Steve Keen’s manifesto for a new economics


A brief review of prominent heterodox economist Steve Keen’s latest book, in which he lays out his vision for the future of economics, arguing that the neoclassical approach has been highly damaging to humanity, and needs to be replaced.

Steve Keen has a new book out, entitled The New Economics – A Manifesto. It is the latest chapter in the author’s tireless efforts to replace neoclassical economics and its damaging dominance of mainstream thinking with what he argues is a more scientific and explanatorily powerful body of thought drawing on post-Keynesian and, more recently, Biophysical economics.

Keen, who has been a heterodox or non-mainstream economist since his student days, has been critiquing neoclassical economics for many years. Post-Keynesianism takes its main inspiration from arguably the twentieth century’s greatest and most influential economist, John Maynard Keynes. It draws on the work of Keynes’ followers at Cambridge University, and those who studied under or have been influenced by them, though post-Keynesians remain a radical minority in the grand scheme of things.

Keen was one of the few economists to correctly predict a major financial and economic crisis in the years leading up to 2008. Not one of these iconoclastic souls was a neoclassical. In the 2011 edition of his book Debunking Economics, he painstakingly deconstructed much of neoclassical theory, and began the task of laying out the monetary economics he felt should replace it. Continue reading

The left need not fear Darwin

For some on the left, Darwinism and theories of human evolution are associated with adherence to an extreme individualism, libertarianism and market fundamentalism. They are seen as the law of the jungle, with the strong rewarded and the weak neglected. Even if they are accepted in biology, their application to society and the economy should on this reading be avoided. But this argument is flawed. After all, human society is grounded in nature and dependent upon it. We cannot escape our origins!

Evolutionary, institutional and complexity economics draw in part on theories originating in biology. There is some overlap between the three approaches. In particular, evolutionary economics emphasises economic change, the generation of variety and novelty, and the complexity of economic systems. The change is not only quantitative, as in standard economics, but also qualitative, in the realm of technology, organisations and economic structure. It is non-linear and often chaotic, in the scientific sense of that term, which limits predictability. Institutions and their evolution are a key part of the analysis, as is innovation. Context matters, so that economic theories and laws should not be universally applied to every situation.

Geoffrey Hodgson, whose work I have recently quoted a number of times on this blog, is an institutionalist economist. In his book Darwin’s Conjecture he attempts to clarify and apply Darwin’s theories of biological evolution to socio-economic evolution. In short, Darwin’s framework of variation, selection and replication are used as a ‘metatheory’, an overarching theoretical framework which can be broadly applied to many phenomena.

Socio-economic evolution is part of the evolution of the natural world and is emergent from but irreducible to it. Applying Darwinian concepts to human society need not be simply about competing individuals but is also about institutions and organisations as evolving social structures. Competition and cooperation are both involved in socio-economic evolution. Yes, selection can involve individuals, and their genes at another level, but can also involve group selection, and institutions. The latter, broadly conceived, include such aspects of human culture as writing, laws, the codification of knowledge, and the institutionalisation of science and technology. Cooperation and morality can be selected in evolutionary processes as much as ‘winners’ from competitive processes, whether these are individuals or firms for example. This is a more subtle and comprehensive conception of human evolution.

The economy can be seen as being embedded in society, which can in turn be seen as embedded in nature. Nuno Ornelas Martins, in his book The Cambridge Revival of Political Economy, argues that for an evolutionary social theory, there are potentially transformational interactions between human agency, social structures, technology and the mode of production, whether that be feudalism, capitalism, socialism or whatever. These interactions occur to varying degrees at different historical moments.

In his 2015 work Conceptualizing Capitalism, Hodgson argues further that capitalism itself evolves, qualitatively as much as quantitatively. In fact the two are inextricably intertwined. It can evolve from within, but also due to external threats or interventions, such as war, foreign aid or the transfer of technology. The diffusion of technology across the system, as well as that of institutions, information and knowledge (and there is an overlap between these processes), helps to drive periods of growth and development. This tends also to involve increasing complexity within the system. But such growth is not automatic, and economies can pass through periods of stagnation as well. Competition may not necessarily increase efficiency or be economically optimal and it remains dependent on the successful functioning of particular institutions. Due to the fact that new institutions and behaviours are often path-dependent, building on old ones, there is always the possibility of ‘institutional sclerosis’ as society and the economy become locked-in to dysfunctional activities and outcomes.

