About this video

• Video Title: Economics from first principles - Steve Keen on: new book, neoclassical failures, Elon Musk and MMT
• Channel: Go Meta with Oli Sharpe
• Speakers: Steve Keen, Oli Sharpe
• Duration: 01:08:51

Overview

This video features an interview with economist Steve Keen, discussing his new book and his critiques of mainstream neoclassical economics. Keen explains his "first principles" approach, highlighting failures in economic textbooks, the role of credit in the economy, and the inaccuracies of neoclassical models, particularly concerning markets, trade, and financial crises. He contrasts his views with those of figures like Elon Musk and discusses the limitations of Modern Monetary Theory (MMT) regarding international trade.

Key takeaways

• Critique of Neoclassical Economics: Keen argues that mainstream economic textbooks are fundamentally flawed and fail to reflect reality, leading to incorrect policy recommendations and a lack of foresight regarding financial crises.
• First Principles Approach: He advocates for building economic models from fundamental principles, such as double-entry bookkeeping for money, to create more realistic representations of economic behavior.
• Role of Credit: The video emphasizes that credit creation by banks is a crucial driver of economic activity, contrary to the neoclassical view that banks are mere intermediaries for savings.
• Critique of Supply and Demand Models: Keen highlights mathematical inconsistencies in neoclassical supply and demand curves, particularly the assumption of a benevolent central authority for redistribution to make them work, and empirical evidence showing constant or falling marginal costs for most firms, contradicting the theory of diminishing marginal productivity.
• Critique of International Trade Theory: The discussion debunks comparative advantage as a static, unrealistic concept, arguing that dynamic factors like industrial development and innovation are more critical for national prosperity, as demonstrated by countries like China.
• Non-Ergodicity in Economics: Keen explains that economic systems are non-ergotic, meaning past performance is not a reliable guide to future outcomes, a concept often ignored by neoclassical economics which relies on optimization at a single point in time.
• Academic Resistance to Change: He points out that economic departments are resistant to paradigm shifts, leading to the perpetuation of flawed theories and the marginalization of dissenting voices.
• Social Media's Impact: The rise of social media is seen as a potential catalyst for change, allowing alternative economic ideas to reach a wider audience, bypassing traditional academic gatekeeping.

Yes, there are several other key points discussed in the video:

• The "Elon Musk" Framing: Keen uses Elon Musk's advocacy for "first principles" thinking as a hook to critique how Musk himself fails to apply this rigorously to economics, particularly in his analogies about government finances.
• Debunking Economics Book: Keen mentions his earlier book, "Debunking Economics," as influential in informing students and critics of mainstream economic theory, especially after the 2008 financial crisis.
• The "Ravel" Software: He refers to his own software, "Ravel," which he uses to build dynamic models and demonstrate the consequences of different economic assumptions, such as the loanable funds model versus the endogenous money model.
• Critique of MMT's Trade Arguments: While acknowledging MMT's accurate description of fiat currency operations within a nation, Keen strongly criticizes its stance on international trade, particularly the idea that exports are a cost and imports are a benefit, arguing it's flawed and disconnected from its core monetary principles.
• Historical Context of Economic Crises: The discussion touches on the Great Depression and the 2008 financial crisis, using them as examples of how neoclassical economics failed to predict or adequately address these events.
• The "Augean Stables" Metaphor: Keen uses this classical metaphor to describe the deeply entrenched and problematic nature of neoclassical economics, suggesting it needs a complete overhaul rather than minor adjustments.
• Call to Engineers: He appeals to engineers to apply their first-principles, modeling approach to economics, suggesting they could build a more realistic system than traditional economists.
• Market Realism vs. Neoclassical Ideal: Keen argues that while markets have strengths, the neoclassical ideal of "perfect competition" is a myth. Real-world markets are evolutionary, characterized by product differentiation and a power-law distribution of firm sizes, not the homogeneous products and equilibrium assumed in textbooks.
• Critique of the Nobel Prize: Keen implicitly criticizes the awarding of the Nobel Prize in Economics to Ben Bernanke, given Bernanke's work on banking, which he argues is still rooted in the flawed neoclassical view that banks are not money creators.