Steve Keen on Neoclassical Economics

There is a video below which is a wide-ranging talk by Steve Keen, and more details can be found about it on Keen’s blog.

Keen raises the following issues:

(1) on neoclassical general equilibrium theory,
(2) demand curves;
(3) how macroeconomics is an emergent property, which is not reducible to microeconomics;
(4) how neoclassical economics commits the fallacy of strong reductionism (although reductionism does work to a very great extent, it sometimes has limitations);
(5) how rational expectations (in the sense of John Muth) is nonsense, and
(6) a monetary theory for the real world.

One of the more interesting points is Keen’s attacks on the law of demand, and the question whether market demand curves do in fact obey the law of demand. That demand curves are necessarily downward sloping is a fundamental assumption of the law of demand, i.e., when the price of a commodity rises, ceteris paribus (“all else held constant” or “all other things being equal”), the quantity demanded falls, and when the price of a commodity falls, consumers demand more of the commodity. This inverse (or negative) relationship is the law of demand. But Keen shows that demand curves are not necessarily downward sloping:

“Economists can prove that ‘the demand curve slopes downward in price’ for a single individual and a single commodity. But in a society consisting of many different individuals with many different commodities, the ‘market demand curve’ is more probably jagged, and slopes every which way. One essential building block of the economic analysis of markets, the demand curve, therefore does not have the characteristics needed for economic theory to be internally consistent.” (Keen 2001: 25).

That is a problem not just for neoclassical economics but for Austrian economics too, as Mark Blaug has argued:

“[sc. there is a] the fundamental flaw in Ludwig von Mises’ ‘praxeology’: [sc. it is] the notion that purposive choice as a Kantian ‘a priori synthetic proposition’ is more than sufficient to account for negatively inclined demand curves. This ignores the fact that a number of a posteriori auxiliary propositions are also required, such as transitivity or consistency of choices ... To this day, this failure to recognize the limited power of a priori synthetic propositions to generate substantive implications for economic behaviour characterises neo-Austrian writings in defence of Mises” (Blaug 1994: 132–133, n. 14; see also Blaug 1997: 332ff.).

Keen has a new edition of his Post Keynesian book on economics, which will be published September 2011:

Steve Keen, 2011. Debunking Economics: The Naked Emperor Dethroned? (rev. and expanded edn), Zed Books.

The earlier edition is as follows:

Steve Keen, 2001. Debunking Economics: The Naked Emperor of the Social Sciences, Zed Books, New York and London.

Unfortunately, the sound is not too good, and one will have to turn the volume up!




BIBLIOGRAPHY

Blaug, M. 1994. “Why I am not a Constructivist: Confessions of an Unrepentant Popperian,” in R. E. Backhouse (ed.), New Directions in Economic Methodology, Routledge, London and New York. 109–136.

Blaug, M. 1997. Economic Theory in Retrospect, Cambridge University Press, Cambridge and New York.

Keen, S. 2001. Debunking Economics: The Naked Emperor of the Social Sciences, Zed Books, New York and London.