Debunking Economics - Revised and Expanded Edition summary

Understanding the Flaws in Economic Theory

In Debunking Economics - Revised and Expanded Edition by Steve Keen, we are taken on a journey through the history of economic thought, starting with the classical economists like Adam Smith and David Ricardo. Keen argues that the foundation of modern economic theory, neoclassical economics, is built on a series of flawed assumptions. These assumptions include the belief in equilibrium, the idea that markets are always efficient, and the concept of rational expectations.

Keen explains that these assumptions are not only unrealistic but also dangerous. He argues that the belief in market equilibrium leads to the acceptance of excessive private debt, which can result in financial crises. He also criticizes the neoclassical theory of perfect competition, stating that it does not reflect the real-world market conditions, where firms have the power to set prices.

The Role of Money and Debt in the Economy

One of the key points Keen makes in Debunking Economics is the importance of money and debt in the economy. He argues that neoclassical economics fails to adequately account for the role of money and debt in the economy, leading to a misunderstanding of the causes of economic crises. Keen introduces the concept of endogenous money, which suggests that money is created by the banking system through the process of lending, rather than being controlled by the central bank.

Keen also emphasizes the role of private debt in driving economic cycles. He argues that during economic booms, the level of private debt increases, leading to a period of prosperity. However, when the level of debt becomes unsustainable, it can trigger a financial crisis, as seen in the 2008 global financial crisis. Keen's analysis challenges the traditional view that government debt is the primary driver of economic instability.

Challenging the Neoclassical View of the Firm

Keen further challenges the neoclassical view of the firm, which assumes that firms operate in a world of perfect competition and have perfect knowledge. He argues that this view does not reflect the reality of the business world, where firms have the power to set prices and often operate in imperfectly competitive markets. Keen introduces the concept of the 'Firm as a Monopoly Producer of a Unique Product', which he believes better reflects the real-world behavior of firms.

Keen also criticizes the neoclassical theory of production, which assumes that firms operate with a given level of technology and can easily substitute between different factors of production. He argues that this view does not account for the role of innovation and the non-substitutability of different factors of production in the real world.

Proposing an Alternative Economic Framework

In the latter part of Debunking Economics, Keen proposes an alternative economic framework based on the insights of the classical economists and the work of more recent heterodox economists. He argues for a more realistic view of the economy, which takes into account the role of money, debt, and imperfect competition. Keen also emphasizes the importance of understanding the economy as a complex, dynamic system, rather than a static equilibrium.

Keen's alternative framework also includes a more realistic view of the role of government in the economy. He argues that the government has a crucial role to play in stabilizing the economy and ensuring full employment, particularly during times of economic crisis. Keen's alternative framework challenges the traditional neoclassical view of the economy and offers a more realistic and nuanced understanding of economic dynamics.