medium wages and salaries. There is no notion of someone working hard just to accumulate money and power as the purpose of work is seen to acquire income that is to be used up in leisure which is equated with consumption of commodities. Again, with a non-linear, non-smooth, discontinuous and jagged supply curve of labor-power, even assuming a continuous, smooth and downward-sloping demand curve for labor-power, multiple intersections of demand and supply, and thus equilibrium wage rates, are possible.

The notion that workers receive wages proportional to their marginal revenue product contributions, assumes perfect competition in both output/product and input markets. Neoclassical theory admits that when the product and labor-power markets are not perfectly competitive, then incomes do not simply reflect relative MRP contributions but also relative bargaining powers of employers and employees. In cases where product markets are imperfect, and demand curves are downward sloping giving rise to separate and steeper MR curves, the worker’s marginal revenue product falls more rapidly than under perfect competition because both marginal physical product and MR fall as output increases from more workers being hired (unlike in perfect competition where falling MRP is a function of falling marginal physical product of labor x constant P =- MR). This can be used to argue for unions as workers would be “exploited” being paid wages less than the price (MR

Sraffa had two basic critiques of horizontal summations/aggregations of individual supply and demand curves to form market supply and demand curves: one for a broad definition of an industry and one for a narrow definition. Labor-power markets behave like Sraffa’s broad industries. Movements along an upward sloping supply curve between particular wage-rate/quantity supplied points will have implications on income distributions and thus demand for products produced by labor and thus product prices and marginal revenues. This will mean a different demand curve for labor power (MRP) at each point along the upward-sloping supply curve of labor power and interdependence of supply and demand functions; and thus, multiple possible equilibrium wage rates and “perverse” outcomes and incentives. Finally, few forms of leisure other than sleep do not require income. But if the quantity supplied is a direct function of wage rate, then the lower the wage rate and thus income, the lower the quantity of labor supplied and the higher the supposed “choice” for leisure. In reality, people do not “choose” between work and leisure, not most people; most people simply work to survive and try to do what it takes (quantity, quality and duration of labor-power) to do so.

This concludes the main points in Part One of Keen’s book that deals with internal logical inconsistencies or contradictions in neoclassical theory. Part Two of the book deals with Keen’s suggestions for a new kind of economics curriculum that offers alternatives to neoclassical theory that is more than just a debate on the existing scope and depth of the typical undergraduate economics curriculum.
Keen’s Notions of a New Kind of Economics: the Cambridge Re-switching Debate
Keen suggests a need to focus on the Cambridge[xxxi] debate on the real nature, measurability, alleged homogeneity, “productivity” and role of “capital”, in theory versus in reality in undergraduate curricula. According to Keen, the term “capital” has two meanings in neoclassical theory: a sum of money and a stock or collection of machinery. They assume that the two terms can be used interchangeably with the money value of the machines used as a proxy variable for the physical quantities of very diverse machines. But machines are often specialized, complicated, made of sub-systems and parts, “lumpy” and not infinitely divisible, and thus diverse physical “units” of capital are difficult to qualify and quantify and thus aggregate either in monetary (money value of machines) or physical terms[xxxii]. This inability to define and measure a “unit” of “capital”, or aggregate “units” of “capital”, then UNDERMINES: a) any notion or measurement of the “marginal productivity of capital”; b) any notion of diminishing marginal productivity of capital; c) any notion that, as the neoclassical theory assumes, profit represents the return to the marginal productivity of capital; d) any notion of the rate of profit depending upon the ‘amount’ of capital rather than the actual case of the measured ‘amount’ of capital depending upon the rate of profit; e) the essential assumption of neoclassical theory that interdependence of industries can be ignored.[xxxiii] ; f) the traditional diagrams showing “households” supplying “factors of production” (labor and capital) to “business” that use them to produce the goods households buy with their earned incomes; g) the notion that “capital” is some kind of homogeneous substance and that what is capital-intensive depends upon the rate of profit; g) the notion that the rate of return on capital represented the marginal product of capital; h) that a particular production function that had lost its primacy to others at a given rate of profit could not regain its primacy at a higher rate of profit unless it benefited from increasing marginal product for a period of time; i) that capital demand could not be upward as well as downward-sloping and supply curves could not be downward as well as upward-sloping with no definable equilibrium position; j) that there is no consistent relationship between “factor incomes” and “factor productivity”; k) that the rate of profit is not a function of inter and intra-class balances of power; l) that “factor prices” determine the distribution of income rather than the distribution of income between wages and profits being necessary to determine factor prices; the distribution of income, independent of the productive processes and a politico-legal and socioeconomic phenomenon.

The Need for Epistemology and Scientific Method in Economics Curricula
In his essay on “There is Madness in Their Method”, Keen takes on, and suggests to be taught in undergraduate curricula, the question of “What is science and scientific method? Keen characterizes neoclassical theory, or “economics” as a “science” but a “pathological” one. He takes on the central axioms or postulates of Philosophical Positivism embodied in neoclassical theory: a) that theory cannot be judged by the soundness of its assumptions only the accuracy of its predictions; b) that predictive accuracy confirms the deductive validity as well as soundness of assumptions of syllogisms and hypotheses; c) that the more significant and all encompassing the theory the more abstract and unrealistic are its assumptions; d) negligibility can be mixed or not differentiated; e) the instrumentalist notion that theory is never an accurate or even a proximate description of reality, but is merely an instrument for predicting the future[xxxiv]; f) negligibility .assumptions (minor details may be ignored[xxxv]) domain assumptions (about the applicable range of conditions of a theory[xxxvi]) and heuristic assumptions (for expositional or analytical devices[xxxvii])
In this discussion on scientific method, Keen relies on the taxonomies of assumptions and critiques of philosopher Alan Musgrave et al.[xxxviii] He notes that subsequent to the initial developments of macroeconomics, this sub-discipline has been under siege not from any asserted lack of, or concern for, the predictive validity of its models, but from a purported lack of correspondence between core assumptions of microeconomics (rationality, markets in equilibrium etc) to form the core assumptions (micro-foundations) of macroeconomics; assumptions do matter in neoclassical economics when convenient. Assumptions may be contradictory leading to internal incoherence (the object of Keen’s inquiry) in a theory. Each “science” is a society of practitioners as much as an intellectual discipline with shared mindsets and core postulates (cannot be challenged without challenging the very foundations of a paradigm) and ancillary ones (that serve, and can/will be modified, to protect the core ones) against attacks from other practitioners from other paradigms which will occur as powerful interests are threatened.[xxxix]
Notions of the equivalence of “superpositionality” (“Schrodinger’s Cat”) found in Quantum Mechanics (different possible positions or aspects of the same phenomenon yielding different approaches or even “laws” having equal validity) or the Heisenberg Effect (phenomena influenced by observations and observers of them) are summarily and incorrectly rejected as impossible by mainstream economics. Core postulates in economics are held on to far longer and with greater zeal than in any other discipline Keen shows due to sociological and economic interests involved in economic constructs more than in the physical sciences. Popper’s Notion of a science being one that makes potentially falsifiable hypotheses, rather than a discipline that uses experimentation, makes no allowance for if or if not, and on what basis, a statement or hypothesis can in fact by falsified in practice. And the focus/obsession with equilibrium in neoclassical economics is both tautological and ideological dressed up as something else.
In this chapter on scientific method, Keen makes an amazing statement that parallels the “End of History” statement of neo-Hegelian Francis Fukiyama[xl] that Fukiyama has since repudiated:
“At the beginning of the third millennium, there is no competing social system against which capitalism must prove its superiority. Feudalism is long dead, and those socialist societies which remain are either socialist in name only, or bit players on the world stage.”[xli]
Neoclassical Theory and Time
In his essay “Let’s Do the Time Warp Again: Why Economics Must Finally Treat Time Seriously” Keen basically rehashes the central points made elsewhere in other essays: a) analyses based on statics and comparative statics do not work well to illuminate or predict aspects of an inherently dynamic economy in which ongoing changes, that take time to occur are the norm; b) small deviations from some supposed equilibrium will not set up morphostatic processes to move the economy back to that equilibrium; c) conventional theory ignores the time-based process through which deviations from equilibrium trigger back-and-forth or negative (morphostatic) reactions leading to a new equilibrium or restoration of a previous one; d) at “higher” levels of analysis, neoclassical theory relaxes the partial equilibrium and “ceteris paribus” assumptions to deal with “all things interrelated”; but instead of a more dynamic and realistic narrative that allows for disequilibrium as well as equilibrium, students get a general equilibrium model purporting to show how all aspects of an economy can be simultaneously in equilibrium—yet they wind up showing that general equilibrium is unattainable within their own paradigm; e) change in price in one market will affect consumer demand (and thus trigger disequilibria) in other markets especially if trades occur, as they will in the real-world, at non-equilibrium prices[xlii]; e) Walras’ vision, solvable with simultaneous linear equations totally falls apart when non-linear difference or differential equations, plus abandonment of the fiction of everything happening at or tending towards equilibrium, are employed[xliii]; f) Debreu’s general equilibrium model, a parallel of the linear Leontief matrix is inherently unstable as the system cannot reproduce itself on a simple or expanded level (e.g. if the required inputs of iron for year 10 exceed the output of iron in year g) and because prices must be feasible in reality—e.g. non-negative prices; economics needs to focus on dynamics and not merely as processes between and tending to static equilibrium states; h) economic analysis should be concerned with rates of change not absolute levels of various variables; i) mathematically unstable systems do not merely cause fluctuations around equilibrium states, they may cause break downs and implosions or, they may simply produce chronic disequilibrium (cycles, Chaos Theory and weather/climate systems); j) more than two variables in a system of non-linear differential equations yields no possible analytic solution and simulations must be conducted to see what complexities may happen; k) butterfly effects (with merely three differential equations) in weather modeling yield order-out-of-chaos complexity with three equilibriums all diverging systems away from equilibrium with even small disturbances; l) if equilibria of a system are unstable, then neither the initial nor the final position of the model will be in equilibrium and thus the notion that dynamic analysis plots movements from one equilibrium to another is simply wrong and equilibrium tells you where the model never will be; m) static analysis cannot be used as a proxy for dynamic analysis; n) non-linear relationships in differential equations will lead to complex but bounded behavior.

