Tuesday, May 26, 2015

Blogging Steve Keen's 'Debunking Economics': Prelude

Despite being educated to past degree level, I have no formal training in economics whatsoever.

I haven't sought out statistics on this but – since students in the UK specialise upon entry to university and the subject is not taught in most schools – I expect that I share this lack of economic education with the vast majority of the nation's population.

Which is unfortunate, because so much of modern political discussion hinges on questions of economics: the National Debt, the deficit, austerity, credit ratings, government bonds, bailing out the banks, house prices, pensions, funding the NHS, costs of EU membership,... major issues all, and the list goes on and on.

What has galvanised me into action is a recent realisation that there is an astonishing discrepancy between what we're led to believe by the media and are told by politicians, and the economic reality. In part, this has arisen through straightforward deception: for instance, David Cameron's claim in 2014* to be 'paying down' the National Debt when in fact it continued to rise throughout the coalition's term in office. The government can get away with this sleight of hand, however, because of the public's unfamiliarity with economic concepts; in this case, the difference between reducing the deficit and paying down the debt. Economic ignorance (which, I hasten to add, is not meant as a slight but as a reflection of the failings of schooling), together with the counterintuitive reality, has made the entrenchment of fallacious ideas almost inevitable.

However, it gets worse. Not only do politicians and the media struggle to understand the modern economy, so too it seems do many economists. Despite having the experience of the Great Depression of the 1930s to inform their judgement, mainstream 'neoclassical' economists failed to anticipate the financial crisis of 2007/08. The theories upon which their models were built did not allow them to foresee such an eventuality. These weren't just theoretical concerns: the flawed theories go some way to explaining US Federal Reserve chairman Ben Bernanke's failure to foresee the crisis in time to prevent its worst impacts.

In the immediate aftermath of the crash, many economists – including Alan Greenspan (chair of the Federal Reserve until 2006) – claimed that no-one could have predicted it. Indeed, only a very small minority thought about the economy in such a way that they were able to foresee the coming crisis, understanding the importance of credit flows, debt growth and banking. Dirk Bezemer, at the University of Groningen, identified twelve economic analysts who made a timed prediction of a real estate crisis and subsequent recession (PDF).

In time I hope to learn more about the insights of all of the analysts and economists listed in Bezemer's paper. One in particular, however, has set out his criticisms and proposed alternatives to the flawed neoclassical theories and models that failed to predict the financial crisis at length and in an accessible manner: Professor Steve Keen.

Keen published his first edition of Debunking Economics in 2001. I described in a previous post how that 2001 edition contained several predictions that would turn out to be remarkably prescient a few years later, and the second edition (pictured), which was published in 2011, has been updated accordingly and substantially expanded.

As an 'economic novice', based on the above reasoning I have determined that this is the right place to start building a worthwhile and useful understanding of the discipline. I hope that "Blogging 'Debunking Economics'" will aid my comprehension of the concepts, and perhaps a few other readers might benefit from them also...

*Making this even worse, he made the claim despite having been rebuked by the UK Statistics Authority for saying the same thing (equally untruthfully) the previous year!

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