WEDNESDAY, APRIL 21, 2010
The Debunking of Economics: A Review of the Work of Steve Keen et al
The Debunking of ‘Economics’ by Steve Keen: A Critical Review-
By James M. Craven/Omahkohkiaaiipooyii
Introduction
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“Though economists have long believed that their theory constitutes ‘a body of generalizations whose substantial accuracy and importance are open to question only to the ignorant or the perverse’ (Robbins 1932), for over a century economists have shown that economic theory is replete with logical consistencies, specious assumptions, errant notions and predictions contrary to empirical data.…Virtually every aspect of conventional economic theory is unsound; virtually every economic policy recommendation is just as likely to do general harm as it is to lead to the general good. Far from holding the intellectual high ground, economics rests on foundations of quicksand. If economics were truly a science, then the dominant school of thought in economics would long ago have disappeared from view” [1][iii]
Keen says that the catalyst for him to begin to question the prevailing neoclassical dogma, and to see it as dangerous dogma and ideology, was a basic “logical” contradiction in microeconomic theory pointed out to him by a lecturer in a first-year Microeconomics course. That contradiction was simple yet glaring and unaddressed. Neoclassical theory says that combinations of any sort (unions, monopolies) reduce social welfare, and, that without them, people would be paid proportionately to their respective productive contributions (MRPs) to total output and society. But, if one simply abolished only one form of combination and not the other; the other would dominate government and society and reduce net social welfare. Thus a “paradox”: that only abolishing both, or retaining both (checks-and-balances), but not abolishing only one of the two, would add to net social welfare and markets doing what markets are supposed to do. No second-best or marginal improvement, solution[iv] would occur with the abolition of at least one but not both of these combination forms.
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This statement by Steve Keen of what lead him to begin to question, and then later actively debunk, the economics[v] in which he had been schooled and has extensively taught, was for me revealing. It was a simple logical paradox, or internal contradiction, in the internal logic of the theory, not some fundamental and glaring contradictions between the predictions and palliatives of orthodox Neoclassical theory versus the ugly realities lived by the masses and covered-up by “mainstream” theory, that led Keen to begin to rebel. He has set about not to debate hard-core fundamentalists, the neoclassical and neoliberal “true believers” of academia and policy circles, but to offer alternative perspectives and paradigms on the issues that are typically problematic for the orthodoxy and that they refuse to hear, debate, question or open themselves to questions about. His focus, for non-economists as well as economists and political economists, is primarily on the internal contradictions in some of the core axioms, postulates, assumptions, hypotheses, mathematical expositions and even epistemology of Neoclassical orthodoxy.
Marxians and Marxists:
Professor Keen’s analysis often appears to me, to be more “Marxian” than Marxist[vi]. His analytical scope and depth appears somewhat detached from grass-roots politics, struggles and issues. He is heavy on theory and light on real-world case studies; light on empirical data on real-world conditions; light on real-world lives and struggles in this book but not in other venues he writes on. Interestingly, there is not even mention of the word “imperialism” –not even listed in the index of the book. He goes into and has some attraction to, chaos-complexity theory attracted partly by the more realistic, non-linear and morphogenetic models, involving positive feedback loops and non-linear differential equations (as opposed to the first and second-order linear differential equations and morphostatic models of neoclassical economics that are often learned, in condensed and inadequate courses of mathematics for economists) that more realistically model real-world systems of natural as well as social phenomena.[vii]
Why has Neoclassical Orthodoxy Survived Critique So Long?
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“However the critiques of this book are not based on politics but on logic. No political position—left, right or middle—should be based on foundations which can be easily shown to be illogical. Yet much of conventional economic theory is illogical. Those who occupy the center stage of politics should find a firmer foundation for their politics than an illogical economic theory. The same comment, of course, applies to those at the left-wing end of the political spectrum, who base their support for radical change on conventional Marxian economics. As I argue in Chapter 13, conventional Marxism is replete with logical errors as is neoclassical economics.”[viii]
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Keen also takes on the utilitarianism of Jeremy Bentham that is central to neoclassical economics: a) that all human behavior, ultimately, and subjectively for each unique individual, comes down to maximization of pleasure and minimization of pain; b) that there is no such thing as society or community—only aggregates or a simple sum of individuals that remain individuals—any “social interests” or social utility functions, are manifested by adding up individual interests and utility functions. These constructs undermine other constructs of neoclassical economics that are uncritically taught: supposed social indifference maps from individual indifference maps; Giffin goods[xi]; market demand curves as mere “horizontal summations” of individual demand curves; general equilibrium; budget constraint line (income) independent of tastes (indifference curves); contours of individual indifference curves cannot intersect (except supposed social indifference curves); human behavior driven by motives other than utility maximization and pain minimization[xii] ) Keen then takes on, the central postulates of consumer welfare theory.[xiii] He also shows how consumer theory and indifference maps are used to attempt to explain any aspect of human behavior related to consumption—“one-size-fits-all”.
Neoclassical Focus on Consumption and Exchange and not Production
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And of course this “socially representative” individual, standing in for all individuals, has no history, context, social class, age, gender, ethnicity, religion or ideology to “clutter-up” the analysis. Keen also notes that if neoclassical theory were to incorporate social class, then at the first- approximation level, perhaps the assumption of the “representative individual” (of most people of a given social class) might be easier to take and work with as incomes and tastes, within social classes, vary much less than between social classes[xv].
Keen shows how an indeterminate, non-continuous and jagged market demand curve, with portions showing a direct, rather than inverse, relationship between price per unit and quantity demanded per unit of time, can lead to multiple-point-intersections between market demand and the supply curves thus leading to multiple potential “equilibriums”. Other objections to neoclassical theory on consumer welfare include: non-evolutionary ways in which consumer behavior is handled; consumer split personalities (maximizing utility and also ethically obeying contracts); irrational definition of rational (takes extensive time and processing power of calculate comparative utilities among myriad combinations of two goods when it would be rational to simply follow habitual rules of thumb); ignorance of and ignoring ethical and other factors in complex human behavior and motives; refusal to consider how behaviors, welfare and peer pressures of others affect individual decisions and behaviors (examined in an area called network economics).
The Neoclassical “Law” of Supply: Sraffa Redux
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Keen argues, employing the analysis of Sraffa that horizontally summing up upward-sloping marginal costs curves of individual firms to produce an upward-sloping market supply curve is as flawed as summing up individual demand curves to form a smooth downward-sloping demand curve.[xvii]
Sraffa attacked two particular cornerstone axioms of neoclassical theory and showed that they were mutually contradictory: 1) in the short run, if at least one factor of production is “fixed” then supply and demand functions cannot be independent of each other and thus any notions of a predictable partial equilibrium are impossible as every point on the supply curve would be associated with a different demand curve; 2) on the other hand, under any circumstances in which supply and demand could be treated as independent of each other, it would be impossible for any factor of production to be fixed and hence marginal costs would be constant and average costs falling.
