A Manifesto for a New Economics

How to make economics fit for the 21st century. Steve Keen has written a book on "The New Economics".

 

In his new book called The New Economics: A Manifesto, Steve Keen follows up on his previous book Debunking Economics, in which he radically criticises ‘mainstream economics’. This time, he does not confine himself to criticism, but also lays out his alternative of how new economics should look like. Building on Thomas Kuhn’s work on paradigm shifts, his book can be understood as an attempt of disrupting the old economic paradigm from the outside to pave the way for something new.

According to Keen, economics should not rely on micro foundation anymore, but rather use system dynamics as a tool for understanding the world. His claim is that the structure of a system mainly determines the outcomes, not depending so much on individual decision making.

Keen concentrates on two topics: the role of money, and climate change. In his chapter Money Matters, Keen criticises the neoclassical ignorance of money and money creation and argues that money creation by banks ‘ex nihilo’ has macroeconomic significance.

Climate Change is his other central topic in his book. He carves out the flaws of prominent economists trying to implement climate change in their models. Most famously, this was done by William Nordhaus, who in parts of his work assumes that all economic activity that does not take place outdoors will not suffer from climate change, which is a bold if not naive assumption. As another example, some models use current correlations between temperature and economic activity and project this into the future, completely ignoring topping points.

In his review of Keen’s book, Dirk Bezemer criticises his use of neoclassical economics as a straw man. Being portrayed as too massive and monolithic a field, Keen ignores that ‘mainstream’ economics has embraced behavioural economics, and other innovation outside of Keen’s description of neoclassical economics.

Bezemer also criticises that Keen neglects alternative ‘new economics’ responses to his criticism, namely agent based modelling and econophysics. In contrast to Keen’s proposal to concentrate only on the macro level, agent based modelling tries to address the complexity of the real world by inflating heterogeneity at the micro level. Econophysics incorporates a thermodynamic way of thinking albeit, again in microeconomic and not macroeconomic models.

Dirk Bezemer’s full review of the book can be read here.

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