Neoclassical Theory versus Institutionalists versus Marxism: Aggregation, Growth, Crises
Keen applies to Marx, the Goodwin model of cyclical economic growth first suggested by Marx. Marx noted that in a highly simplified economy made up of only capitalists and workers, there would be recurring cycles of income and employment shares. During high rates of economic growth, associated high levels of employment would lead to higher wage demands eating into profits, causing reduced investment and recessions, which would then produce the opposite conditions of higher unemployment, reduced wages, higher profit levels that would trigger new recovery of higher growth rates, employment levels and wage demands eating into profits… This model reduces down to two central equations: a) rate of change of workers’ share of output = workers’ wage demand minus (-) the rate of productivity growth; b) the rate of change of employment = rate of growth of output minus (-) population growth and technological change.
These two equations of Marx’s simplified model are linked as workers’ wage demands depend upon rate of employment while rate-of-growth determining investment depends upon income distribution (higher ratio of wages to output reduces profit and thus investment). These two equations yield cyclical patterns similar to that envisaged by Marx as workers’ share of output and rate of employment both cycle indefinitely and do not tend towards oscillate around some kind of equilibrium. When the variables debt-to-output ratio and government spending are added for more realism, cycles in all variables continue without any exogenous shocks being introduced.

In his essay on “The Sum of the Parts: Why Keynes’s Criticisms of Conventional Economics are Still Relevant Today”, Keen takes on the origins and history of macroeconomics[xliv] in overall conventional economics. Macroeconomics was criticized for a long time as a patchwork of ad hoc assumptions, some contradictory, about phenomena at the macro or aggregate level. It was accused of lacking the “logical rigor”, supposed tight foundations and internal coherence of microeconomics[xlv]. Since its foundation, macroeconomics has been under siege to more clearly and tightly build its analyses and models on the foundations of microeconomics (micro foundations of macro) no matter what the methodological problems in treating collective social welfare as the product of aggregating or summing of individual welfare situations. But problems of aggregation, along with some other methodological problems, led to the fiction of the supposed “single representative agent” or single producer/consumer as a model of the whole macro economy[xlvi]. Keynes’ and Marx’s critiques of conventional economics are still appropriate critiques of modern economics.
Neoclassicals, like political conservatives in general, see the whole or macro as, and equal to, a mere summation of its parts or micro elements. This stands in contrast to the Institutionalists, who see the whole as greater than the sum of its parts (due to synergy or the potential energy embodied in complementarity and synchronicity of parts of a system). Marxists and Marxians see systems as wholes that can be greater, or less, than the sums of their parts due to progressive and regressive roles and balances of contradictions within, defining and driving, all systems. Neoclassicals see “causality” as linear and unidirectional with ultimate independent (exogenous shocks) and dependent variables (final effects) with endogenous (internal) morphostatic (self-equilibrating) processes between causes and effects. Complexity theorists, Institutionalists and Marxists see “over-determination”, non-linearity, order in chaos and chaos in order, and chronic disequilibria of systems[xlvii]. Neoclassicals assume that the economy can be meaningfully analyzed as a separate sphere of society, without any reference to socioeconomic and politico-legal or environmental contexts or history, whereas Marxists and Institutionalists make no such assumptions. Neoclassical theory assumes a separate and “pure” science of “Economics” is possible and “scientifically” more useful than the approaches of “political economy”. The Neoclassicals assume an abstract model of universal humanity, Homo Oeconomicus, (free of gender, age, race, ethnicity, social class, educational background etc) or the “representative agent” that is used to predict human behavior. Institutionalists and Marxists assume many variables (some biological, social, historical, contextual and stochastic) govern and shape forms and content human behavior in diverse contexts. Neoclassicals see the test of the scientific worth and validity of all theory (including validity of the logic and assumptions of theory) is predictive validity. Marxists assume a dialectical unity of theory and praxis, each informing the other, with the purpose of theory not only to predict and guide action, but to explain the essences of things and to provide useable foundations for further theory and praxis. And where Neoclassicals claim their science to be “value-free”, Marxists openly proclaim their science to be developed and applied and “biased” in the service of the oppressed and against oppressors. In Neoclassical theory, the focus is on individuals, consumption, and exchange.

Say’s Principle or Walras’ Law: Marx vs Keynes
Say’s Law, sometimes called “Walras’ Law” or “Say’s Principle” is an example of a notion of the macroeconomy as morphostatic system where “Supply creates its own demand” or in modern terms “The Sum of all notional excess demands is zero.” It is based on the supposed “Income-Output Identity” that says since all expenditures are costs, and all that are costs for some, are also revenues incomes for someone else, thus the nominal money value of all costs of total output must equal the sum of the various forms of incomes earned producing those goods and services that make up total output, “therefore” Supply (output) will always create sufficient incomes to demand that which has been supplied and in the aggregate, there will always be sufficient demand to justify supply. This model assumes a highly competitive economy in which prices are as free to fall as to rise. Individual agents may be net buyers or sellers of various goods and services but in sum their excess demands will be zero carrying over to the whole economy when all agents are aggregated. All of this implies that intervention of any forms, in a supposed “self-regulating and self-equilibrating economy would lead to cures worse than the diseases they were intended to treat. Since prices (wages, interest rates, rents, product prices) were assumed to be perfectly flexible upwards and downwards, any short-run deviations or notional excess demands were assumed to be zero in the long-run. If Savings(S) > Investment(I), then supposedly, according to Neoclassical theory, interest rates were too high, they would fall, causing increased quantity demanded of loanable funds to be used for increased investment, and quantity supplied of loanable funds would fall until S = I. If demand for consumer goods fell (notational excess demand negative), demand for investment goods would supposedly rise (notational excess demand positive) and offset the fall in demand for consumer goods. If Tax revenue were greater than Government Spending, the economy would slow down, rising unemployment and falling incomes would cause both falling tax revenues and rising government expenditures on transfer payments, until T = G. If imports (M) > Exports(X) then net outflow of money supply would reduce the general price level (Quantity Theory of Money) which would then make exports cheaper and stimulate export demand, make imports relatively more expensive and reduce import demand, until, voila, M = X. And finally, if unemployment is on the rise, it “must mean” that real wages are too high and thus when wages fall and those unemployed are willing to worker harder for lower wages they will no longer be “voluntarily unemployed”. This was the narrative and vision of “Says Law” or “Walras Law”.