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If internal rising marginal costs do not constrain the production and profitability of an individual firm as neoclassical economics suggests, what are the constraints on the individual firm? According to Keen, who is often almost channeling Sraffa, the major constraints are those which neoclassical economics simply assumes away as not relevant: costs of transportation, information, marketing (a cost of distribution not production as assumed to try to rescue the rising marginal cost curve) and access; plus, acceptable market price and creditworthiness.
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Keen is well aware of the issue of economies of scale (present, according to Keen most in large firms or farms producing relatively homogenous products) and the issue of perfect competition being self-negating or self-imploding. No one goes into business to lose; they all dream of profits for power and power for profits. Big fish swallow small fish. Pure competition and its own survival imperatives dictate increasing product differentiation (real or imagined) leading to monopolistic competition and a slightly downward-sloping demand curve (some market power) and often, oligopoly and then monopoly—effective or actual. It is all very dialectical: negation of the negation, or, ultra-competition leads to anti-competition, which leads to more competition (among oligopolies) at higher levels with more at stake with more to lose. Size does matter, economies of scale do constitute serious barriers to entry and competition, the long-run supply curve assumes constant technology (a highly spurious assumption) and the only way that perfect competitors could exist in any long-run sense would be with an industry so huge that it could handle the huge number of very small firms that the perfect competition model requires. In answer to these reservations, the Neoclassicals retreat, again, to an attempted theory-saving assumption of constant returns to scale in which case size does not matter. According to Keen, when all these caveats are taken into account, the case for perfect competitors and against monopolies collapses with the exposed logical contradictions internal to the theory alone. But this should not be taken as an endorsement of monopolies, Keen notes, but each monopoly should be judged on a case-by-case basis he notes.
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Neoclassical Marginal Productivity Theory
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For commodities other than labor-power, demand is determined by consumers (mostly from Households) on the basis of incomes and tastes, while supply is determined by costs of production. But labor-power is not strictly consumed but hired to produce other commodities for sale and labor-power is not supplied for “profit” or subject to diminishing returns. So in essence, the demand for labor-power is determined by producers while the supply of labor-power is determined by consumers of the commodities produced by labor (the utilization or consumption of labor-power in production). According to neoclassical theory, the supply of labor-power is determined by a trade-off between income and leisure coupled with an assumed disutility of all labor and progressive taxation effects.
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Here Keen notes four basic objections to the neoclassical theory. He argues that labor-power supply curves may well be 1) backward bending so that a fall in wage-rates may induce an increase in quantity supplied of labor-power; 2) when workers face powerful and organized employers, workers will not get fair wages unless they organize; 3) Sraffa’s problems with aggregation of individual supply and demand curves to form market curves apply even more to labor-power markets; 4) notions of workers “freely” choosing between work and leisure is fundamentally flawed.
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The notion that workers receive wages proportional to their marginal revenue product contributions, assumes perfect competition in both output/product and input markets. Neoclassical theory admits that when the product and labor-power markets are not perfectly competitive, then incomes do not simply reflect relative MRP contributions but also relative bargaining powers of employers and employees. In cases where product markets are imperfect, and demand curves are downward sloping giving rise to separate and steeper MR curves, the worker’s marginal revenue product falls more rapidly than under perfect competition because both marginal physical product and MR fall as output increases from more workers being hired (unlike in perfect competition where falling MRP is a function of falling marginal physical product of labor x constant P =- MR). This can be used to argue for unions as workers would be “exploited” being paid wages less than the price (MR <>
Sraffa had two basic critiques of horizontal summations/aggregations of individual supply and demand curves to form market supply and demand curves: one for a broad definition of an industry and one for a narrow definition. Labor-power markets behave like Sraffa’s broad industries. Movements along an upward sloping supply curve between particular wage-rate/quantity supplied points will have implications on income distributions and thus demand for products produced by labor and thus product prices and marginal revenues. This will mean a different demand curve for labor power (MRP) at each point along the upward-sloping supply curve of labor power and interdependence of supply and demand functions; and thus, multiple possible equilibrium wage rates and “perverse” outcomes and incentives. Finally, few forms of leisure other than sleep do not require income. But if the quantity supplied is a direct function of wage rate, then the lower the wage rate and thus income, the lower the quantity of labor supplied and the higher the supposed “choice” for leisure. In reality, people do not “choose” between work and leisure, not most people; most people simply work to survive and try to do what it takes (quantity, quality and duration of labor-power) to do so.
This concludes the main points in Part One of Keen’s book that deals with internal logical inconsistencies or contradictions in neoclassical theory. Part Two of the book deals with Keen’s suggestions for a new kind of economics curriculum that offers alternatives to neoclassical theory that is more than just a debate on the existing scope and depth of the typical undergraduate economics curriculum.
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The Need for Epistemology and Scientific Method in Economics Curricula
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Neoclassical Theory versus Institutionalists versus Marxism: Aggregation, Growth, Crises
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These two equations of Marx’s simplified model are linked as workers’ wage demands depend upon rate of employment while rate-of-growth determining investment depends upon income distribution (higher ratio of wages to output reduces profit and thus investment). These two equations yield cyclical patterns similar to that envisaged by Marx as workers’ share of output and rate of employment both cycle indefinitely and do not tend towards oscillate around some kind of equilibrium. When the variables debt-to-output ratio and government spending are added for more realism, cycles in all variables continue without any exogenous shocks being introduced.
In his essay on “The Sum of the Parts: Why Keynes’s Criticisms of Conventional Economics are Still Relevant Today”, Keen takes on the origins and history of macroeconomics[xliv] in overall conventional economics. Macroeconomics was criticized for a long time as a patchwork of ad hoc assumptions, some contradictory, about phenomena at the macro or aggregate level. It was accused of lacking the “logical rigor”, supposed tight foundations and internal coherence of microeconomics[xlv]. Since its foundation, macroeconomics has been under siege to more clearly and tightly build its analyses and models on the foundations of microeconomics (micro foundations of macro) no matter what the methodological problems in treating collective social welfare as the product of aggregating or summing of individual welfare situations. But problems of aggregation, along with some other methodological problems, led to the fiction of the supposed “single representative agent” or single producer/consumer as a model of the whole macro economy[xlvi]. Keynes’ and Marx’s critiques of conventional economics are still appropriate critiques of modern economics.