Turning to a non-economist, Robert Anton Wilson, whose eclectic work Prometheus Rising attempts to describe the evolution of humanity, particularly as a result of the evolution of the brain and nervous system: there is some link, though not a direct correspondence, between evolution, wealth creation and the acceleration of the generation and use of information in human society. Genuine wealth creation that serves humanity comes not just from the orthodox economic factors land, labour and capital, but from using the neurons in our brains intelligently. This is not necessarily synonymous with GDP growth, at least over short periods, and to the extent that wealth creation can damage the environment, it can generate new problems to be solved alongside less sustainable forms of wealth.

Wilson echoes the arguments of Eric Beinhocker in his The Origin of Wealth by claiming that genuine increases in wealth and economic value involve the creation of greater order and coherence, or negative entropy. So there is some sort of correspondence between evolution and wealth creation. Socio-economic evolution is occurring faster than biological evolution, though the former remains dependent on the latter and truthfully speaking is part of it. We run a great risk of seriously damaging our own prospects if we neglect our impact on the nature on which we all depend. This is the essence of arguments for a more sustainable form of human development.

Thus applying biological theories such as Darwinism to the economy and society generates many insights, which can be more various and subtle than knee-jerk responses which object to the law of the jungle and the undermining of a kinder, gentler, more cooperative and less competitive world. There is plenty to learn from such an approach, for the left as much as the right. We cannot escape our place and role in nature. With the advance of knowledge and technology, we increasingly amass the power to damage the environment as well as solve its problems. All too often, these problems are of our own making. Let us hope that we can learn from such processes sufficiently to prevent the damaging activity which could potentially overwhelm our continued development.

Complexity economics and transcending the micro-macro division

origin-of-wealth“[Traditional] economics is split into two halves: microeconomics and macroeconomics. Microeconomics is the bottom-up view of the economy and starts with individual decision makers and then builds up to markets and economies. Macroeconomics is the top-down view that starts with questions such as why there is unemployment and then drills down to find an answer…Most economists agree that ideally, there should not be a separate microeconomics and macroeconomics. One should be able to start with micro behaviors and work up, or with macro patterns and work down, and be able to use either approach seamlessly within one theory. Although the two halves of the field share many ideas, techniques and the overall traditional equilibrium framework, they unfortunately have yet to achieve that aspiration. Like the two teams that built the transcontinental railroad across the United States in the nineteenth century, microeconomists and macroeconomists have been working toward each other from different sides of the field. Unfortunately, after a century of laying tracks, they have failed to meet in the middle…

The micro-level interactions of agents in a complex adaptive system create macro-level structures and patterns…The ultimate accomplishment of Complexity Economics would be to develop a theory that takes us from the theories of agents, networks, and evolution, all the way up to the macro patterns we see in real-world economies…

Such a theory would view macroeconomic patterns as emergent phenomena, that is, characteristics of the system as a whole that arise endogenously out of interactions of agents and their environment…

Emergence may seem mysterious, but it is actually something that we experience every day. For example, a single water molecule of two hydrogen atoms and one oxygen atom does not feel wet (assuming that you could feel a single molecule). But a few billion water molecules in a cup feel wet. That is because wetness is a collective property of the slippery interactions between water molecules in a particular temperature range. If we lower the temperature of the water, the molecules interact in a different way, forming the crystal structure of ice, losing its emergent characteristic of wetness and taking on the characteristic of hard. Similarly, what we call a symphony is a pattern of sound that emerges out of the playing of individual instruments, and what we call a kidney is a pattern of cells working together to provide a higher-level function that none of the cells could do on its own.

Complexity Economics likewise views economic patterns such as business cycles, growth, and inflation as emergent phenomena arising endogenously out of the interactions in the system.”

Eric D. Beinhocker (2006), The Origin of Wealth – Evolution, Complexity, and the Radical Remaking of Economics, (p.163, 167-8).

Big data and complexity: evidence for the structural approach to economic development

This post summarises some of the ideas in an interesting article from the May issue of the Cambridge Journal of Economics. The piece shows that an analysis of ‘complex networks’ using ‘big data’ lends support to structuralist arguments about growth and development. I briefly discuss the implications for industrial policies intended to promote the ‘catching up’ of poor countries with richer ones.