Here Keen first brings in the voice and critique of Say’s Law by Keynes who divided the economy into consumer goods and investment goods sectors. If for example, notional excess demands for consumer goods goes negative, then instead of notational excess demands for investment goods being positive to offset the rising surpluses of consumer goods as Say’s or Walras’ “Law” would predict, then, since investment is based on profit expectations, then a fall in demand for consumer goods and rising unemployment, more than likely, leads to general pessimism. The net result will more likely be more, not less, negative notational excess demands for investment goods as well as for consumer goods, and thus a cumulative-change-based downward and general slump of the whole economy.
Marx’s critique of Say’s Law was more penetrating than Keynes’ according to Keen. Marx took on the central implicit assumption of Say that commodities are sold to acquire money to be used to immediately purchase other commodities and none is used to accumulate wealth. But the central desire, and indeed systemic and contextual imperative of capitalists and thus capitalism, is to accumulate surplus-value, wealth and market power, and expanded reproduction of the system itself, at risk, of loss of market power and competitiveness, and thus of eventual failure of the business, for failure to do so relative to competitors. If every agent’s intended excess demand were zero, then capitalists, would not be able to produce surplus value.[xlviii] Say and Walras envisaged an economy with no production, only pre-existing commodities exchanged with each agent striving to covert commodities of “fair” and “equal” values. (C1 —-M—–C2) where C1 and C2 are commodities with different use values but equivalent exchange values and M = Money. But capitalists, according to Marx are governed by capital circulation circuits that violate Say’s/Walras’ ‘Law’: M—-C—-M’ where M is the money advanced to purchase commodities (C) labor-power and raw materials that produce value greater than the costs of the labor power and other inputs to be sold at a sum M’ > M. The capitalists are driven to supply more (product commodities) than they demand (input commodities) with the difference accumulated surplus-value, which means their excess demand is negative and the sum of all excess demands is negative not zero violating Say’s/Walras’ Law.
Further this is all happening over time ignored in the neoclassical analysis even with comparative statics. Economic growth requires sustained and rising aggregate demand to trigger and justify rising investment, employment, aggregate supply, incomes etc. This requires, according to Keen, citing Minsky that summed-up over all sectors, current spending plans be greater than current received income. This means that production, exchange, and credit, be seen as integrated and holistic aspects of all capitalist economies.
Several Neoclassical notions are taken on by Keen: a) of the rate of profit being driven down by competition to “normal profit”; b) the marginal product of capital (marginal contribution of capital to output and treated as a “cost” of capital or zero notation) taking profit (or even super-profit in the short-run) as a variable out of economic theory in the long-run; the notion of Walras’ Law on the sum of notational excess demands equal to zero providing a sort of center of gravity around which the economy and its sectors oscillate. Marx’s analysis and critique of Say’s Law was far more penetrating than was Keynes’ and Keynes actually embraced Marx’s critique after becoming aware of it. But Keynes did add to the discussion according to Keen with his introduction of the difference between uncertainty and risk in investment and the imperative for “rules of thumb” and heuristics in investment planning. We project our highly imperfect understanding of the present on to the future (e.g. liquidity preference) leading to highly volatile investment, employment and output structures and patterns. Keynes also took on the concept of marginal efficiency of capital (MEC or MEI = ratio of yield of capital to price of capital) as ‘indeterminate’ because of volatile asset prices and a different MEC for each asset price. Instead of the MEC being a determinant of investment, it may be better regarded as a by-product of investment and current expectations[xlix]. Thus, according to Keynes, because of risk versus uncertainty, expectations about the future based on the present, liquidity preference determining the rate of interest, speculative capital asset prices, Saving and Investment could well be out of balance for protracted periods[l].
The demise of the IS-LM rendition of Keynes by Hicks led to other paradigms and models such as the “Rational Expectations” school and then the “representative agent” model of the macroeconomy. The Rational Expectations School was a reaction to the 1970s stagflation and the undermining of the so-called Phillips’ “trade-off between inflation rates and unemployment rates by both falling real output and rising unemployment (stagnation) and rising inflation rates.
The Phillips’ Trade-off: Unemployment or Inflation
The Phillips’ Trade-off between unemployment and inflation rates was partly based on the Classical assumption, embodied in the Quantity Theory of Money, that inflation was due to excess rates of growth of money supply and thus was demand-side based. To reduce unemployment required stimulating aggregate demand the price of which would be higher inflation. To reduce inflation meant reductions in aggregate demand the price of which would be higher unemployment. But how to explain both rising unemployment and inflation rates and save the cornerstones of Classical/Neo-classical theory? The “Rational Expectationists” (RE) argued that the predictions of all economic agents would correspond with the predictions of the IS-LM model and that those predictions would be correct. If not-expected, an increase in money supply would reduce unemployment with a lag in time until the inflation occurred. If the inflationary effects of an expansionary monetary policy were correctly predicted and anticipated, then according to the RE school, then they would raise prices immediately to get ahead of the predictable and predicted inflation, with the result that rising general costs with rising prices, would only cause decreases in aggregate supply, exacerbating inflation, and also mitigate any unemployment reducing effects of an expansionary monetary policy. This theory diminished in the 1980s with repeated demolition by empirical evidence; but it shows how traditional economics will attempt to rescue core postulates of a theory of a self-adjusting/equilibrating macroeconomy, when under assault by reality and empirical evidence, by creative “adjustments”, utilizing totally bogus ancillary and rescuing ad hoc assumptions.
Market Efficiency and Asset Pricing
Keen’s final chapter in Part II, the whole section of which is on complexities or issues that should be part of a sound education in economics, deals with market “efficiency” and asset pricing in financial markets: “The Price is not Right: Why Finance Markets Can Get the Price of Assets so Badly Wrong. Here Keen takes on the assumptions and “logic” of traditional theory on financial markets: 1) the assumption that all financial investors have identical expectations about all financial prospects of all companies; 2) that these identical expectations of all investors are correct; 3) that all investors have unlimited credit; 4) the markets clear with respect to every interval of time; 5) all debts must be paid. These core assumptions are employed to argue, or rather summarily assert[li], that competitive financial markets will correctly (“efficiently”) price assets even with uncertain future earnings.
Keen then takes on the conventional theory with a critique of the work of Irving Fisher whose own failure to predict the 1929 stock market crash and later Great Depression led to his own personal financial ruin. Here some of Keen’s critiques are prophetic with respect to the current global financial crises and meltdown as he walks through Fisher’s 15 determinants of stock price levels and Fisher’s own failure to apply them, along with the failure of his own models, in the sudden evaporation of his wealth. Instead of being in or tending toward equilibrium, Fisher saw financial markets as deviating further from supposed equilibrium if disturbed, and even fully imploding depending upon debt loads, how many debtors were totally broken, over-investment, over-speculation, deflation, rising real value of debt, pessimism, hoarding, and reductions in the money supply set off chain reactions leading to the Great Depression and modifications of Fisher’s pre-Depression work. Keen critiques here of any notions of financial markets being inherently efficient and self-equilibrating. They are, he argues, inherently unstable, inefficient, highly speculative vehicles in an uncertain environment and volatile ‘fractal markets’ that overreact to good and bad news, generate cycles in asset prices and drive speculative booms and bubbles along with debt-driven busts and implosions.

Keen and Reforming Capitalism
Part Three of his book of essays ends with proposals for “Alternatives” to the menu typically served in most undergraduate programs in Economics. In his essay “Finance and Economic Breakdown: Why Stock Markets Crash, he suggests the need to explore some of the central constructs of Chaos Theory, the Fractal Markets Hypothesis[lii], the Inefficient Markets Hypothesis (endogenous instability accounts for ¾ of all volatility with real impacts on the real economy in crowding out investment etc), the Financial Instability Hypothesis of Minsky (how finance interacts with the real economy to produce booms and busts via Ponzi schemes and deleterious debt-to-asset ratios) and proposals for regulatory reforms of financial markets. Here Keen notes that:
“ Reform, of course, cannot make capitalism stable; but it can remove the elements of our corporate system which contribute most strongly to instability.” [liii]
Here Keen suggests exploring some proposed reforms to reduce the volatility and casino-like atmosphere of the stock markets and appears intent to show that such proposals[liv] are not that “radical”. Why he would avoid the use of the word radical or find radical solutions problematic we can only speculate if we dare.[lv] But I do find, in his general focus on internal logical inconsistencies of Neoclassical theory, an absence any discussion of the real world consequences, on real people, of the bankrupt and contrived assumptions of Neoclassical theory when they are taught, accepted, acted upon and embodied/applied in real-world policies. The words “imperialism”, “genocide” and “racism” are not even mentioned in the index to his book.

Keen, who describes himself as a “critic of neoclassical economics who likes mathematics”, provides an interesting discussion on the uses and misuses of mathematics in his essay “Don’t Shoot Me I am Only the Piano: Why Mathematics is not the Problem”. Complaints about the misuses of mathematics he argues, is like blaming the instrument (piano) for the discordant playing of the piano player. He argues that new approaches to the teaching of Economics should focus on math not only as a tool to illuminate reality, but also as a tool to identify, critique and expose the contradictions and misuses of mathematics in neoclassical theory. He explores “Bad Mathematics”[lvi]; “Limits to Mathematics”[lvii]; “The Recurring Nightmare of Straight [and smooth or continuous] Lines”[lviii] and a slight discussion on the future of mathematics .