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Say’s Principle or Walras’ Law: Marx vs Keynes
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Here Keen first brings in the voice and critique of Say’s Law by Keynes who divided the economy into consumer goods and investment goods sectors. If for example, notional excess demands for consumer goods goes negative, then instead of notational excess demands for investment goods being positive to offset the rising surpluses of consumer goods as Say’s or Walras’ “Law” would predict, then, since investment is based on profit expectations, then a fall in demand for consumer goods and rising unemployment, more than likely, leads to general pessimism. The net result will more likely be more, not less, negative notational excess demands for investment goods as well as for consumer goods, and thus a cumulative-change-based downward and general slump of the whole economy.
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Keen and Reforming Capitalism
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Keen, who describes himself as a “critic of neoclassical economics who likes mathematics”, provides an interesting discussion on the uses and misuses of mathematics in his essay “Don’t Shoot Me I am Only the Piano: Why Mathematics is not the Problem”. Complaints about the misuses of mathematics he argues, is like blaming the instrument (piano) for the discordant playing of the piano player. He argues that new approaches to the teaching of Economics should focus on math not only as a tool to illuminate reality, but also as a tool to identify, critique and expose the contradictions and misuses of mathematics in neoclassical theory. He explores “Bad Mathematics”[lvi]; “Limits to Mathematics”[lvii]; “The Recurring Nightmare of Straight [and smooth or continuous] Lines”[lviii] and a slight discussion on the future of mathematics .
Keen and His Views of Marxism
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“We now turn to some of the alternatives to conventional economics that do exist—warts and all. We begin with the most radical alternative—Marxian economics. You may, if you have typecast me as ‘left-wing’ expect me to praise Marxian analysis. If so, you are in for a surprise.”[lix]
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Marx critiqued Ricardo for understanding, on the one hand, that the value of labor-power (wages) is less than the value of output produced by that activated labor-power (labor) while on the other hand not asking why the difference that gives rise to surplus value. Marx rejected Smith’s notion of possible “productivity of capital” arguing that value ‘created’ equals value lost (depreciation) by capital. But Marx was careful to avoid any theory of surplus-value or profit that depended upon buying cheap and selling dear in exchange and assumed that on the average, commodities sell at their real values (socially necessary labor times) and profits are the result of selling them at real values (real values of output produced by labor and value of labor power or capacity to work that is utilized for labor) on the average.
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I fear that Keen, who decries some of the alleged inconsistencies Marx’s unfinished work, some of the alleged errors of applied Marxism and the alleged self-absorption of some Marxists, even Marxians, does not understand that Marxism represents far more than the unfinished manuscripts of Marx or many of the self-proclaimed Marxists and Marxians that inhabit the halls and journals of Western academia with which he is familiar.
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[i].Keen Steve Debunking Economics: The Naked Emperor of the Social Sciences. Zed Books, London, 2003; see his essay in this book entitled “Nothing to Lose But Their Minds: Why Marxists are Irrelevant But Most of Marx is Not” pp. 269-99; see also support for the book athttp://www.debunking-economics.com
[ii] Keen critiques what is typically taught at undergraduate levels not some sophisticated modifications of neoclassical theory taught in graduate schools.
[iii] Keen Steve, Ibid Zed Books, London, 2003, p. 4
[iv] Keen, Steve, Ibid. cite of Lancaster, K and Lipsey, R.G. “The General Theory of the Second Best”, 1956, “Review of Economic Studies” Vol. 24: 11-3. The theory of second best notes: a single step to an ideal situation reduces net social welfare if two or more steps are required to move from a present to ideal situation—all or none ideal solution.
[v] Keen notes in his opening essay “No More Mr. Nice Guy”: “Clearly then, my target in this book is not economics in general, but the dominant school of thought within economics.” Keen, Steve, op cit. p. 10
[vi] “Marxians” are typically academics who study and appeal to some of the core concepts of Marx, mostly on the basis of the superiority of Marx’s theories or theoretical system in terms of empirical support for core constructs and/or in explaining and predicting—more than in transforming—reality. Often their objections to the core postulates and axioms of neoclassical economics are as “a-priori” as are the postulates and axioms of the Neoclassicals to which they take exception; and they are often based on what is of particular interest intellectually to them personally, rather than on any documented practical utility (in concrete struggles, under concrete conditions, of concrete oppressed peoples), of the theories they develop. Marxists, on the other hand, are guided by the notions of unity of theory and praxis, seeking truth from facts, and Marx’s 11th Thesis on Feuerbach that is the inscription on his grave at Highgate cemetery in London: “The Philosophers have only interpreted the world in various ways; the point, however, is to change it”. Marxists are thus very concerned with how theory advances and is in turn tested by application in concrete praxis.
[vii] Some of the American leftist academics have found themselves at places like the Santa Fe Institute doing work in non-linear dynamics, Chaos-Complexity theory, “ordinary differential equations” (e.g. third-order non-linear differential equations) applied to issues. Although Chaos-Complexity theory contains some parallels with core postulates and approaches of dialectical materialism (unstable equilibriums; perpetual change; cumulative change via positive feedback loops; morphogenetic instead of Newtonian-like and self-equilibrating morphostatic systems;“negation of the negation”; order underneath chaos and potential chaos in all order due to fundamental contradictions; non-linear change; etc), some call Chaos-Complexity theory “faux” or “mechanical” or “vulgar” or “academic” dialectics” because of an emphasis on a-priori model building and testing outside of real-world praxis to apply and test the theory. Keen himself calls Chaos theory and evolutionary economics “alternative religions”.
[viii] Keen, Steve, op cit. p. 14
[ix] Some critics of neoclassical economics see it as an essentially coherent and internally consistent theoretical system founded on three basic meta-postulates, composed of several sub-postulates, that are fundamentally bankrupt: I Methodological Individualism; II Methodological Instrumentalism; III Methodological Equilibration Arnsperger, Christian and Varoufakis, Yanis, “What is Neoclassical Economics?”, Post-autistic Economics Review Issue 38, July 2009 cited in Craven, James in “Neoclassical Economics and Neo-liberalism as Neo-imperialism”, paper presented to The Academy of Marxism, Chinese Academy of Social Sciences (CASS), August 11, 2009. Beijing, PRC.
