“Have you ever wondered why economists don’t always seem to make much sense?”
I have always had a nagging doubt about economics and economists. For many years I just thought I wasn’t smart enough to understand what often, on the face of it at least, never made much sense to me. I was also somewhat perplexed by an intellectual discipline that didn’t really seem to be very good at what it purported to do, explain and predict what was going on in the economy.
Thank goodness I have now come across Steve Keen, Professor of Economics and Finance, at the University of Western Sydney. Arriving home on Sunday night I actually sat for 15 mins in my stationary car, outside my house, to listen to the end of the BBC Radio 4 programme he was on. The last time I did that was many years ago when, in tears, I listened to the tragic end of Of Mice and Men, by John Steinbeck.
I wasn’t crying on Sunday night. I was excited and captivated by what Steve had to say because he is the first person I have heard who seems to have any idea how the economy really works. After listening to him I went inside my house and bought a Kindle copy of his increasingly well known book Debunking Economics and spent half the night reading it. I haven’t finished it yet but that didn’t stop me sending two copies to my children first thing the next morning and suggesting they read it too.
I am no economist, but what Steve has to say is really quite fascinating. Steve predicted the financial crisis we are now embroiled in as long ago as December 2005, and warned, back in 1995, that the period of apparent stability could merely be the “the calm before the storm”. His leading role as one of the tiny minority of economists to both foresee the crisis and warn of it was recognised by his peers when he received the Revere Award from the Real World Economics Review for being the economist who most cogently warned of the crisis and whose work is most likely to prevent future crises.
In his book he explains how many widely believed economic models have actually been proved to be wrong by economists themselves, but they keep on using them. How the current economic paradigm is a house built on sand and how so many widely accepted rules of economics can be relatively easily shown to be wrong. Almost nothing we have been taught seems to be true, from the shape of the demand curve to the Efficient Markets Hypothesis.
Steve is most critical of the neoclassical school of economics that dominates economic education and thinking today and that has, he argues, lead us to where we are now. Its fundamental idea is that markets are stable and self correcting, which the recent financial instability would somewhat disprove. Steve is currently developing his own theory around the idea that markets are, in fact, the opposite, fundamentally unstable.
Why does this matter to you? Well you and your business’s prosperity over the next few years will be dictated by investment decisions you make from now on and it will help you greatly to better understand what may be coming your way. There is no more sobering thought than Steve’s belief that we are barely 30% into this financial muddle. He also thinks that a lot of change will be needed to the economic orthodoxy if we are to prevent similar things happening in the future.
It has to be said that Steve’s book is not an easy read, in fact he readily accepts that the bits where he systematically refutes established economic wisdom are a bit boring, but if you have ever wanted to get better acquainted with economics then buy the book and sign up to Steve’s blog http://www.debtdeflation.com/blogs .
You too might find that, like me, for the first time perhaps, you actually now understand what is going on.