Keen and His Views of Marxism
In turning to some alternatives to neoclassical economics, Keen makes the following statement:

“We now turn to some of the alternatives to conventional economics that do exist—warts and all. We begin with the most radical alternative—Marxian economics. You may, if you have typecast me as ‘left-wing’ expect me to praise Marxian analysis. If so, you are in for a surprise.”[lix]
Keen’s essay or chapter on “Marxian Economics” has the provocative title “Nothing to Lose but Their Minds: Why Most Marxists[lx] Are Irrelevant But Most of Marx is Not.” Here he argues against Marx’s theory of surplus value and the notion that it comes from labor alone and is the difference between the value of output created by activated labor-power (labor) and the commodity labor power (capacity to labor). Keen claims that Marx did not understand his own logic and had proposed a theory on the foundation of reasons that he himself had previous shown to be erroneous. He also argues that “Marxian economics” still remains a powerful tool for understanding the essence and dynamics of capitalism as long as one does not accept the inevitability of the demise of capitalism to due self-implosion from its own defining and internal contradictions. But Keen does argue that Marx was far more than as Samuelson characterized him: “a minor Post-Ricardian” and notes that Marx’s theory of value[lxi] actually liberates classical economics from the centrality of the labor theory of value providing a deep and critical understanding of capitalism. Here Keen goes through and dismisses the Physiocratic notion that “Land” (which existed/exists prior to and without Capital and Labor) is the source of “Value”. He dismisses Smith’s labor theory of value on the grounds that a theory or model of labor as a sole source of value, could not determine price, yet ratios of values (of only direct forms of labor) were supposed to determine exchange ratios and thus no allowance for profits and rent in pricing. Adam Smith was left with an adding-up (of “costs”) theory of price determination and thus no strict relationship between value and price.
Ricardo, who accepted Smith’s labor theory of value differentiated between “labor embodied” (direct labor time) and “labor commanded” (labor time plus profit and rent or both direct and indirect labor time) with embodied labor being less volatile than commanded labor in price determination. Ricardo, unlike Smith, argued that machinery created no net value or value in excess of its own value or the value lost in depreciation.

Marx critiqued Ricardo for understanding, on the one hand, that the value of labor-power (wages) is less than the value of output produced by that activated labor-power (labor) while on the other hand not asking why the difference that gives rise to surplus value. Marx rejected Smith’s notion of possible “productivity of capital” arguing that value ‘created’ equals value lost (depreciation) by capital. But Marx was careful to avoid any theory of surplus-value or profit that depended upon buying cheap and selling dear in exchange and assumed that on the average, commodities sell at their real values (socially necessary labor times) and profits are the result of selling them at real values (real values of output produced by labor and value of labor power or capacity to work that is utilized for labor) on the average.
Keen’s critique of Marx includes the so-called “Transformation Problem” (values into prices) which he treats relatively lightly.[lxii] He also takes on Marx’s “Labor Theory of Value and Surplus Value” with the claim that three of Marx’s central assumptions violate his own general approach to commodities: a) that with respect to means of production, purchasers make use of exchange but not use value; b) that their use-values cannot exceed their exchange values; c) that the use-values of commodity inputs (machinery, intermediate goods and raw materials) are transferred to the use-values of the commodities they create as long as they lose their exchange value. These assumptions, Keen argues violate Marx’s general approach to the analysis of the commodity[lxiii]. He argues that in attempting to rescue his theory of value and surplus-value from internal contradictions, Marx wound up in compromise with his own principles and postulates[lxiv]. Keen argues for an abandonment of the labor theory of value and the notion that only labor can create value or surplus-value. He also argues that the appreciation and usefulness of the full richness of Marx’s contributions, often misunderstood or caricatured by Marxists and Marxians themselves according to Keen, can only be restored by differentiating between Marxism and the works of many Marxists driven by ideology to rescue Marx from internal contradictions in the same fashion as neoclassicals are driven by ideology to attempt to rescue neoclassical economics from its own contradictions. Yet it was Marx himself, who urged in a letter to Arnold Ruge, not the utopian “construction of the future for all time”, but rather the “ruthless criticism of everything that exists; the criticism being ruthless in the sense that it neither fears its own results (even if in opposition to Marx’s results) nor fears conflict with the powers that be.”[lxv]