[x] Keen, Steve, Ibid. p. 8 Here Keen asserts that it is the lack of internal consistency in the neoclassical theories and neoliberal policy prescriptions, rather than the class-nature of the values, approaches and objectives of the theories and policies, that prevent their usefulness in illuminating, understanding and transforming the aspects of the real world that they model. He does not appear to allow for a logically internally consistent and coherent theoretical system that is totally bankrupt in its ability to understand or transform the real-world because the class it was designed to serve, against the interests of other classes, is a doomed class from its own internal contradictions, imperatives and balances of forces in the real world.
[xi] Giffin goods are inferior goods whose actual consumption declines as income increases. Necessities are goods whose consumption as a share of income declines. Luxuries are those goods whose actual consumption and share of total income rise as income rises. Representative goods ate those whose share of income spent on them is constant regardless of level of income (do not exist). Engels curves, which map the changes in spending patterns as incomes change, can assume any shape. For Bentham’s postulate (the whole is a simple sum of its parts) to hold true, Engels curves would have to have a constant slope (fixed distribution of income which violates the assertion that relative incomes are determined by the price system) or, they must all have a constant slope (which means Engels curves must be linear straight lines and thus goods are neither necessities nor luxuries) and the same slope (all have identical tastes). These are known as ‘homothetic’ and ‘affine’ Engels curves (meaning that Bill Gates spends every dollar the same way as everyone else and no one’s structures of consumption vary as a function of age, income or other factors). These assumptions needed to derive social utility from the sum of the individual utilities—that all individuals are identical and unchanging, or, that society is made up of only one individual consuming one good, are absurd on their face yet are employed in neoclassical analysis which attempts to get around the absurdity with the construct of the “representative consumer” or ‘SMD conditions’, another absurdity).
[xii] According Stanley Jevons one of the founders of neoclassical economics, behavioral motives from compassion, conscience, religious or other sources, that cannot be simply reduced to utility maximization and pain avoidance, also play a role in human behavior but cannot be easily, if at all, mathematically modeled).
[xiii] Conventional consumer indifference curves assume: a) Completeness (various possible combinations of two goods, A and B, can be rationally, consistently ranked at the ordinal but not cardinal level (qualified as more, less, or equal but not quantified) in terms of utility they yield to a particular individual; b) Transivity (If A preferred to B and B to C then A to C preferred); c) Non-satiation (more preferred to less); d) Convexity (“Law” of Diminishing Marginal Utility gives rise to convex shape of indifference curves); e) All income is consumed in the present with saving simply treated as consumption of future goods; f) individual demand curves derived from individual indifference maps as budget constraint lines pivot with changes in relative prices with income constant, and uncritical parallel shifts with relative prices constant and income changing; g) labor supply is simply a choice between income and leisure with the slope of the budget constraint line equal to the real wage; h) choices between present and future consumption of goods are indifference curve maps with relative prices replaced with the rate of interest or rate of time preference.
[xiv] This is analogous to someone with size-10 feet putting on a size-7 shoe and when the shoe does not fit, that person elects to amputate his toes to make the size-7 shoe fit rather than seek a properly-sized shoe.
[xv] Keen, Steve, op cit, p. 52 cites the work of Alan Kirman on “collectively coherent” group behavior;
[xvi] Traditional neoclassical theory, which defines short-run as a time period in which at least one factor of production is fixed (say land or “capital”) while others vary (say “labor”) and “factor crowding” of the fixed factors; this leads to diminishing marginal productivity and thus rising marginal and average costs as output increases. This perspective tends to weigh the factor-crowding effects stronger than the offsetting, synergistic and cost-reducing effects of increasing specialization and division of labor coupled with the human capacity to learn and adapts to reverse emerging conditions like diminishing marginal productivity. Thus, in the real-world, unlike the textbook diagrams done by graphic artists for aesthetics, marginal and average cost curve are gentler, L-shaped rather than u-shaped, and less steeply rising; and thus supply curves may be flat or even downward sloping. The only way that the marginal cost curves could rise so slowly, while average costs curves rose so steeply, as neoclassical theory assumes and the textbook diagrams illustrate, is if only “trivially small” quantities of output were being produced.
[xvii] Piero Sraffa argued, as early as 1926, that the so-called “law of diminishing marginal returns” will not apply in general to an industrial economy where constant marginal returns, and thus constant marginal costs and a flat market supply curve would likely prevail. This was a direct attack on neoclassical theory of production in which diminishing marginal returns is the central “law or axiom” to analysis of all of production. In the event of constant marginal returns being the norm, then both the output and total revenue functions would both be straight lines through the origin with the slope of the total revenue line being greater (hopefully for the producer) than the slope of the cost curve. Once fixed costs were covered, there would be additions to total profits with every unit sold with more output adding more profits to infinity. Mainstream economists when given the Sraffa critique respond with even if it works in practice, does it work in theory?” which is the opposite of what science asks: “Even if it works in theory, does it work in practice?”
[xviii] Sraffa, Piero, “The Law of Returns Under Competitive Conditions”; “Economic Journal”, 40: pp 538-550; “The Trees of the Forest: A Criticism”; “Economic Journal, 44: pp 89-92; cited in Keen, Steve, op cit. p 317. If, increasing supply in agriculture, relative prices of land and labor change, then this changes the distribution of income and thus demand curve with a different demand curve along each of the points of the supply curve and thus it is impossible to draw independent supply and demand curves that intersect at just one place.
[xix] The notion of a smoothly falling demand curve and a smoothly rising supply curve intersecting to determine market price becomes an illusion. Where MC = MR, the MR of the last unit sold will be substantially greater than the MC of producing it and thus output is constrained not by MC but by costs of expanding sales at the expense of competitors. Instead, according to Sraffa, in the real-world, firms have a target output level they try to exceed and a target mark-up or profit margin they try to maintain with the size of the firm constrained by its market niche and access to favorable credit for expansion.
[xx] With a flat production function, the MRP will be constant in pure competition (constant MPP x constant P = MR) and thus will never intersect the real wage and thus the firm’s output level cannot be explained by cost or real wage of employing labor-power.
[xxi] Neoclassical theory has three notions of time: market period in which no factor of production can be varied; short-run with at least one factor of production constant so that increasing output is subject to diminishing returns; and long-run in which all inputs can be varied; this is still a comparative statics approach.
[xxii] Keen, Steve op cit. p.80. Keen gives a useful metaphor to illustrate his point. If deriving a car over a given distance, to calculate optimum speed to maintain to achieve optimum fuel consumption over a given distance., One would need to know lowest gas consumption per unit of distance traveled per second because if you work out the optimum speed first, then the lowest gas consumption is at zero km per hour which means zero distance. Since time is an essential aspect of economic behavior as distance is an essential aspect of travel, both problems have to be worked out simultaneously. The economic analogy for finding total profit maximization is equivalent to finding first optimum speed for gas consumption then multiplying it by distance traveled which winds up saying that the cheapest way to get from point A to point B is at zero miles per hour.