The Cambridge Journal of Economics (CJE) is an influential heterodox journal published six times a year. It includes as one of its patrons nobel prize-winner Amartya Sen and as associate editors Ha-Joon Chang, Mushtaq Khan and Anwar Shaikh, whose ideas I have sometimes discussed in previous posts.

As CJE articles are usually behind a paywall, I thought it would be helpful to summarise and comment on one or two when they are interesting and relevant to this blog. Continue reading

Micro-macro dynamics and complexity

The whole is greater than the sum of its parts. That, in a nutshell, is the concept of emergence which justifies the existence of macroeconomics as a field of study distinct from microeconomics.

Mainstream economics places great store on ‘microfoundations’, and new classical macroeconomics aims to do away with the macro side of things by assuming that the hyper-rational representative individual or agent is the basic building block of its models.

Complexity and systems theory has a lot to offer those who accept the need for microfoundations in economics, but in a way that macroeconomic objects emerge from them, and cannot be predicted from simply examining a single ‘representative’ micro agent.

If this is the correct way to proceed, then macro objects can be said to emerge from the interactions of micro agents. The latter can be different from one another, in form and behaviour, but still produce an emergent order which can be studied and used to further understanding and inform economic policy.

As micro agents interact and produce coherent macro relations, structures and processes, the latter also act to shape micro-level behaviour. There is thus a two-way interaction between micro and macro, or a micro-macro dynamics.

This video, while not focusing exclusively on economics, covers what is an important part of the nature of the objects studied (ontology) in many strands of heterodox or non-mainstream economics. It touches, simplistically, on the difference between a pure free market and socialist economy, whether such things exist or not, but much of it is useful and is worth a view, keeping economics in mind.

In an economics employing a micro-macro dynamics, the micro agents might be individuals, classes, households or firms, while the macro structures and processes might be the national or international economy.

The unstable economy and the delusion of ‘the Great Moderation’

economyths-cover“Economists are taught that the economy is intrinsically stable – price changes are small and random, so perturbations are rapidly damped out by the ‘invisible hand’ of market forces. This assumption would be fine, except that it is contradicted by all of financial history. Booms and busts aren’t exceptions, they are the standard course of things…the assumption of stability has been a feature of scientific modelling of natural systems since the time of the ancient Greeks…we need to better account for the dynamic, unpredictable, and reflexive nature of the economy.

…A property of complex systems like the economy is that they can often appear relatively stable for long periods of time. However, the apparent stability is actually a truce between strong opposing forces – those positive and negative feedback loops. When change happens, it often happens suddenly – as in earthquakes, or financial crashes.”

David Orrell (2010), Economyths – How the science of complex systems is transforming economic thought

The above quote is from another book on Complexity Economics. This one is much shorter than The Origin of Wealth, which I discussed last week, and it is livelier and more accessible, so I can highly recommend it as an introduction to these kinds of ideas. Continue reading

Wealth creation and Complexity Economics: beyond left and right?

origin-of-wealth“Margaret Thatcher once said, ‘There is no such thing as Society. There are individual men and women and there are families.’ From the perspective of Complexity Economics, she was simply wrong. The interactions of millions of people, making decisions, engaging in strong reciprocal behaviour, acting out their cultural norms, cooperating, competing, and going about their daily lives, creates an emergent phenomenon that we call society – a phenomenon as real as the emergent pattern of a whirlpool. Within society are the constructs of states, markets and communities, the three of which together create the economic world that we live in. We may not be able to control or predict the future direction of society, but we can endeavour to ensure that these three elements work together to create wealth, social capital, and opportunity.”

