The End of Economics

If Australian economist Steve Keen’s book, Debunking Economics, doesn’t end, once and for all, the terminally convoluted discourse that afflicts mainstream economics, nothing will. Although the book’s purpose is to show that neoclassical economics is all bunk, however, it is also, remarkably, as good an introduction to neoclassical economics as any you’re likely to find.

Unlike textbooks that introduce economic models with terse statements of assumptions like “marginal cost is increasing” and simple examples to illustrate them, Keen’s book takes these assumptions apart, discusses why they are often incorrect, and explains why such errors matter a great deal. In an ordinary economics textbook, assumptions are advanced uncritically, or with an example illustrating why they are true – but never explaining how far from universally true these assumptions really are.

For instance, a typical assumption that economists take for granted but Keen exposes is “that the perfectly competitive firm is so small, relative to the overall market, that its impact on the market can be treated as zero.” But Keen expresses a thought that may glimmer in the mind of a student at this point: “infinitesimals ain’t zero.” Somehow, in the economic models, the zeros add up to an aggregate impact that is much greater than zero. Major conclusions are drawn in economic theory from both of these contradictory assumptions.

This kind of thing leaves economics students wondering if they have missed something; perhaps there was a prerequisite they haven’t studied, or perhaps something was said in class that everybody else heard, except them. The fact that there are many exceptions to the assumptions – indeed, that they are more honored in the breach than in the observance – is obscured in footnotes or abstruse disclaimers. Learners are left wondering, why can we even call this a “rule”?

The problem, of course, is that like white lies, the near-truths and untruths compound until after a while the whole edifice is on shaky ground. Let me propose a slight rewording of Sir Walter Scott’s famous line: “Oh what a tangled web we weave, when first we practice to assume.” That tangled web is the structure of contemporary economics. As Keen says, “If you believe you can use unreality to model reality, then eventually your grip on reality itself can become tenuous.”

An old Monty Python routine, The Royal Society for Putting Things on Top of Other Things, shows a meeting of stiff-upper-lipped English gentlemen discussing their continuing mission of ensuring that as many things are put on top of other things as possible. When one of the polite but self-important gentlemen (played by John Cleese) tentatively advances the opinion that the whole thing is a bit silly, the chairman agrees and abruptly announces, “OK, meeting adjourned forever.” At conferences I’ve attended (mostly on financial theory, not economics), I have found myself anticipating a similar pronouncement at any moment, though it never comes.

Such farce comes to mind when reading discussions of economic theory that seem thoroughly unmoored from reality. Although Keen is obviously extremely well-versed in economic theory, he hasn’t come unstuck from the real world, as many economists have.