Steve Keen
Encyclopedia
Steve Keen is a Professor in economics
and finance
at the University of Western Sydney
. He classes himself as a post-Keynesian, criticizing both modern neoclassical economics
and Marxian economics
as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include Hyman Minsky
, Piero Sraffa
, Joseph Alois Schumpeter, and Francois Quesnay
. His recent work mostly concentrates on mathematical modeling and simulation of financial instability
. He is a Fellow
at the Centre for Policy Development
.
. The hypothesis predicts that an overly large debt to GDP ratio
can cause deflation and depression. Here, the falling of the price level results in a continually rising real quantity of outstanding debt. Moreover, the continued deleveraging of outstanding debts increases the rate of deflation. Thus, debt and deflation act on and react to one another, resulting in a debt-deflation spiral. The outcome is a depression. Steve Keen argues that the current global economic crisis is the result of too much debt.
is contained in his book Debunking Economics. Keen presents a wide variety of critiques on neoclassical economic theory, and argues that they show neoclassical assumptions are fundamentally flawed. Keen points out that several neoclassical assumptions are empirically unsupported (that is, they are unsupported by observable and repeatable phenomena) nor are they desirable for society at large (that is, they do not necessarily produce either efficiency or equity for the majority). He argues that economists' overall conclusions are very sensitive to small changes in these assumptions.
Keen's book closes with a survey of various schools of heterodox economics
, concluding "None of these is at present strong enough or complete enough to declare itself a contender for the title of ‘the’ economic theory of the 21st century." However, he argues that neoclassical economics is a degenerative research program, not generating new knowledge but growing a belt of protective auxiliary hypotheses to shield its core beliefs from critique. There is an accompanying web site which provides more detailed mathematical expositions.
, often cost-plus pricing
; compare fellow post-Keynesian Alfred Eichner
, who also argued for markup pricing.
He cites Eiteman & Guthrie, finding 89% of firms set prices above the level where marginal revenue is equal to marginal cost, as well as more recent work by Alan Blinder
.
Keen's article on "profit maximization, industry structure, and competition" has had counter-arguments by Paul Anglin.
Firms setting price to marginal cost is consistent with the neoclassical theory of the firm if those firms have some market power. However, Keen argues" that economic theory neglects the effect on price of increasing or reducing supply by a single item and finds that charging a markup is actually a more stable, profitable equilibrium. In neoclassical theory, a firm would also charge a markup above marginal cost. In fact, part of the purpose of the work by Eiteman & Guthrie and by Blinder that Keen cites as evidence, was to show that real life firms have some monopoly
power, within the standard context of a neoclassical model.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
at the University of Western Sydney
University of Western Sydney
The University of Western Sydney, also known as UWS, is a multi-campus university in the Greater Western region of Sydney, New South Wales, Australia...
. He classes himself as a post-Keynesian, criticizing both modern neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
and Marxian economics
Marxian economics
Marxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...
as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include Hyman Minsky
Hyman Minsky
Hyman Philip Minsky was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises...
, Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
, Joseph Alois Schumpeter, and Francois Quesnay
François Quesnay
François Quesnay was a French economist of the Physiocratic school. He is known for publishing the "Tableau économique" in 1758, which provided the foundations of the ideas of the Physiocrats...
. His recent work mostly concentrates on mathematical modeling and simulation of financial instability
Instability
In numerous fields of study, the component of instability within a system is generally characterized by some of the outputs or internal states growing without bounds...
. He is a Fellow
Fellow
A fellow in the broadest sense is someone who is an equal or a comrade. The term fellow is also used to describe a person, particularly by those in the upper social classes. It is most often used in an academic context: a fellow is often part of an elite group of learned people who are awarded...
at the Centre for Policy Development
Centre for Policy Development
The Centre for Policy Development is an Australian independent public interest think tank, founded in 2007. It was originally associated with the then magazine New Matilda-Fellows of the Centre :Fellows of the Centre include::*Fred Argy...
.
Financial instability and debt deflation
Most of Steve Keen's recent work focuses on modeling Hyman Minsky's financial instability hypothesis and Irving Fisher's debt deflationDebt deflation
Debt deflation is a theory of economic cycles, which holds that recessions and depressions are due to the overall level of debt shrinking : the credit cycle is the cause of the economic cycle....
. The hypothesis predicts that an overly large debt to GDP ratio
Debt to GDP ratio
In economics, the debt-to-GDP ratio is one of the indicators of the health of an economy.It is the amount of national debt of a country as a percentage of its Gross Domestic Product ....
can cause deflation and depression. Here, the falling of the price level results in a continually rising real quantity of outstanding debt. Moreover, the continued deleveraging of outstanding debts increases the rate of deflation. Thus, debt and deflation act on and react to one another, resulting in a debt-deflation spiral. The outcome is a depression. Steve Keen argues that the current global economic crisis is the result of too much debt.