I fear that Keen, who decries some of the alleged inconsistencies Marx’s unfinished work, some of the alleged errors of applied Marxism and the alleged self-absorption of some Marxists, even Marxians, does not understand that Marxism represents far more than the unfinished manuscripts of Marx or many of the self-proclaimed Marxists and Marxians that inhabit the halls and journals of Western academia with which he is familiar.
Keen’s final essay/chapter is entitled “There are Alternatives: Why There is Still Hope for a Better Economics”. He gives a very brief overview supposed strengths and weaknesses of Austrians[lxvi], Post-Keynesians[lxvii], Sraffians[lxviii], Chaos-Complexity theory[lxix] and Evolutionary economics[lxx] none of which he claims can take over as the dominant paradigm for the 21st century, which he said, in 2001, awaits a global crisis of capitalism.
[i].Keen Steve Debunking Economics: The Naked Emperor of the Social Sciences. Zed Books, London, 2003; see his essay in this book entitled “Nothing to Lose But Their Minds: Why Marxists are Irrelevant But Most of Marx is Not” pp. 269-99; see also support for the book at
[ii] Keen critiques what is typically taught at undergraduate levels not some sophisticated modifications of neoclassical theory taught in graduate schools.
[iii] Keen Steve, Ibid Zed Books, London, 2003, p. 4
[iv] Keen, Steve, Ibid. cite of Lancaster, K and Lipsey, R.G. “The General Theory of the Second Best”, 1956, “Review of Economic Studies” Vol. 24: 11-3. The theory of second best notes: a single step to an ideal situation reduces net social welfare if two or more steps are required to move from a present to ideal situation—all or none ideal solution.
[v] Keen notes in his opening essay “No More Mr. Nice Guy”: “Clearly then, my target in this book is not economics in general, but the dominant school of thought within economics.” Keen, Steve, op cit. p. 10
[vi] “Marxians” are typically academics who study and appeal to some of the core concepts of Marx, mostly on the basis of the superiority of Marx’s theories or theoretical system in terms of empirical support for core constructs and/or in explaining and predicting—more than in transforming—reality. Often their objections to the core postulates and axioms of neoclassical economics are as “a-priori” as are the postulates and axioms of the Neoclassicals to which they take exception; and they are often based on what is of particular interest intellectually to them personally, rather than on any documented practical utility (in concrete struggles, under concrete conditions, of concrete oppressed peoples), of the theories they develop. Marxists, on the other hand, are guided by the notions of unity of theory and praxis, seeking truth from facts, and Marx’s 11th Thesis on Feuerbach that is the inscription on his grave at Highgate cemetery in London: “The Philosophers have only interpreted the world in various ways; the point, however, is to change it”. Marxists are thus very concerned with how theory advances and is in turn tested by application in concrete praxis.
[vii] Some of the American leftist academics have found themselves at places like the Santa Fe Institute doing work in non-linear dynamics, Chaos-Complexity theory, “ordinary differential equations” (e.g. third-order non-linear differential equations) applied to issues. Although Chaos-Complexity theory contains some parallels with core postulates and approaches of dialectical materialism (unstable equilibriums; perpetual change; cumulative change via positive feedback loops; morphogenetic instead of Newtonian-like and self-equilibrating morphostatic systems;“negation of the negation”; order underneath chaos and potential chaos in all order due to fundamental contradictions; non-linear change; etc), some call Chaos-Complexity theory “faux” or “mechanical” or “vulgar” or “academic” dialectics” because of an emphasis on a-priori model building and testing outside of real-world praxis to apply and test the theory. Keen himself calls Chaos theory and evolutionary economics “alternative religions”.
[viii] Keen, Steve, op cit. p. 14
[ix] Some critics of neoclassical economics see it as an essentially coherent and internally consistent theoretical system founded on three basic meta-postulates, composed of several sub-postulates, that are fundamentally bankrupt: I Methodological Individualism; II Methodological Instrumentalism; III Methodological Equilibration Arnsperger, Christian and Varoufakis, Yanis, “What is Neoclassical Economics?”, Post-autistic Economics Review Issue 38, July 2009 cited in Craven, James in “Neoclassical Economics and Neo-liberalism as Neo-imperialism”, paper presented to The Academy of Marxism, Chinese Academy of Social Sciences (CASS), August 11, 2009. Beijing, PRC.
[x] Keen, Steve, Ibid. p. 8 Here Keen asserts that it is the lack of internal consistency in the neoclassical theories and neoliberal policy prescriptions, rather than the class-nature of the values, approaches and objectives of the theories and policies, that prevent their usefulness in illuminating, understanding and transforming the aspects of the real world that they model. He does not appear to allow for a logically internally consistent and coherent theoretical system that is totally bankrupt in its ability to understand or transform the real-world because the class it was designed to serve, against the interests of other classes, is a doomed class from its own internal contradictions, imperatives and balances of forces in the real world.
[xi] Giffin goods are inferior goods whose actual consumption declines as income increases. Necessities are goods whose consumption as a share of income declines. Luxuries are those goods whose actual consumption and share of total income rise as income rises. Representative goods ate those whose share of income spent on them is constant regardless of level of income (do not exist). Engels curves, which map the changes in spending patterns as incomes change, can assume any shape. For Bentham’s postulate (the whole is a simple sum of its parts) to hold true, Engels curves would have to have a constant slope (fixed distribution of income which violates the assertion that relative incomes are determined by the price system) or, they must all have a constant slope (which means Engels curves must be linear straight lines and thus goods are neither necessities nor luxuries) and the same slope (all have identical tastes). These are known as ‘homothetic’ and ‘affine’ Engels curves (meaning that Bill Gates spends every dollar the same way as everyone else and no one’s structures of consumption vary as a function of age, income or other factors). These assumptions needed to derive social utility from the sum of the individual utilities—that all individuals are identical and unchanging, or, that society is made up of only one individual consuming one good, are absurd on their face yet are employed in neoclassical analysis which attempts to get around the absurdity with the construct of the “representative consumer” or ‘SMD conditions’, another absurdity).
[xii] According Stanley Jevons one of the founders of neoclassical economics, behavioral motives from compassion, conscience, religious or other sources, that cannot be simply reduced to utility maximization and pain avoidance, also play a role in human behavior but cannot be easily, if at all, mathematically modeled).
[xiii] Conventional consumer indifference curves assume: a) Completeness (various possible combinations of two goods, A and B, can be rationally, consistently ranked at the ordinal but not cardinal level (qualified as more, less, or equal but not quantified) in terms of utility they yield to a particular individual; b) Transivity (If A preferred to B and B to C then A to C preferred); c) Non-satiation (more preferred to less); d) Convexity (“Law” of Diminishing Marginal Utility gives rise to convex shape of indifference curves); e) All income is consumed in the present with saving simply treated as consumption of future goods; f) individual demand curves derived from individual indifference maps as budget constraint lines pivot with changes in relative prices with income constant, and uncritical parallel shifts with relative prices constant and income changing; g) labor supply is simply a choice between income and leisure with the slope of the budget constraint line equal to the real wage; h) choices between present and future consumption of goods are indifference curve maps with relative prices replaced with the rate of interest or rate of time preference.
[xiv] This is analogous to someone with size-10 feet putting on a size-7 shoe and when the shoe does not fit, that person elects to amputate his toes to make the size-7 shoe fit rather than seek a properly-sized shoe.
[xv] Keen, Steve, op cit, p. 52 cites the work of Alan Kirman on “collectively coherent” group behavior;
[xvi] Traditional neoclassical theory, which defines short-run as a time period in which at least one factor of production is fixed (say land or “capital”) while others vary (say “labor”) and “factor crowding” of the fixed factors; this leads to diminishing marginal productivity and thus rising marginal and average costs as output increases. This perspective tends to weigh the factor-crowding effects stronger than the offsetting, synergistic and cost-reducing effects of increasing specialization and division of labor coupled with the human capacity to learn and adapts to reverse emerging conditions like diminishing marginal productivity. Thus, in the real-world, unlike the textbook diagrams done by graphic artists for aesthetics, marginal and average cost curve are gentler, L-shaped rather than u-shaped, and less steeply rising; and thus supply curves may be flat or even downward sloping. The only way that the marginal cost curves could rise so slowly, while average costs curves rose so steeply, as neoclassical theory assumes and the textbook diagrams illustrate, is if only “trivially small” quantities of output were being produced.
[xvii] Piero Sraffa argued, as early as 1926, that the so-called “law of diminishing marginal returns” will not apply in general to an industrial economy where constant marginal returns, and thus constant marginal costs and a flat market supply curve would likely prevail. This was a direct attack on neoclassical theory of production in which diminishing marginal returns is the central “law or axiom” to analysis of all of production. In the event of constant marginal returns being the norm, then both the output and total revenue functions would both be straight lines through the origin with the slope of the total revenue line being greater (hopefully for the producer) than the slope of the cost curve. Once fixed costs were covered, there would be additions to total profits with every unit sold with more output adding more profits to infinity. Mainstream economists when given the Sraffa critique respond with even if it works in practice, does it work in theory?” which is the opposite of what science asks: “Even if it works in theory, does it work in practice?”
[xviii] Sraffa, Piero, “The Law of Returns Under Competitive Conditions”; “Economic Journal”, 40: pp 538-550; “The Trees of the Forest: A Criticism”; “Economic Journal, 44: pp 89-92; cited in Keen, Steve, op cit. p 317. If, increasing supply in agriculture, relative prices of land and labor change, then this changes the distribution of income and thus demand curve with a different demand curve along each of the points of the supply curve and thus it is impossible to draw independent supply and demand curves that intersect at just one place.
[xix] The notion of a smoothly falling demand curve and a smoothly rising supply curve intersecting to determine market price becomes an illusion. Where MC = MR, the MR of the last unit sold will be substantially greater than the MC of producing it and thus output is constrained not by MC but by costs of expanding sales at the expense of competitors. Instead, according to Sraffa, in the real-world, firms have a target output level they try to exceed and a target mark-up or profit margin they try to maintain with the size of the firm constrained by its market niche and access to favorable credit for expansion.
[xx] With a flat production function, the MRP will be constant in pure competition (constant MPP x constant P = MR) and thus will never intersect the real wage and thus the firm’s output level cannot be explained by cost or real wage of employing labor-power.
[xxi] Neoclassical theory has three notions of time: market period in which no factor of production can be varied; short-run with at least one factor of production constant so that increasing output is subject to diminishing returns; and long-run in which all inputs can be varied; this is still a comparative statics approach.
[xxii] Keen, Steve op cit. p.80. Keen gives a useful metaphor to illustrate his point. If deriving a car over a given distance, to calculate optimum speed to maintain to achieve optimum fuel consumption over a given distance., One would need to know lowest gas consumption per unit of distance traveled per second because if you work out the optimum speed first, then the lowest gas consumption is at zero km per hour which means zero distance. Since time is an essential aspect of economic behavior as distance is an essential aspect of travel, both problems have to be worked out simultaneously. The economic analogy for finding total profit maximization is equivalent to finding first optimum speed for gas consumption then multiplying it by distance traveled which winds up saying that the cheapest way to get from point A to point B is at zero miles per hour.
[xxiii] Problems in the neoclassical theory of monopolies are illustrated via a metaphor of trying to convince someone that the earth is flat starting from the premise that it is a sphere. A small plot of land on which someone is standing appears flat for all intents and purposes and any curvature is not noticeable and thus would be treated as zero curvature for all intents and purposes. When adjacent plots of land are brought into the discussion, larger segments also appear flat so that when all are aggregated, the earth appears flat.
[xxiv] In neoclassical theory, as it is taught typically at the undergraduate levels, demand curves of monopolies and other imperfect competitors, are presented as linear, smooth and downward-sloping and thus, marginal revenue curves are also shown as linear, downward sloping, smooth, and intersecting the x-axis at half the distance from the origin to the x-intercept of the demand curve.
[xxv] According to Keen if individual firms operate where MC = MR, then collectively, at the market level, the pure competitors will be operating where collective marginal costs exceed marginal revenue. Here Keen’s explanation of the rationale of the MC = MR rule in neoclassical economics needs further elaboration. The MC = MR rule is based on the notion that the central imperative for all capitalists is maximization of total profits (actually of real, after-tax, risk-adjusted total profits) not marginal profit or unit margin which would be where the MR > MC gap would be greatest. Thus up to but not beyond where MC = MR, although unit profit margins are falling with an increasing marginal cost curve and a flat MR curve, even the last unit of output before where MC = MR yields “infinitesimal” profit which “ain’t zero” (Keen’s point on aggregation problems) and thus adds to total profits just as minimizing losses, deductions from total profits, minimize reductions of total profits. This point is not made clear in treating MC = MR as a “term” of zero.
