This book is a recommendation to help me with my dis-orientations in econ-related news and policies, especially those fiercely defend capitalism. Arguments usually end in opinions about my lack of knowledge or understandings about economics,
"Capitalism works, regardless of the problems it inevitably have caused. This is econ 101."
Steve Keen made it very clear that this book is for the confused, those questions why public policies put so much weight on economics theories. He invited everyone to join the discussion and examine the mainstream classical-economic models, and exposed the poor assumptions and maths behind these influential models.
This is the book that explain why these theories, driving important government policies, can’t reconcile with our "gut feelings".
The first six chapters introduced the economics textbook basic theories, with precise definition of typical jargon: capital, value, and marginal, etc.
By carefully explaining what the econ-textbook graphs depicted, more importantly what the graphs did not show, Keen told a very different story of what the classical theories concluded.
Under such careful explanations, Keen made these classical concepts and the underpinning mathematical methods very easy to understand. After clarifying all the mixed terminologies and rationales behind aggregating individual behaviors to represent a collective, Keen highlight the small but significant errors that were lost in the details but detrimental to these classical models.
Another cool thing Keen showed is that some of these classical model behaved in a completely different way under computer simulations, violating a lot of the claims and conclusions these theories originally aimed to achieved. He also spelt out clearly what unrealistic assumptions were made by these models and how these assumptions had led to internal inconsistency, leading the model to fall apart with scrutiny.
It is no surprises that the “rational human” used in many economical theories does not exist at all, it is news to me that “the rational human” were made irrational in several models. One example is the “indifferent curve”, it assumes that because a person will achieve same utility by purchasing different quantities of various commodities, one shall be indifferent (equally happy) if the same utility is achieved. But what built upon this assumption is more peculiar, that a person will spend all his/her income on consumption that increasing his/her income also increase his/her purchasing power in a 1:1 ratio.
Keen spent a whole chapter (chapter 4) in exploring how the assumption to neglect very small amount as zero led to erroneous conclusions of the “the perfect market” theory, which claimed that competitiveness can drive down prices and monopoly is bad. In contrast, Keen showed that monopoly will eventually reach the same price equilibrium as competitive markets made up by small firms; worse, he showed that small firms could hardly reach the size to produce at “marginal profit” and would stop expanding at a higher price level.
These details are only brought to our attention by Keen’s insights; as ordinary public, I did not have any suspicions at all except feeling puzzled at the conclusion these theories arrived. Unlike other scientific disciplines, the conclusion is the emphasis of these economic theories, backgrounds and concrete proofs were seldom shown to us and we were told to accept such indoctrination.
From chapter 7 onwards, Keen described the “Assumptions don’t matter” notion introduced by Friedman to defend the problematic classical economical models.
The more significant the theory, the more unrealistic the assumptions.
Milton Friedman
This part of the book has turned into a historical account of how economists preserved the problematic models by reinterpretations, modifying part of the assumptions, ignore the problems as the model appeared to describe the real-world data reasonably well, or reframe the economic concepts to a philosophical one.
Similar to the Newton’s mechanics that we all study in school, even it is wrong, it describe our daily reality quite well, thus is useful. A lot of older scientific concepts have now proven to be quite wrong and scientists in all the field are constantly refining our understandings with increasingly fine details and precise measurements.
Studying complex systems (i.e. economics and climate modeling) is a daunting task, and it is extraordinary to see that economists have taken a different path than the mainstream science that rather than rigorously test and update their hypotheses, economists just twisted the statistics, the maths, and even public policies to align to their models.
Well, I guess this is the only discipline that is capable to bend reality, due to its massive involvement in politics. But as Keen pointed out, there are alternatives theories and the field is undergoing some sort of a reform. More and more economists have step forward to point out the flaws of their models, so that the already precarious models were not further abused for political agenda. Further searching had land me on this interesting Pitchfork Economics podcasts, aiming to expose what went wrong in economics-driven policies that had led to extreme inequality.
Debunking economics definitely had made me aware that faulty economic theories may be responsible to a lot of structural problems our society is facing currently. After reading the book, I am still no expert, but I am equipped with the basics to stay vigilant and the esteems to questions future economical claims that go against my “gut feelings”.