Debunking Economics
Keen's full-range critique of neoclassical economicsNeoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
is contained in his book Debunking Economics. Keen presents a wide variety of critiques on neoclassical economic theory, and argues that they show neoclassical assumptions are fundamentally flawed. Keen points out that several neoclassical assumptions are empirically unsupported (that is, they are unsupported by observable and repeatable phenomena) nor are they desirable for society at large (that is, they do not necessarily produce either efficiency or equity for the majority). He argues that economists' overall conclusions are very sensitive to small changes in these assumptions.
Keen's book closes with a survey of various schools of heterodox economics
Heterodox economics
"Heterodox economics" refers to approaches or to schools of economic thought that are considered outside of "mainstream economics". Mainstream economists sometimes assert that it has little or no influence on the vast majority of academic economists in the English speaking world. "Mainstream...
, concluding "None of these is at present strong enough or complete enough to declare itself a contender for the title of ‘the’ economic theory of the 21st century." However, he argues that neoclassical economics is a degenerative research program, not generating new knowledge but growing a belt of protective auxiliary hypotheses to shield its core beliefs from critique. There is an accompanying web site which provides more detailed mathematical expositions.
Critique of neoclassical theory of the firm
Keen's work (as opposed to his popularization) has also focused on refuting the neoclassical theory of the firm, which argues that firms will set marginal revenue equal to marginal cost. Keen notes that empirical research finds real firms set price well above marginal cost: they charge a markupMarkup (business)
Markup is the difference between the cost of a good or service and its selling price. A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and...
, often cost-plus pricing
Cost-plus pricing
Cost-plus pricing is a pricing method used by companies to maximize their profits.The firms accomplish their objective of profit maximization by increasing their production until marginal revenue equals marginal cost, and then charging a price which is determined by the demand curve. However, in...
; compare fellow post-Keynesian Alfred Eichner
Alfred Eichner
Alfred Eichner was an American post-Keynesian economist who challenged the neo-classical price mechanism and asserted that prices are not set through supply and demand but rather through mark-up pricing....
, who also argued for markup pricing.
He cites Eiteman & Guthrie, finding 89% of firms set prices above the level where marginal revenue is equal to marginal cost, as well as more recent work by Alan Blinder
Alan Blinder
Alan Stuart Blinder is an American economist. He serves at Princeton University as the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs in the Economics Department, Vice Chairman of The Observatory Group, and as co-director of Princeton’s Center for Economic Policy Studies,...
.
Keen's article on "profit maximization, industry structure, and competition" has had counter-arguments by Paul Anglin.
Criticisms
Some reviewers contend that Keen has not shown what he claims and that he misrepresents economic theory. Keen agrees that some more nuanced and qualified versions of neoclassical economics exist at very high levels. However he claims that his critique is aimed at the core neoclassical ideas that are taught in universities at undergraduate and postgraduate level and which are often used as the basis for policy prescriptions. As a cover blurb from Alan Isaac states, Keen's book is "A wide-ranging yet accessible critique of the staples of neoclassical pedagogy."Firms setting price to marginal cost is consistent with the neoclassical theory of the firm if those firms have some market power. However, Keen argues" that economic theory neglects the effect on price of increasing or reducing supply by a single item and finds that charging a markup is actually a more stable, profitable equilibrium. In neoclassical theory, a firm would also charge a markup above marginal cost. In fact, part of the purpose of the work by Eiteman & Guthrie and by Blinder that Keen cites as evidence, was to show that real life firms have some monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
power, within the standard context of a neoclassical model.
Other publications
- Lee, Frederic S. and Steve Keen (2004): "The Incoherent Emperor: A Heterodox Critique of Neoclassical Microeconomic Theory", Review of Social Economy, V. 62, Iss. 2: 169-199
- Co-editor of: Commerce, Complexity and Evolution: Topics in Economics, Finance, Marketing, and Management: Proceedings of the Twelfth International Symposium in Economic Theory and Econometrics. New York: Cambridge University Press. ISBN 0-521-62030-9.
External links
- Website of "Debunking Economics" and Steve Keen's personal web site
- Steve Keen's Debtwatch blog
- List of Steve Keen's publications
- There is madness in their method A sample chapter from Debunking Economics.
- A more detailed presentation of the contents in the Physica A article.
- A news feature on an EconophysicsEconophysicsEconophysics is an interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes and nonlinear dynamics...
paper co-written by Prof. Keen appeared in the journal Nature, accompanied by an editorial. - Interview conducted on the 13th of Dec 2009 by Dominic Frisby about Steve Keen's predictions for 2010
- Steven Keen 04 February 2010 (video from Switzer TV)