[xxiii] Problems in the neoclassical theory of monopolies are illustrated via a metaphor of trying to convince someone that the earth is flat starting from the premise that it is a sphere. A small plot of land on which someone is standing appears flat for all intents and purposes and any curvature is not noticeable and thus would be treated as zero curvature for all intents and purposes. When adjacent plots of land are brought into the discussion, larger segments also appear flat so that when all are aggregated, the earth appears flat.
[xxiv] In neoclassical theory, as it is taught typically at the undergraduate levels, demand curves of monopolies and other imperfect competitors, are presented as linear, smooth and downward-sloping and thus, marginal revenue curves are also shown as linear, downward sloping, smooth, and intersecting the x-axis at half the distance from the origin to the x-intercept of the demand curve.
[xxv] According to Keen if individual firms operate where MC = MR, then collectively, at the market level, the pure competitors will be operating where collective marginal costs exceed marginal revenue. Here Keen’s explanation of the rationale of the MC = MR rule in neoclassical economics needs further elaboration. The MC = MR rule is based on the notion that the central imperative for all capitalists is maximization of total profits (actually of real, after-tax, risk-adjusted total profits) not marginal profit or unit margin which would be where the MR > MC gap would be greatest. Thus up to but not beyond where MC = MR, although unit profit margins are falling with an increasing marginal cost curve and a flat MR curve, even the last unit of output before where MC = MR yields “infinitesimal” profit which “ain’t zero” (Keen’s point on aggregation problems) and thus adds to total profits just as minimizing losses, deductions from total profits, minimize reductions of total profits. This point is not made clear in treating MC = MR as a “term” of zero.
[xxvi] Here the Neoclassicals may argue, as Sweezy argued with the kinked demand-curve of the individual oligopolist, that the demand curve of the individual perfect competitor is an expositional/pedagogical/heuristic model of likely behavioral reactions, imperatives, interests and constraints, not a model of market or individual price determination, under given market structures.
[xxvii] Here there is a proverbial “chicken-and-egg” (cause and effect) problem. Which comes first: the intersection of market supply and demand setting price for the individual pure competitor, or, the individual competitors equating marginal costs to price? Why should a level of output which partly involves a loss according to Keen (the part where MC > MR) determine where the individual sees price as being set? In the case of monopoly, MC = MR determines output level and demand determines the maximum allowable price at that quantity (price and quantity are not determined by the intersection of market supply and demand curves as in the case of pure competition). Here it must be noted that the Neoclassicals do not assume the flat or horizontal demand curve of the individual pure competitor solely on the basis of the assumption of no individual firm large enough to affect market supply, they also assume homogenous products and freedom of entry and exit as responsible also. Keen goes on his website to show: in perfect competition: a) where MC = P = MR profits are not maximized; b) MC curves must be horizontal or constant for a definitive comparison of perfect competition and monopoly.
[xxviii] In characterizing neoclassical theory, perhaps because of using shorthand notations Keen makes some mischaracterizations of the theory. For example he notes that as price rises demand falls when he means that quantity demanded falls not the whole demand function (at least not according to neoclassical theory) and he notes: “Here we will consider the argument that wages equal the marginal product of labor.”(Keen, Steve, op. cit. p. 110) Actually, the theory says that to maximize total profits in production, the firm should hire up to but not beyond where wage for labor-power equals the marginal revenue product of labor. The marginal revenue product is a result of both the marginal physical product of labor (amount of output or change in total output due to a marginal addition of one particular worker) times the marginal revenue (or price in the case of pure competition) that the output sells for. No one gets paid a wage greater than the market “value” of the output they produce. This was the central point made by Marx in explaining the origin and nature of surplus value except that Marx did not seen land or capital as “productive” but only as factors that may enhance or inhibit the productivity of labor.
[xxix] Given that an attack on diminishing returns, diminishing marginal productivity, and fixed factors of production in the short-run are repeated over and over and central to Keen’s overall critique, I am surprised he missed one argument he could advance against the notion of fixed factors in the short run. Land and “capital”, like labor, have both quantitative and qualitative dimensions that are interdependent. The quantity and quality of some machine (noting that capital is a social relation not a stock of things) or of an acre of land is, in market terms, meaningless, if not turned on, used and maintained, by labor skilled in its use and maintenance, while the quantities and qualities of land and “capital”, (noting capital is a social relation and not a ‘stock’ of things) if activated, can augment the productivity of the quality and quantity of labor employed. Thus, application of the quantity and quality of labor, activates the qualities and quantities of land and capital (not productive in and of themselves as they are idle and commercially useless without labor) that may or may not (land and capital of certain quantities and qualities may actually sabotage rather than enhance productivity of labor) augment the productivity of labor. Thus the notion of “fixed” land and capital mixed with variable labor is highly problematic if not total nonsense.
[xxx] Remember this notion was previously debunked: that a perfectly competitive supplier can sell more units without having to reduce price.
[xxxi] This is a debate (“re-switching”) that has been raging between MIT economists at Cambridge, Massachusetts and economists at Cambridge University in England over some twenty years.
[xxxii] The discussion of “capital” as an embodiment of social-power relations is not mentioned or discussed here. Keen brings in Sraffa’s vs. neoclassical theory’s treatment of aggregated capital. Socially necessary hours of labor can be aggregated after correcting for skilled labor as multiple of relatively ‘unskilled’ labor to reflect higher productivity; and acres of land can be aggregated after adjusting for acres of varying levels of fertility; but highly diverse, in many ways, machines, buildings, etc, have no common property except price, the yardstick used by mainstream theory to aggregate capital. But this involves meaningless circularity in aggregation, as the price of the machine is a function of the profit expected from it, yet the rate of profit, the ratio of profit to price, varies as prices change. Sraffa reduces value of “capital” to “building blocks” of dated (embodied direct and indirect) inputs of labor hours with/times wages rate (fraction of surplus) as an inverse linear function of rate of profit. The “Value” of a machine assumed to be value of inputs (machines and labor) times a rate of profit to reflect passage of time; this is applied repeatedly to all machines and labor inputs to produce their inputs, yielding a set of labor hour terms and declining but never zero residual of machinery inputs. Thus, Sraffa treats the “value of a machine” as the product of the sum of the labor inputs (direct and indirect, living and dead) to produce it with each sum representing the physical quantity of labor employed times terms for the wage (an inverse function of the rate of profit) and the accumulated impact of profits over time (a direct function of the rate of profit and raised to a power to reflect passage of time in years) yielding opposing effects as the value of an item of capital may rise as the rate of profit rises only to fall as the rate of profit rises further.