[xxvi] Here the Neoclassicals may argue, as Sweezy argued with the kinked demand-curve of the individual oligopolist, that the demand curve of the individual perfect competitor is an expositional/pedagogical/heuristic model of likely behavioral reactions, imperatives, interests and constraints, not a model of market or individual price determination, under given market structures.
[xxvii] Here there is a proverbial “chicken-and-egg” (cause and effect) problem. Which comes first: the intersection of market supply and demand setting price for the individual pure competitor, or, the individual competitors equating marginal costs to price? Why should a level of output which partly involves a loss according to Keen (the part where MC > MR) determine where the individual sees price as being set? In the case of monopoly, MC = MR determines output level and demand determines the maximum allowable price at that quantity (price and quantity are not determined by the intersection of market supply and demand curves as in the case of pure competition). Here it must be noted that the Neoclassicals do not assume the flat or horizontal demand curve of the individual pure competitor solely on the basis of the assumption of no individual firm large enough to affect market supply, they also assume homogenous products and freedom of entry and exit as responsible also. Keen goes on his website to show: in perfect competition: a) where MC = P = MR profits are not maximized; b) MC curves must be horizontal or constant for a definitive comparison of perfect competition and monopoly.
[xxviii] In characterizing neoclassical theory, perhaps because of using shorthand notations Keen makes some mischaracterizations of the theory. For example he notes that as price rises demand falls when he means that quantity demanded falls not the whole demand function (at least not according to neoclassical theory) and he notes: “Here we will consider the argument that wages equal the marginal product of labor.”(Keen, Steve, op. cit. p. 110) Actually, the theory says that to maximize total profits in production, the firm should hire up to but not beyond where wage for labor-power equals the marginal revenue product of labor. The marginal revenue product is a result of both the marginal physical product of labor (amount of output or change in total output due to a marginal addition of one particular worker) times the marginal revenue (or price in the case of pure competition) that the output sells for. No one gets paid a wage greater than the market “value” of the output they produce. This was the central point made by Marx in explaining the origin and nature of surplus value except that Marx did not seen land or capital as “productive” but only as factors that may enhance or inhibit the productivity of labor.
[xxix] Given that an attack on diminishing returns, diminishing marginal productivity, and fixed factors of production in the short-run are repeated over and over and central to Keen’s overall critique, I am surprised he missed one argument he could advance against the notion of fixed factors in the short run. Land and “capital”, like labor, have both quantitative and qualitative dimensions that are interdependent. The quantity and quality of some machine (noting that capital is a social relation not a stock of things) or of an acre of land is, in market terms, meaningless, if not turned on, used and maintained, by labor skilled in its use and maintenance, while the quantities and qualities of land and “capital”, (noting capital is a social relation and not a ‘stock’ of things) if activated, can augment the productivity of the quality and quantity of labor employed. Thus, application of the quantity and quality of labor, activates the qualities and quantities of land and capital (not productive in and of themselves as they are idle and commercially useless without labor) that may or may not (land and capital of certain quantities and qualities may actually sabotage rather than enhance productivity of labor) augment the productivity of labor. Thus the notion of “fixed” land and capital mixed with variable labor is highly problematic if not total nonsense.
[xxx] Remember this notion was previously debunked: that a perfectly competitive supplier can sell more units without having to reduce price.
[xxxi] This is a debate (“re-switching”) that has been raging between MIT economists at Cambridge, Massachusetts and economists at Cambridge University in England over some twenty years.
[xxxii] The discussion of “capital” as an embodiment of social-power relations is not mentioned or discussed here. Keen brings in Sraffa’s vs. neoclassical theory’s treatment of aggregated capital. Socially necessary hours of labor can be aggregated after correcting for skilled labor as multiple of relatively ‘unskilled’ labor to reflect higher productivity; and acres of land can be aggregated after adjusting for acres of varying levels of fertility; but highly diverse, in many ways, machines, buildings, etc, have no common property except price, the yardstick used by mainstream theory to aggregate capital. But this involves meaningless circularity in aggregation, as the price of the machine is a function of the profit expected from it, yet the rate of profit, the ratio of profit to price, varies as prices change. Sraffa reduces value of “capital” to “building blocks” of dated (embodied direct and indirect) inputs of labor hours with/times wages rate (fraction of surplus) as an inverse linear function of rate of profit. The “Value” of a machine assumed to be value of inputs (machines and labor) times a rate of profit to reflect passage of time; this is applied repeatedly to all machines and labor inputs to produce their inputs, yielding a set of labor hour terms and declining but never zero residual of machinery inputs. Thus, Sraffa treats the “value of a machine” as the product of the sum of the labor inputs (direct and indirect, living and dead) to produce it with each sum representing the physical quantity of labor employed times terms for the wage (an inverse function of the rate of profit) and the accumulated impact of profits over time (a direct function of the rate of profit and raised to a power to reflect passage of time in years) yielding opposing effects as the value of an item of capital may rise as the rate of profit rises only to fall as the rate of profit rises further.
[xxxiii] The assumption that changes in the output of industry A do not affect the costs of many other industries which in turn affected the costs of industry A and thus the conditions for any partial equilibrium that is the focus of neoclassical theory are gone.
[xxxiv] This stands in contrast to ‘scientific realism’ that says theory must accurately represent, to some extent, reality in order to accurately predict and transform it.
[xxxv] E.g. A falling ball, dropped near earth, behaves nearly as if dropped in a vacuum and thus the theory of gravity had great explanatory power, even assuming away as “negligible”, air resistance, with gravity constant and some simple calculus. This notion says that if a theory has great explanatory power with economy of effort (highly restrictive negligibility assumptions) it is to be preferred to one with marginally better explanatory powers but at significant more cost and elaboration or detail.
[xxxvi] An example an erroneous domain assumption invalidating a theory according to Keen is the assumption that risk can stand in as a proxy variable for uncertainty. Risk applies to regularities of past events yielding probabilities of future ones whereas uncertainty applies with no regular guide from the past to probabilities in the future.
[xxxvii] Heuristics are rules of thumb or expositional or analytical devices. A heuristic assumption is one known to be false but employed as part of simplifying and successive approximations as steps in the development of a more general theory. An example, according to Keen would be Newton’s model of the solar system with only the sun and earth followed by Poincare who developed formulae for planetary motion in systems with more than one planet. This was followed by Einstein who first stated openly, as unrealistic, his own heuristic assumptions only to openly abandon them later yielding more not less accurate theory.
[xxxviii] Musgrave, Alan, “ ‘Unrealistic Assumptions’ in Economic Theory: The F-Twist Untwisted”, Kyklos, 34: 377-387, cited in Keen, Steve, op cit. p. 318
[xxxix] Keen mentions, in this sociological approach to science and what science does and why, alternatives such as: Marxism; Complexity-Chaos Theory; Evolutionary Economics; The Austrian School; Post-Keynesians; Sraffian Economics the purported strengths and weaknesses he explores in his essay on alternatives.
[xl] Fukuyama, Francis, “The End of History and the Last Man”, 1992 This is the notion of the final “triumph” of and supposed proof of the superiority of capitalism over socialism.
[xli] Keen, Steve, op cit. p. 162 This is a truly amazing and unsupported statement to make in an essay on science and scientific method. On what basis does he simply assert, for example, that say China and its CPC is either socialist in “name only” or a “bit player on the world stage.” This is a breathtaking statement from someone supposedly well-versed in Marx and Hegel as well as in scientific standards of definitions and “proof” in assertions made.
[xlii] In an example of ancillary postulates created to protect core ones, Walras assumed that no trades occur until general equilibrium in all markets is achieved and/or that prices would tend toward equilibrium levels. Walras saw the economy as a giant auction house in which quantities of each commodity is fixed but demanders will offer to buy from zero up to all depending upon price. The auctioneer attempts to sell all commodities at once, and, rather than treating each commodity independently, he or she refuses to accept any price for any commodity until supply and demand for each and every commodity are in equilibrium. Through a process of “tatonnement” or groping, Walras argued that eventually a set of prices that balanced supply and demand in all markets would be found.
[xliii] Debreu’s vision of general equilibrium, intended to rescue Walras from his own contradictions only made it worse. Debreu assumed: one “market” in which all commodities are exchanged for all of time in one instant; complete certainty out of any uncertainty, as to what input-output combinations of consumer and producer commodities will be possible in the future; consumption and production plans made for the whole future; possibility not stability of general equilibrium the issue; a set of positive prices equating quantities demanded and supplied for all commodities simultaneously can be determined;
[xliv] Keen dates the birth of macroeconomics as a sub-discipline with Keynes’ General Theory in 1936.
[xlv] This brings to mind the famous quip or joke by Robert Heilbroner that “Mathematics has brought to economics rigor, and alas, also mortis.”
[xlvi] Among the Institutionalists, post-Keynesians, Complexity-Chaos theorists there are increasing demands to develop the “macro (contextual) foundations of micro” rather than the “Micro foundations of macro.”
[xlvii] Systems may be seen as “morphostatic” or “morphogenetic” or something in-between. A morphostatic system is subject to negative feedback effects (effects which work in directions opposite to the direction of movement of a system) such as a temperature thermostat which senses deviations of actual from set room temperature and shuts-off or turns on heat to maintain an equilibrium temperature. A morphogenetic system is subject to positive feedback effects which are involved in cumulative change where feedback effects continue and reinforce the direction of change of the system such as in the slogan of the Medici Family that ruled Florence: “Money to get power; power to get money.”
[xlviii] As Marx put it: “The industrial capitalist throws out less value in the form of money into the circulation than he draws out of it…Since he functions…as an industrial capitalist, his supply of commodity-value is always greater than his demand for it. If his supply and demand in this respect covered each other it would mean that his capital had not produced [sic] any surplus value… His aim is not to equalise his supply and demand, but to make the inequality between them… as great as possible.” (Marx, Karl, Capital, Vol II, Progress Publishers, cited in Keen, Steve, op cit. p. 194)
[xlix] According to John Hicks, three central assumptions formed the foundation of Classical (and Neoclassical) economics on the issues with which Say’s Law dealt: 1) Money supply determined output (seen as a constant times the money stock) determines output and employment; 2) level of investment = f (rate of interest); 3) Saving = f (rate of interest) and S = I Note Hicks also had saving depending upon the level of output. So if Saving increases, then so does investment via falling rates of interest. Higher money wages will reduce employment and thus real wages, while reducing money wages, increases employment and reduces real wages. Decreasing money supply decreases output and income and the main explanation for economic downturns according to Classical theory.
[l] Hicks also reduced Keynes work with three highly simplified assumptions that made a caricature of the complexity of Keynes’ argument according to Keen: a) demand for money = f ( rate of interest) as opposed to affixed relationship between money and output in Classical theory; b) Investment = f ( rate of interest); c) Saving is a function of income. Missing are the central concepts of risk vs. uncertainty, expectations about the future from the present, liquidity preference motives (speculative, transactions and precautionary). Hicks claimed that Keynes ignored the impact of income on money demand and the role of transactions demand and that the demand for money should be seen as a function of both levels of income and interest rates. The downward sloping IS curve a product of Hicks’ equations on investment and savings relations; and his upward-sloping LM curve based on the notion of the money demand relation assuming the money supply determined exogenously by the monetary authority. The IS curve, based on level of investment as an inverse function of interest-rate, saving as a direct function of income and investment determining income with multiplier effects. Thus the IS curve, connects points showing various interest-rate and income level yielding equilibrium in the goods markets (S = I). The LM curve, based on the assumption that money supply was determined exogenously by the monetary authority while demand for money was a direct function of income and an inverse function of interest rate. The LM curve connects various points showing interest-rate and income levels leading to equilibria in money markets. Thus income and rate of interest are determined by the intersection of IS and LM curves just like price per unit and quantity demanded are determined by intersections of supply and demand curves in neoclassical theory. Hicks’ work led to the notion of a segmented LM curve with a Classical Region (full employment where attempts to increase output only increase interest and inflation rates and do not move real output) and Keynesian Region (liquidity trap where monetary policy was ineffective but fiscal policy was effective and without higher interest rates) and thus “reconcile” Keynes with the Classics. Hicks also proposed that all three variables (money demand, investment and savings) all be made functions of income and rate of interest but not of degrees of uncertainty or expectations. The Hicksian IS-LM analysis is seen by Keen not as a fair synopsis of Keynes’ General Theory, but rather an ideologically driven attempt to take Keynes back to Walras within his own General Theory or a caricature (minus central constructs expectations and uncertainty) of it.