Eric D. Beinhocker (2006), The Origin of Wealth

Complexity Economics has much to offer in its critique of the mainstream, and its incorporation of a plethora of ideas whose application the author suggests could mean ‘the end of left versus right’. There may be some truth in this. The rise of populism across the West and the policies espoused by our would-be political leaders are in some cases hard to categorise simply across the political spectrum. We have those from both the left and the right attacking liberal trade and immigration. Their support has at least partly emerged from the huge number who have grown disaffected with the establishment in the presence of rising income and wealth inequality and stagnant wages, with a small minority seeming to benefit disproportionately from globalization. Having said that, I don’t think the author had these developments in mind. He was writing before the Great Recession, and his vision is more one of states and markets as inevitably intertwined in promoting the common good, beyond ‘left wing utopias and free market fantasies’. Continue reading

The nature of the social world: a touch of philosophy

599px-The_Blue_Marble“The…argument is against methodological individualists, such as Popper (and Margaret Thatcher who claimed that ‘society’ does not exist!), who argue that all explanations can be couched in terms of an individual person’s beliefs and actions. The first refutation concerns emergent properties. There are attributes of people that concern physical properties such as height or weight; there are attributes that we share with other animals such as pain or hunger; but there are many attributes, essentially human ones, that are unavoidably social, for example ‘bachelor’, ‘banker’, or ‘nun’. These are only intelligible within the context of a social institution or practice. The second argument is that many activities we undertake, most obviously perhaps language, must already exist and be available for people to learn and then use. As Wittgenstein argued, there can be no such thing as a private language – every time anyone has a conversation, uses a credit card, or waits for a train they are assuming the existence of a structured, instransitive domain of resources, concepts, practices, and relationships. The successful occurrence of social activities warrants the existence of causally efficacious, although unobservable, social structures.”

John Mingers (2014), Systems Thinking, Critical Realism and Philosophy

Mingers makes a good argument for the relevance of what are variously called structures or systems in social science. There are objects we can think about that are larger than the individual, such as society, which cannot be directly observed while their effects can be. This produces a rational for examining the economy of a nation, particular industries, social groups such as class etc. Continue reading

Rents and rent-seeking: they can be good for your (economic) health


A number of rents, and the rent-seeking which sustained them, played a critical role in the development of capitalism in the East Asian countries. Not only was the creation of rents critical for primitive accumulation and learning, transfer rents were critical for maintaining political stability even though the economic implications of these transfers varied significantly. The role of rents in economic development is worth stressing in the aftermath of the financial crisis of the late 1990s. The depth of this crisis led many economists to link the immediate economic woes of the regions to the systems of rents and rent-seeking popularly described as ‘crony capitalism’. The implicit counterfactual to ‘crony’ capitalism is a ‘genuine and impartial’ capitalism of free markets, zero rents, fair market-determined returns for everyone, and a minimal state which only maintains a level playing field. However appealing such a mythical capitalism may be, our discussion has been concerned to establish that such a model is not relevant for developing economies, and perhaps not for any economy. The relevant distinction is between rent-seeking systems which are developmental and those which are crippling. The relevant policy question is to understand how one may transform into the other…

…The long-run relationship between rent-seeking and growth is of much greater interest. If growth requires the management of growth-enhancing rents rather than the abolition of all rents, high-growth countries will always have rents and will therefore inevitably have to live with rent-seeking. Globalization and liberalization will not change this fundamental economic problem, nor is globalization or liberalization likely to succeed if policy-makers attempt to proceed on the basis of inappropriate no-rent market models. The no-rent model remains compelling not because the evidence supports it, but because its policy implications are much simpler to understand. Our analysis suggests that identifying the conditions which have in the past been conducive for growth is a much more challenging task. The conditions which allow value-enhancing rents to emerge and which limit rent-seeking costs vary from country to country because countries do not have the same political conditions and do not follow the same technology trajectory. This is where a deeper examination of the historical evidence is important to warn us against falling for seductively simple theories. There is no evidence in Asia, possibly no evidence anywhere, of long-run development taking place on a no-rent basis. Instead, the policy challenge is to construct and reconstruct institutions and politics in developing countries to sustain developmental rents and rent-seeking while attacking value-reducing rents and rent-seeking.

Mushtaq H. Khan (2000), Rent-Seeking as Process, in M.H. Khan and Jomo K.S. (eds) Rents, Rent-Seeking and Economic Development

Olympic success: down to the individual or the system?

Rio 2016 logoSome of my readers may well be enjoying coverage of the Olympic Games in Rio de Janeiro at the moment, if that’s your thing; others may be fed up with it and doing all they can to avoid it. Yes, this post is about sport, but it is also about political economy and social science, whose practitioners have throughout their history debated the meaning of and relationship between the individual and the social in society. I want to explore the lessons for these subjects of countries such as Great Britain, which has done very well in last three Olympic Games in terms of medals won, and overall team performance. Continue reading