[xxxiii] The assumption that changes in the output of industry A do not affect the costs of many other industries which in turn affected the costs of industry A and thus the conditions for any partial equilibrium that is the focus of neoclassical theory are gone.
[xxxiv] This stands in contrast to ‘scientific realism’ that says theory must accurately represent, to some extent, reality in order to accurately predict and transform it.
[xxxv] E.g. A falling ball, dropped near earth, behaves nearly as if dropped in a vacuum and thus the theory of gravity had great explanatory power, even assuming away as “negligible”, air resistance, with gravity constant and some simple calculus. This notion says that if a theory has great explanatory power with economy of effort (highly restrictive negligibility assumptions) it is to be preferred to one with marginally better explanatory powers but at significant more cost and elaboration or detail.
[xxxvi] An example an erroneous domain assumption invalidating a theory according to Keen is the assumption that risk can stand in as a proxy variable for uncertainty. Risk applies to regularities of past events yielding probabilities of future ones whereas uncertainty applies with no regular guide from the past to probabilities in the future.
[xxxvii] Heuristics are rules of thumb or expositional or analytical devices. A heuristic assumption is one known to be false but employed as part of simplifying and successive approximations as steps in the development of a more general theory. An example, according to Keen would be Newton’s model of the solar system with only the sun and earth followed by Poincare who developed formulae for planetary motion in systems with more than one planet. This was followed by Einstein who first stated openly, as unrealistic, his own heuristic assumptions only to openly abandon them later yielding more not less accurate theory.
[xxxviii] Musgrave, Alan, “ ‘Unrealistic Assumptions’ in Economic Theory: The F-Twist Untwisted”, Kyklos, 34: 377-387, cited in Keen, Steve, op cit. p. 318
[xxxix] Keen mentions, in this sociological approach to science and what science does and why, alternatives such as: Marxism; Complexity-Chaos Theory; Evolutionary Economics; The Austrian School; Post-Keynesians; Sraffian Economics the purported strengths and weaknesses he explores in his essay on alternatives.
[xl] Fukuyama, Francis, “The End of History and the Last Man”, 1992 This is the notion of the final “triumph” of and supposed proof of the superiority of capitalism over socialism.
[xli] Keen, Steve, op cit. p. 162 This is a truly amazing and unsupported statement to make in an essay on science and scientific method. On what basis does he simply assert, for example, that say China and its CPC is either socialist in “name only” or a “bit player on the world stage.” This is a breathtaking statement from someone supposedly well-versed in Marx and Hegel as well as in scientific standards of definitions and “proof” in assertions made.
[xlii] In an example of ancillary postulates created to protect core ones, Walras assumed that no trades occur until general equilibrium in all markets is achieved and/or that prices would tend toward equilibrium levels. Walras saw the economy as a giant auction house in which quantities of each commodity is fixed but demanders will offer to buy from zero up to all depending upon price. The auctioneer attempts to sell all commodities at once, and, rather than treating each commodity independently, he or she refuses to accept any price for any commodity until supply and demand for each and every commodity are in equilibrium. Through a process of “tatonnement” or groping, Walras argued that eventually a set of prices that balanced supply and demand in all markets would be found.
[xliii] Debreu’s vision of general equilibrium, intended to rescue Walras from his own contradictions only made it worse. Debreu assumed: one “market” in which all commodities are exchanged for all of time in one instant; complete certainty out of any uncertainty, as to what input-output combinations of consumer and producer commodities will be possible in the future; consumption and production plans made for the whole future; possibility not stability of general equilibrium the issue; a set of positive prices equating quantities demanded and supplied for all commodities simultaneously can be determined;
[xliv] Keen dates the birth of macroeconomics as a sub-discipline with Keynes’ General Theory in 1936.
[xlv] This brings to mind the famous quip or joke by Robert Heilbroner that “Mathematics has brought to economics rigor, and alas, also mortis.”
[xlvi] Among the Institutionalists, post-Keynesians, Complexity-Chaos theorists there are increasing demands to develop the “macro (contextual) foundations of micro” rather than the “Micro foundations of macro.”
[xlvii] Systems may be seen as “morphostatic” or “morphogenetic” or something in-between. A morphostatic system is subject to negative feedback effects (effects which work in directions opposite to the direction of movement of a system) such as a temperature thermostat which senses deviations of actual from set room temperature and shuts-off or turns on heat to maintain an equilibrium temperature. A morphogenetic system is subject to positive feedback effects which are involved in cumulative change where feedback effects continue and reinforce the direction of change of the system such as in the slogan of the Medici Family that ruled Florence: “Money to get power; power to get money.”
[xlviii] As Marx put it: “The industrial capitalist throws out less value in the form of money into the circulation than he draws out of it…Since he functions…as an industrial capitalist, his supply of commodity-value is always greater than his demand for it. If his supply and demand in this respect covered each other it would mean that his capital had not produced [sic] any surplus value… His aim is not to equalise his supply and demand, but to make the inequality between them… as great as possible.” (Marx, Karl, Capital, Vol II, Progress Publishers, cited in Keen, Steve, op cit. p. 194)
[xlix] According to John Hicks, three central assumptions formed the foundation of Classical (and Neoclassical) economics on the issues with which Say’s Law dealt: 1) Money supply determined output (seen as a constant times the money stock) determines output and employment; 2) level of investment = f (rate of interest); 3) Saving = f (rate of interest) and S = I Note Hicks also had saving depending upon the level of output. So if Saving increases, then so does investment via falling rates of interest. Higher money wages will reduce employment and thus real wages, while reducing money wages, increases employment and reduces real wages. Decreasing money supply decreases output and income and the main explanation for economic downturns according to Classical theory.