[li] The assertions of the “efficient markets hypothesis” are the usual of crude Philosophical Positivism: “One cannot judge a theory by purported empirical soundness or reasonableness of its assumptions”. Paradoxically, Irving Fisher founded not only the “efficient [rational] markets hypothesis” applied to financial markets, but also the Debt-Deflation Theory of Great Depressions focusing on often irrational speculative bubbles. Fischer argued that the rate of interest was simply a price in the exchange (time preference) between present and future consumption of goods (lender low time preference and borrower high time preference) and expectations of lenders and borrowers about future income. Usury did not mean charging interest, but charging interest without corresponding assumption of risk. Demand curves of loanable funds are downward-sloping and supply curves upward sloping. Loans, unlike goods bought and sold in the same time and place, take place over time (granted now, repaid later). Later the Efficient Markets Hypothesis (EMH) and Capital Assets Pricing Model (CAPM) were added to Fisher’s pre-Depression time-value-of-money theories assuming: 1) collective expectations of all stock investors are accurate predictions of the prospects of the companies; 2) share prices reflect all pertinent information pertinent to the future of the companies; 3) changes in share prices are entirely due to changes in information relevant to future prospects of companies and that information is sent/received in a random and unpredictable fashion (exogenous shocks); 4) stock prices take a ‘random walk’ so that past movements are no guide to future movements; 5) finance markets are in continual equilibrium.; 6) investor utility is a direct function of expected returns and an inverse function of risk or variability (standard deviation) of returns; 7) investment possibilities could all be specified into Investment Opportunity Clouds (IOCs).; 8) all investors borrow/lend at a common pure rate of interest; 9) all investors have homogeneous (agreement) expectations on all investments; 10) no feedback from market valuations to investor perceptions; 11) investors unconcerned with present or future actions of other investors. Here Keen explains and critiques, step-by-step, the work of W.F. Sharpe in “Portfolio theory and Capital Markets”, McGraw-Hill, NY, 1970. The theory of Sharpe totally falls apart when Sharpe’s assumptions (domain assumptions not negligibility or heuristic assumptions) meet the real world of differences in investor expectations, uncertain futures and credit rationing.
[lii] A statistical interpretation of patterns of stock prices and not a model of how stock markets or investors actually behave. This hypothesis argues that stock prices do not display a “random walk pattern” of the EMH but that of a more complex pattern of a fractal. Fractals show “self-similarity”, according to Keen: they look the same regardless of time frames; each number of a series is a simple but non-linear function of previous numbers of the series whereas in a random generated series, each number is independent of all previous numbers. Keen, p. 247
[liii] Keen, Steve, op.cit p. 255
[liv] Proposals such as restricting access to the stock market with only one Walrasian auction per day to reduce volatility; stocks changed to being time-limited voting bonds;
[lv] The word radical comes from the Latin root “radix” or “the root”; to be radical is to argue for getting to the root of that which must be understood/changed. In the West, to be known as an open Marxist or Communist, and to be doing “mass work” in the open, is to invite all sorts of possible retribution against oneself, one’s family and those with whom one works and thus many self-proclaimed Marxists, in The West and elsewhere, “hide in plain sight”, in various ‘mainstream’ political parties, under various cover labels, like “progressive”, “heterodox”, “Marxian” etc.
[lvi] “Bad Mathematics” has four forms according to Keen: 1) Logical contradictions: theory is supposedly ‘saved’ by ancillary assumptions which contradict what the theory purports to show; 2) Omitted variables: essential aspect of reality assumed away to make the math run; 3) False Equalities: two different things treated as equal such as risk and uncertainty; 4) Unexplored conditions: some relations are assumed or assumed possible without the necessary conditions specified, present or possible.
[lvii] Here Keen points to the work of Henri Poincare in 1899 on the many body problem of astrophysics that led to the proof of chaotic systems. He showed the impossibility of an accurate algorithm predicting the dynamics and trajectories of a model with three of more elements to it, especially utilizing non-linear differential equations, and showed that even any purported approximations would rapidly lose any accuracy. The future could only be mathematically predicted if the present were known and modeled with infinite accuracy which is impossible. In addition, there is Godel’s proof that all mathematical systems must take some external or imposed foundational axioms as articles of faith and thus none is “self-contained”.
[lviii] This issue according to Keen arises from the central assumptions of neoclassical economics that: a) the whole is ‘no more’ than the simple sum of its parts; b) interactions between parts are zero or negligible; 3) no interactions with one variable multiplied by another variable (Total Revenue treated as P x Q only with P or Q situationally treated as a constant).
[lix] Keen, Steve, op. cit. 268.
[lx] I find this sweeping assertion of the supposed “irrelevance of ‘most’ Marxists” to be as cavalier and even arrogant as the statement about there being no socialist [more than in name only] alternatives to capitalism. In the West, especially the U.S. Canada and even in Eurocentric Australia, if there is one national religion it is anti-Communism and thus anyone who self-defines or self-declares himself or herself to be a Marxist or a Communist is in essence self-declaring himself or herself to be an enemy of the capitalist State and inviting all sorts of repression. Further, if the person calls himself/herself a Marxist and not a Marxian, he or she is making a declaration of doing practical mass work in addition to scholarship in opposition to capitalism and the established order. This takes courage that should be respected even if one is not a self-declared Marxist or Marxian or even if one is in disagreement with the versions of Marxism being professed.
[lxi] Marx’s work on value and price was unfinished. Marx clearly noted that his theory of value was a theory of the essential centers of gravity (value as embodied socially necessary labor time) around which prices may fluctuate for various reasons including subjective assessments of utility by buyers and sellers (especially in the cases of rarities) but he noted that the labor theory of value was not a theory of precise price determination.
[lxii] In successive [heuristic] approximations Marx assumed a constant rate of surplus value (s/v) over all industries and time, that capitalists would substitute capital (c) for labor-power (v) when possible and thus the rate of profit (s/c + v) had a tendency to fall over time. Capitalists would respond by attempting to lower wages (v) to offset rising c and the tendency of the rate of profit to fall. Joan Robinson argued that a rise in c might well increase s/v and thus the rate of profit might not fall but rise. The “Transformation Problem” occurs when capitalists are driven by rate of profit and not rate of surplus value: if labor is the only source of surplus value, then industries with higher average ratios of labor to capital should have higher profit rates and in a competitive capitalist economy, this would mean firms moving out of capital-intensive to labor-intensive industries in search of higher rates of profit. How to reconcile an assumption of constant s/v over all industries and time with at least competitive equalization of rates of profit. Marx argued that capitalists recover profits proportional to their investments regardless of in labor-intensive or capital-intensive industries. In response, Keen brings out Sraffa’s scheme of “labor-value units” inspired by Marx and the critique of Steedman, I, “Questions for Kaleckians”, Review of Political Economy, 1992, 4: 125-151 The argument is that Marx converted outputs but not inputs into price terms and if this error is corrected non-sense violating assumptions of an equilibrium situation. Steedman argued that there is no need to convert physical quantities into values and then values into prices but can and must convert production data on physical quantities directly into prices with an “equilibrium assumption” of a uniform rate of profit. According to Keen, the supposed inconsistencies noted by Steedman undermined Marx’s notions of labor as the only source of value, value as the only source of surplus-value and profits and that value determines price. Arun Bose whose work (“Marx on Exploitation and Inequality”, Oxford U. Press, 1980, New Delhi) is alluded to by Keen, argued that there were two Marxs: one of the labor theory of value and one of Marx’s capital theory and that they can be reconciled to a degree with a concept of all direct and indirect labor inputs (capital) converted to dated and weighted labor units (commodity inputs of each given period are reduced to direct labor plus capital plus equilibrium rate of profit of the previous period still leaving some commodity residual ) leading to the conclusion that non-labor commodities plus labor are the basis of value. Marx, it should be noted, provided both negative proof of labor as the source of all value by eliminating any contenders but also did a positive proof of the labor origins of value and surplus value based on dialectical logic (unity and opposition of use and exchange value in overall value; here Marx contrasted the exchange-value of labor power or labor-time to produce means of subsistence, with its use-value or value greater than itself produced by embodied direct labor).
[lxiii] A) link of transfer of value of a machine to its depreciation incorrect; b) use-value of output of a machine (for consumers) not equal to use-value of machine (for producers) a notion of “abstract utility” more consistent with neoclassical economics; c) Which of two values (use or exchange) do machines “transfer”?; if use-value transfers, then Marx is consistent with his own analysis of commodities; but not consistent, if exchange-value, taken as equivalent to depreciation (but less than value-added when even , according to Keen, assumed so elsewhere by Marx in the “Grundrisse”) is being transferred to the product.
[lxiv] Keen claims that the labor theory of value could only hold if the use-value and exchange-value of a machine were identical yet Marx assumed them to be “intrinsically incommensurable magnitudes.” He also makes the extraordinary claim that with the labor theory of value gone, so too the tendency of the rate of profit to fall is lost and thus or “therefore” the “inevitability” of the fall of capitalism and its replacement with socialism also falls. This is of course a caricature of what Marx actually argued with respect to the fundamental causes of the fall of capitalism.
[lxv] Marx, Karl, Letter to Arnold Ruge, 1843
[lxvi] Austrians’ strengths: capitalism as an evolutionary system that best adapts to disequilibrium the normal state; deals with uncertainty not as equal to probabilistic risk; focus on dynamic entrepreneur gaining advantages from uncertainty and disequilibrium; weaknesses: close to neoclassical economics; central role of diminishing returns and accept marginal productivity theory but allow for super-normal profits; money supply erroneously treated as entirely exogenously determined by the State as they argue for endogenous money supply; fundamental problems with Hayek’s social theory of spontaneous vs. designed orders; assumption that the economy, although in disequilibrium, will oscillate around some kind of equilibrium state; irrational avoidance of mathematics in analysis.
[lxvii] Post-Keynesians; strengths: focus on uncertainty not taken as equivalent to risk; no models of human behavior like the hedonistic calculus of the “Economic Man” model of the neoclassicals; more emphasis on roles of debt, credit and nature of money than by neoclassicals; argue for macroeconomic foundations of microeconomics rather than the reverse demanded by neoclassical economics; emphasis on monopoly and quasi-monopoly market power, economies of scale, mark-up pricing, competitive imperatives to hold excess capacity to avoid diminishing returns and the state of the macroeconomy as a factor in investment decisions. Weaknesses: no general theory of value; use of static logic and lack of dynamic analysis. Post-Keynesians said by Keen to be the most coherent of the alternative schools of thought today.
[lxviii] Sraffians; strengths: Sraffa’s “Production of Commodities by Means of Commodities” said by Keen to be” the most careful analysis of the mechanics of production and understanding of interrelations of production at the level of the individual commodity in the history of economics”; dependency of the ‘quantity of capital’ on the profit rate rather than the reverse; the phenomenon of re-switching; weaknesses: no use of time or dynamics (Steedman argued that comparative statics does allow for enough time for changes in prime costs and mark-ups to have full effects but this only works with one and only one stable equilibrium state of the economy); Sraffa only intended as a platform to critique other theory not a basis for itself an overall economic theory.
[lxix] Chaos-Complexity Theory: strengths: work in this area stresses need for attention to dynamics, non-linearity of phenomena and disequilibria of chaotic systems; weaknesses: many models and experiments a-priori, hypothetico-deductivist and difficult to empirically verify or use empirical data in modeling
[lxx] Evolutionary economics: strengths: not Social Darwinism but applies Darwin’s building-block concepts of diversity, differentiation, environmental adaptation, selection and replication to economic systems that are also evolutionary systems; weaknesses: everything in flux and economic systems do make “jumps” unlike Darwin’s central assumption they do not; still in its infancy as a school of thought.

