Debunking Keen

Sinclair Davidson, RMIT University

Steve Keen Debunking Economics: The Naked Emperor of the Social Sciences Sydney: Pluto Press, 2001. ISBN 1-86403-070-4 (paperback) RRP $38.95.

Steve Keen’s book Debunking Economics is well written and addresses important issues from the commanding heights of wit and clarity. Keen addresses his book to students and those who believe they have been ‘silenced’ by economics. The book itself promises two objectives: An exposition of ‘conventional’ theory and a ‘debunking’ of that theory. Indeed, the back cover promises ‘you’ll never be deceived by an economist again’. In this, Keen promises more than he delivers. The book itself is divided broadly into two sections. The author first sets out and debunks ‘conventional economics’. The second section sets out some alternative approaches to economics. Along the way, Keen includes chapters on economic methodology, a defence of mathematics in economics and a chapter on alternative schools of economic thought.

Keen has drawn several conclusions by the end of his book. These are as follows: Neoclassical economics should not and cannot be used for public policy purposes. This is because neoclassical economics is theoretically and logically inconsistent. Even if neoclassical economics were not wrong, the underlying conditions required for its application could never be met in reality. Keen oversteps the boundary of knowledge, however, when he also argues that market solutions to societal problems are likely to reduce human welfare, and that society is greater than the sum of its parts. Keen either lacks understanding of economics, or how economists actually go about their art, or— more likely— is somewhat disingenuous. All in all, Keen has done an excellent hatchet job. Most of this hatchet job occurs through misrepresentation, although there is some factual inaccuracy.

Keen rather modestly advises his readers that ‘I am completely free of the “habitual modes of thought and expression” which so troubled Keynes’ (p. xiii). This is incorrect. Keen employs the Keynesian approach very well. This is to make up a very imprecise caricature of your opponent, and then to demolish that construct. This is cheap. It would be preferable, and more honest, to follow Paul Krugman’s approach. Krugman actually names people who propose fallacious theories; the reader can then do additional research and draw informed conclusions.

In addition, while Keen attacks neoclassical economics, he specifically limits his attack to undergraduate economics. Indeed, he makes a classic undergraduate mistake. In his chapter on the theory of the firm, he is confused by the definition of the term ‘monopoly’. Economists define a monopoly as being a single firm in a single industry. Keen seems to think that a monopoly is any large firm. Worse, when not misrepresenting views, he manufactures them. For example, he writes that if the world operated as neoclassical economists says it should then ‘income should go to those who deserve it’. Most neoclassical economists would argue, however, that income should go to those who earn it.

Keen does an excellent hatchet job, mostly through misrepresentation, although there is also some factual inaccuracy.

Keen is particularly concerned about the policy advice of neoclassical economists. Economists, it seems, have attempted to remake the world in the image of their theoretical models. Politicians and bureaucrats have simply and uncritically accepted this advice. Indeed, politicians and bureaucrats have continued to accept this advice even though it is wrong, and the world is worse off as a consequence. Now it is true that many economists are contemptuous of politicians, but Keen must believe that politicians are intellectually challenged. Herein lies a problem for his argument. In his introductory chapter, Keen acknowledges that ‘only’ the parties of the middle follow economic policies. Unfortunately for his argument, these are the political parties that invariably form government. It would appear then that not only do political parties follow incorrect policies, but that the electorate also does not know its own self-interest. Economists try to avoid making these types of value judgements. Keen’s somewhat arrogant implication is that he knows the electorate’s self-interest whereas it does not.

There is a literature that investigates the relationship between economists and public policy. George Stigler, for example, has written extensively on the issue (see Leube and Moore, 1986). Keen, however, does not refer to that literature. Contrary to Keen’s view, it is not clear that economists have ‘convinced’ politicians that their models are correct. It is more likely that politicians have realised that their preferred policy options need economic justification, and have simply sought out economists who would confirm pre-existing views. Consider one of the biggest economic policy backflips in the twentieth century: the abandonment of fixed exchange rates. There is no evidence to suggest that policy makers were convinced by economic arguments against fixed exchange rates. Rather the policy change occurred because Bretton Woods had become unworkable in practice.

