A timely new book challenges the received wisdom in economics.

It was the Queen who asked the big question in the aftermath of the financial crisis – why did nobody see it coming? Many of the world’s most distinguished economists took upthe challenge, with varying degrees of success. The basic answer was that they couldn’t possibly have known. There was nothing in their experience or theories to prepare them for a freak event like the fall of Lehman Brothers. Nothing short of a crystal ball would have enabled them to see the crisis coming. Nye Bevan’s words spring to mind: ‘why try to look into the crystal ball when you can read the book.’ The point is that these economists should have seen the crisis coming, since the data and the lessons of history were clear for anyone who cared to look. The fact that they didn’t reflects the sorry state of mainstream economics.

One of the few economists who did predict the crisis, Australian academic Steve Keen, has just launched a revised second edition of his 2001 book Debunking Economics: The Naked Emperor Dethroned? He explains in detail how the very foundations of neoclassical economics are based on faulty logic and barely any consideration of what actually goes on in the real world. Even what is taught as Keynesian economics is really a sanitised version, bereft of Keynes’ most salient insights.

An almost religious faith in equilibrium lies at the heart of the neoclassical approach. If you are convinced that markets always function in equilibrium then the idea of any sudden reversal is hard to conceive. If we live in the best of all possible worlds, how can there be a crisis? The problem is that the real world is a rather more complicated place, where not much moves in simple straight lines and where there is no evidence that markets smoothly and instantaneously glide between states of equilibrium. Fortunately there are other visions, though a full-blooded alternative to the neoclassical school has yet to emerge. Keen follows an interpretation of Keynes that is more faithful to his original ideas than the mainstream, and which is influenced greatly by the late Hyman Minsky. He attributes the level of overall debt in the economy as the main cause of the crisis; it was when he examined the level of private debt in major world economies that Keen saw trouble, at a time when most economists were still toasting the ‘Great Moderation’. Moreover, the overall levels of debt in western economies just before the crisis far exceeded what preceded the Great Depression. Until we sort out this problem of private debt in the economy (the problem is private debt, not government debt), spending and demand will continue to be subdued and the hard times will drag on. Unless households and firms are relieved of the debt burden, simply printing money and transferring it onto bank balance sheets (aka quantitative easing) is not going to work. Keen favours a Jubilee, or en masse forgiveness of debt. He is not the only person in recent weeks to advocate transferring cash directly to households rather than to banks. The challenge of devising a way to achieve this while meeting other political objectives and at the same time reframing the debate on the economy is one for policymakers to ponder.

Keen is not approaching macroeconomics from a predominantly ideological standpoint. He is not trying to overthrow capitalism, but to better understand its workings, the argument being more one of ‘right versus wrong’ than ‘right versus left.’ And he gives short shrift to those who cling to standard Marxist economic theory. His ideas deserve to be studied carefully by the left, as he presents the beginnings of a serious alternative to an economic paradigm that is clearly not working. Though the book may not be plain sailing if you don’t have a basic grounding in economics, it is a ‘must read’ for anyone with a serious interest in the ongoing debate on building a fresh alternative to an intellectually bankrupt neoliberal consensus. As Steve Keen would tell us ‘economics is simply too important to be left to economists.’

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Tanweer Ali is a member of Progress

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Photo: RachelH_