[l] Hicks also reduced Keynes work with three highly simplified assumptions that made a caricature of the complexity of Keynes’ argument according to Keen: a) demand for money = f ( rate of interest) as opposed to affixed relationship between money and output in Classical theory; b) Investment = f ( rate of interest); c) Saving is a function of income. Missing are the central concepts of risk vs. uncertainty, expectations about the future from the present, liquidity preference motives (speculative, transactions and precautionary). Hicks claimed that Keynes ignored the impact of income on money demand and the role of transactions demand and that the demand for money should be seen as a function of both levels of income and interest rates. The downward sloping IS curve a product of Hicks’ equations on investment and savings relations; and his upward-sloping LM curve based on the notion of the money demand relation assuming the money supply determined exogenously by the monetary authority. The IS curve, based on level of investment as an inverse function of interest-rate, saving as a direct function of income and investment determining income with multiplier effects. Thus the IS curve, connects points showing various interest-rate and income level yielding equilibrium in the goods markets (S = I). The LM curve, based on the assumption that money supply was determined exogenously by the monetary authority while demand for money was a direct function of income and an inverse function of interest rate. The LM curve connects various points showing interest-rate and income levels leading to equilibria in money markets. Thus income and rate of interest are determined by the intersection of IS and LM curves just like price per unit and quantity demanded are determined by intersections of supply and demand curves in neoclassical theory. Hicks’ work led to the notion of a segmented LM curve with a Classical Region (full employment where attempts to increase output only increase interest and inflation rates and do not move real output) and Keynesian Region (liquidity trap where monetary policy was ineffective but fiscal policy was effective and without higher interest rates) and thus “reconcile” Keynes with the Classics. Hicks also proposed that all three variables (money demand, investment and savings) all be made functions of income and rate of interest but not of degrees of uncertainty or expectations. The Hicksian IS-LM analysis is seen by Keen not as a fair synopsis of Keynes’ General Theory, but rather an ideologically driven attempt to take Keynes back to Walras within his own General Theory or a caricature (minus central constructs expectations and uncertainty) of it.
[li] The assertions of the “efficient markets hypothesis” are the usual of crude Philosophical Positivism: “One cannot judge a theory by purported empirical soundness or reasonableness of its assumptions”. Paradoxically, Irving Fisher founded not only the “efficient [rational] markets hypothesis” applied to financial markets, but also the Debt-Deflation Theory of Great Depressions focusing on often irrational speculative bubbles. Fischer argued that the rate of interest was simply a price in the exchange (time preference) between present and future consumption of goods (lender low time preference and borrower high time preference) and expectations of lenders and borrowers about future income. Usury did not mean charging interest, but charging interest without corresponding assumption of risk. Demand curves of loanable funds are downward-sloping and supply curves upward sloping. Loans, unlike goods bought and sold in the same time and place, take place over time (granted now, repaid later). Later the Efficient Markets Hypothesis (EMH) and Capital Assets Pricing Model (CAPM) were added to Fisher’s pre-Depression time-value-of-money theories assuming: 1) collective expectations of all stock investors are accurate predictions of the prospects of the companies; 2) share prices reflect all pertinent information pertinent to the future of the companies; 3) changes in share prices are entirely due to changes in information relevant to future prospects of companies and that information is sent/received in a random and unpredictable fashion (exogenous shocks); 4) stock prices take a ‘random walk’ so that past movements are no guide to future movements; 5) finance markets are in continual equilibrium.; 6) investor utility is a direct function of expected returns and an inverse function of risk or variability (standard deviation) of returns; 7) investment possibilities could all be specified into Investment Opportunity Clouds (IOCs).; 8) all investors borrow/lend at a common pure rate of interest; 9) all investors have homogeneous (agreement) expectations on all investments; 10) no feedback from market valuations to investor perceptions; 11) investors unconcerned with present or future actions of other investors. Here Keen explains and critiques, step-by-step, the work of W.F. Sharpe in “Portfolio theory and Capital Markets”, McGraw-Hill, NY, 1970. The theory of Sharpe totally falls apart when Sharpe’s assumptions (domain assumptions not negligibility or heuristic assumptions) meet the real world of differences in investor expectations, uncertain futures and credit rationing.
[lii] A statistical interpretation of patterns of stock prices and not a model of how stock markets or investors actually behave. This hypothesis argues that stock prices do not display a “random walk pattern” of the EMH but that of a more complex pattern of a fractal. Fractals show “self-similarity”, according to Keen: they look the same regardless of time frames; each number of a series is a simple but non-linear function of previous numbers of the series whereas in a random generated series, each number is independent of all previous numbers. Keen, p. 247
[liii] Keen, Steve, op.cit p. 255
[liv] Proposals such as restricting access to the stock market with only one Walrasian auction per day to reduce volatility; stocks changed to being time-limited voting bonds;
[lv] The word radical comes from the Latin root “radix” or “the root”; to be radical is to argue for getting to the root of that which must be understood/changed. In the West, to be known as an open Marxist or Communist, and to be doing “mass work” in the open, is to invite all sorts of possible retribution against oneself, one’s family and those with whom one works and thus many self-proclaimed Marxists, in The West and elsewhere, “hide in plain sight”, in various ‘mainstream’ political parties, under various cover labels, like “progressive”, “heterodox”, “Marxian” etc.
[lvi] “Bad Mathematics” has four forms according to Keen: 1) Logical contradictions: theory is supposedly ‘saved’ by ancillary assumptions which contradict what the theory purports to show; 2) Omitted variables: essential aspect of reality assumed away to make the math run; 3) False Equalities: two different things treated as equal such as risk and uncertainty; 4) Unexplored conditions: some relations are assumed or assumed possible without the necessary conditions specified, present or possible.
[lvii] Here Keen points to the work of Henri Poincare in 1899 on the many body problem of astrophysics that led to the proof of chaotic systems. He showed the impossibility of an accurate algorithm predicting the dynamics and trajectories of a model with three of more elements to it, especially utilizing non-linear differential equations, and showed that even any purported approximations would rapidly lose any accuracy. The future could only be mathematically predicted if the present were known and modeled with infinite accuracy which is impossible. In addition, there is Godel’s proof that all mathematical systems must take some external or imposed foundational axioms as articles of faith and thus none is “self-contained”.
[lviii] This issue according to Keen arises from the central assumptions of neoclassical economics that: a) the whole is ‘no more’ than the simple sum of its parts; b) interactions between parts are zero or negligible; 3) no interactions with one variable multiplied by another variable (Total Revenue treated as P x Q only with P or Q situationally treated as a constant).
[lix] Keen, Steve, op. cit. 268.
[lx] I find this sweeping assertion of the supposed “irrelevance of ‘most’ Marxists” to be as cavalier and even arrogant as the statement about there being no socialist [more than in name only] alternatives to capitalism. In the West, especially the U.S. Canada and even in Eurocentric Australia, if there is one national religion it is anti-Communism and thus anyone who self-defines or self-declares himself or herself to be a Marxist or a Communist is in essence self-declaring himself or herself to be an enemy of the capitalist State and inviting all sorts of repression. Further, if the person calls himself/herself a Marxist and not a Marxian, he or she is making a declaration of doing practical mass work in addition to scholarship in opposition to capitalism and the established order. This takes courage that should be respected even if one is not a self-declared Marxist or Marxian or even if one is in disagreement with the versions of Marxism being professed.