The empirical component of Keen’s argument is exceptionally poor. He proceeds by way of disproving mathematical identities and theorems. If the mathematics is wrong, he argues the economics is wrong. He also argues, paradoxically, that economists are poor mathematicians. It seems economics must be wrong by definition. This is the well-known maxim, ‘That is all very well in practice, but it does not work in theory’. If economics is wrong in theory then Keen should be able to demonstrate errors in public policy.

Contrary to Keen's view, it is not clear economists have "convinced" politicians their models are correct.

Keen does have a ‘So-what?’ section in many chapters, but they are often incomprehensible. For example, he argues that economists cannot explain wage determination because ‘the inequality which is so much a characteristic of modern society reflects power rather than justice’. Neoclassical economics has no theory of ‘justice’, but Keen’s intended audience would not know that. In another chapter he introduces the macroeconomic provisions of the Maastricht Treaty as an example of where economists are in error. The driving force for the European Union, however, was not economic theory. Many economists, including Paul Krugman, have argued against the European Union. Again, Keen’s readers are unlikely to know this. Other empirical statements are simply not referenced. The reader is invited to believe statements such as ‘One of the most striking aspects of the late 20th century was the increase in the gap between the poorest worker and the richest’ on face value.

Keen is at great pains to emphasise that his argument should not be characterised as a ‘left versus right’ debate, nor should we dismiss him as simply being a ‘left-winger’. He is a disinterested observer in the pursuit of truth. Not so: His ‘left-wing’ value judgements condemn him. In his arguments against neoclassical policies, Keen makes much of the Sonnenshein-Mantel-Debreu (SMD) conditions. These conditions set out when the economic analysis of an individual can be extrapolated to ‘society’ at large. This is a variation of the ‘Arrow-impossibility theorem’, wherein Kenneth Arrow demonstrated that it is not possible to aggregate individual preferences in any meaningful way. Many neoclassical economists proceed in their analysis as if Arrow’s impossibility theorem did not exist, or the SMD conditions were met. This is a failure of much of neoclassical economics. Keen, however, uses the SMD conditions to argue that ‘society is more than the sum of its individual members’. How does he know? Many on the ideological right interpret Arrow’s theorem, as Margaret Thatcher does, as implying ‘There is no such thing as society’.

It is here, and in his unsubstantiated value judgements, that Keen identifies himself as being from the left. That does not mean that his arguments are inherently wrong, but he does have an agenda beyond simply telling the truth.

It is too easy to be seduced into empty slogans and dogma. But that does not mean the dogma is wrong.

To be blunt, Debunking Economics is yet another tome dressed up in academic respectability that preaches left-wing views and opinion. It must be considered as one of many books critical of ‘economic rationalism’. This is most unfortunate and disappointing. Keen is capable of better. The issues he raises are important and should be discussed. Keen, however, has given up the argument, as he indicates in the first chapter, ‘No more Mr Nice guy’. It is not good enough to argue that economics is wrong because hooligans protest outside Nike stores and the World Bank. Something is wrong with how undergraduate economics is taught. The quality of economic analysis in Australia is poor. It is too easy to be seduced into empty slogans and dogma. But that does not mean that the dogma is wrong.

Keen believes that markets do not work well. It is possible that they don’t work well relative to a mathematical ideal, but do they work in practice? Consider a simple thought experiment: Take an economy and arbitrarily divide it into two pieces. Allow the market to operate in one piece, and government to run the economy in the other piece. Fast forward by fifty years and observe what has happened. It turns out that West Germany and South Korea prospered relative to East Germany and North Korea when this experiment was actually conducted. If market economics is wrong, Keen needs to explain this ‘anomaly’.

Keen’s book will get the attention it deserves, on average. Those who are already predisposed to his views will quote it. Those who are not so predisposed will not read it. To that extent, Keen has not contributed to a debate, but rather to a tirade.


Leube, K. and T. Moore (1986) The Essence of Stigler Hoover Institution Press.

Sinclair Davidson is Associate Professor in the School of Economics and Finance at RMIT University.

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