About jimcraven10

About jimcraven10 1. Citizenship: Blackfoot, U.S. and Canadian; 2. Position: tenured Professor of Economics and Geography; Dept. Head, Economics; 3. Teaching, Consulting and Research experience: approx 40 + years all levels high school to post-doctoral U.S. Canada, Europe, China, India, Puerto Rico and parts of E. Asia; 4. Work past and present: U.S. Army 1963-66; Member: Veterans for Peace; former VVAW; Veterans for 9-11 Truth; Scholars for 9-11 Truth; Pilots for 9-11 Truth; World Association for Political Economy; Editorial Board International Critical Thought; 4.. U.S. Commercial-Instrument Pilot ; FAA Licensed Ground Instructor (Basic, Advanced, Instrument and Simulators); 5. Research Areas and Publications: International law (on genocide, rights of nations, war and war crimes); Imperialism (nature, history, logic, trajectories, mechanisms and effects); Economic Geography (time and space modeling in political economy; globalization--logic and effects; Political Economy and Geography of Imperialism); Indigenous versus non-Indigenous Law; Political Economy of Socialism and Socialist Construction; 6. Member, Editorial Board, "International Critical Thought" published by the Chinese Academy of Social Sciences; International Advisory Board and Columnist 4th Media Group, (Beijing); 7. Other Websites publications at;;; 8.Biography available in: Marquis Who’s Who: in the World (16th-18th; 20th; 22nd -31st (2014) Editions); Who’s Who in America (51st-61st;63rd-68th(2014) Editions); Who’s Who in the West (24th- 27th Editions);Who’s Who in Science and Engineering (3rd to 6th, 8th, 11th (2011-2012) Editions); Who’s Who in Finance and Industry (29th to 37th Editions); Who’s Who in American Education (6th Edition). ------------------- There are times when you have to obey a call which is the highest of all, i.e. the voice of conscience even though such obedience may cost many a bitter tear, and even more, separation from friends, from family, from the state, to which you may belong, from all that you have held as dear as life itself. For this obedience is the law of our being. ~ Mahatma Gandhi
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4 Responses to The Debunking of Economics: A Review of the Work of Steve Keen et al

  1. Pingback: DOCTOR X, ‘PURE SHIT’ AND THE ROYAL SOCETY’S MOTTO | Welcome to the Blog of Jim Craven



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