[lxi] Marx’s work on value and price was unfinished. Marx clearly noted that his theory of value was a theory of the essential centers of gravity (value as embodied socially necessary labor time) around which prices may fluctuate for various reasons including subjective assessments of utility by buyers and sellers (especially in the cases of rarities) but he noted that the labor theory of value was not a theory of precise price determination.
[lxii] In successive [heuristic] approximations Marx assumed a constant rate of surplus value (s/v) over all industries and time, that capitalists would substitute capital (c) for labor-power (v) when possible and thus the rate of profit (s/c + v) had a tendency to fall over time. Capitalists would respond by attempting to lower wages (v) to offset rising c and the tendency of the rate of profit to fall. Joan Robinson argued that a rise in c might well increase s/v and thus the rate of profit might not fall but rise. The “Transformation Problem” occurs when capitalists are driven by rate of profit and not rate of surplus value: if labor is the only source of surplus value, then industries with higher average ratios of labor to capital should have higher profit rates and in a competitive capitalist economy, this would mean firms moving out of capital-intensive to labor-intensive industries in search of higher rates of profit. How to reconcile an assumption of constant s/v over all industries and time with at least competitive equalization of rates of profit. Marx argued that capitalists recover profits proportional to their investments regardless of in labor-intensive or capital-intensive industries. In response, Keen brings out Sraffa’s scheme of “labor-value units” inspired by Marx and the critique of Steedman, I, “Questions for Kaleckians”, Review of Political Economy, 1992, 4: 125-151 The argument is that Marx converted outputs but not inputs into price terms and if this error is corrected non-sense violating assumptions of an equilibrium situation. Steedman argued that there is no need to convert physical quantities into values and then values into prices but can and must convert production data on physical quantities directly into prices with an “equilibrium assumption” of a uniform rate of profit. According to Keen, the supposed inconsistencies noted by Steedman undermined Marx’s notions of labor as the only source of value, value as the only source of surplus-value and profits and that value determines price. Arun Bose whose work (“Marx on Exploitation and Inequality”, Oxford U. Press, 1980, New Delhi) is alluded to by Keen, argued that there were two Marxs: one of the labor theory of value and one of Marx’s capital theory and that they can be reconciled to a degree with a concept of all direct and indirect labor inputs (capital) converted to dated and weighted labor units (commodity inputs of each given period are reduced to direct labor plus capital plus equilibrium rate of profit of the previous period still leaving some commodity residual ) leading to the conclusion that non-labor commodities plus labor are the basis of value. Marx, it should be noted, provided both negative proof of labor as the source of all value by eliminating any contenders but also did a positive proof of the labor origins of value and surplus value based on dialectical logic (unity and opposition of use and exchange value in overall value; here Marx contrasted the exchange-value of labor power or labor-time to produce means of subsistence, with its use-value or value greater than itself produced by embodied direct labor).
[lxiii] A) link of transfer of value of a machine to its depreciation incorrect; b) use-value of output of a machine (for consumers) not equal to use-value of machine (for producers) a notion of “abstract utility” more consistent with neoclassical economics; c) Which of two values (use or exchange) do machines “transfer”?; if use-value transfers, then Marx is consistent with his own analysis of commodities; but not consistent, if exchange-value, taken as equivalent to depreciation (but less than value-added when even , according to Keen, assumed so elsewhere by Marx in the “Grundrisse”) is being transferred to the product.
[lxiv] Keen claims that the labor theory of value could only hold if the use-value and exchange-value of a machine were identical yet Marx assumed them to be “intrinsically incommensurable magnitudes.” He also makes the extraordinary claim that with the labor theory of value gone, so too the tendency of the rate of profit to fall is lost and thus or “therefore” the “inevitability” of the fall of capitalism and its replacement with socialism also falls. This is of course a caricature of what Marx actually argued with respect to the fundamental causes of the fall of capitalism.
[lxv] Marx, Karl, Letter to Arnold Ruge, 1843
[lxvi] Austrians’ strengths: capitalism as an evolutionary system that best adapts to disequilibrium the normal state; deals with uncertainty not as equal to probabilistic risk; focus on dynamic entrepreneur gaining advantages from uncertainty and disequilibrium; weaknesses: close to neoclassical economics; central role of diminishing returns and accept marginal productivity theory but allow for super-normal profits; money supply erroneously treated as entirely exogenously determined by the State as they argue for endogenous money supply; fundamental problems with Hayek’s social theory of spontaneous vs. designed orders; assumption that the economy, although in disequilibrium, will oscillate around some kind of equilibrium state; irrational avoidance of mathematics in analysis.
[lxvii] Post-Keynesians; strengths: focus on uncertainty not taken as equivalent to risk; no models of human behavior like the hedonistic calculus of the “Economic Man” model of the neoclassicals; more emphasis on roles of debt, credit and nature of money than by neoclassicals; argue for macroeconomic foundations of microeconomics rather than the reverse demanded by neoclassical economics; emphasis on monopoly and quasi-monopoly market power, economies of scale, mark-up pricing, competitive imperatives to hold excess capacity to avoid diminishing returns and the state of the macroeconomy as a factor in investment decisions. Weaknesses: no general theory of value; use of static logic and lack of dynamic analysis. Post-Keynesians said by Keen to be the most coherent of the alternative schools of thought today.
[lxviii] Sraffians; strengths: Sraffa’s “Production of Commodities by Means of Commodities” said by Keen to be” the most careful analysis of the mechanics of production and understanding of interrelations of production at the level of the individual commodity in the history of economics”; dependency of the ‘quantity of capital’ on the profit rate rather than the reverse; the phenomenon of re-switching; weaknesses: no use of time or dynamics (Steedman argued that comparative statics does allow for enough time for changes in prime costs and mark-ups to have full effects but this only works with one and only one stable equilibrium state of the economy); Sraffa only intended as a platform to critique other theory not a basis for itself an overall economic theory.
[lxix] Chaos-Complexity Theory: strengths: work in this area stresses need for attention to dynamics, non-linearity of phenomena and disequilibria of chaotic systems; weaknesses: many models and experiments a-priori, hypothetico-deductivist and difficult to empirically verify or use empirical data in modeling
[lxx] Evolutionary economics: strengths: not Social Darwinism but applies Darwin’s building-block concepts of diversity, differentiation, environmental adaptation, selection and replication to economic systems that are also evolutionary systems; weaknesses: everything in flux and economic systems do make “jumps” unlike Darwin’s central assumption they do not; still in its infancy as a school of thought.