A Critical Reading of Steve Keen’s Debunking Economics (L’imposture économique

Samir Amin is director of the Third World Forum in Dakar, Senegal. His books published by Monthly Review Press include The Liberal VirusThe World We Wish to SeeThe Law of Worldwide Value, and, most recently, The Implosion of Contemporary Capitalism. This article was translated from the French by Shane Mage.

1. Let me begin by saying that I have read Steve Keen’s book Debunking Economics (L’imposture économique) with the greatest pleasure and, moreover, that I learned a great deal from it. I have never read anything quite so convincing on the absurdity, the absence of simple realism, the nonsensical hypotheses and unforgivable errors in logic, that characterize the whole of vulgar economics—the “neoclassical” self-proclaimed mainstream economics. For my part, I needed no convincing as to the ideological (in the worst sense of the word) nature of that pile of rubbish cluttering up the economics taught in our universities. That is why I never thought it worthwhile to waste time in proving it by a detailed and precise examination of those “Nobelists'” lucubrations.  It was enough for me briefly to point out the absurdity and logical mistakes of all the tendencies in conventional economics, whose only real concern was to set up an “anti-Marx” in opposition to the scientific analysis of capitalism initiated by Marx.  The reader of my early book, (written as a doctoral thesis in 1954-1955 and defended in 1957) L’accumulation à l’échelle mondiale (Accumulation on a World Scale) will have understood that my overall concern was to continue the work of Marx through an analysis of modern globalized capitalism under the forms and conditions characterizing it in that period—i.e., the 1950’s, the morrow of the second world war.  Because it was marginal to my main preoccupation, as  a committed intellectual, caring above all to help reinforce progressive struggles through the best possible analysis of capitalist reality, I regarded  the critique of conventional academic economics as relatively unimportant. In that framework, I thought the most important thing was to emphasize in my analysis the reality of the mechanisms of global capitalism’s unequal reproduction mechanisms, the contrast between the dominant imperialist centers and the subaltern peripheries struggling for their emancipation.

Such being the case, there remained the need for a serious critique of conventional economics. Indeed, the false ideas it conveys are not limited in their devastating effects to professional economists and the bourgeois ruling class’s decision makers; they have injected the Liberal Virus (see my 2003 book of that title) into the working classes themselves. So I am personally grateful to Steve Keen for having accomplished that, and having done it brilliantly.

2. It will not be hard for me to point out, though briefly, our areas of basic agreement.

(i) I began my career in higher education with studies in mathematics and physics, which I gave up in favor of “economics” in order to secure for myself a professional life more in concordance with my intention to live as a militant. What I learned in mathematics (a bit faded, now) had showed me that those economists claiming a mathematical basis for their doctrines were very poor mathematicians. As I have written, no scientific profession would ever employ them, so striking was their incompetence. For example, setting zero as the final point of a curve tending toward zero amounts to ignoring the real effects of the specific and individual form of the equation at issue.

(ii) I affirmed that the general rule is decreasing, not increasing, costs; and because of this firms naturally try to get bigger, a necessary condition for them to retain market share and stay profitable. “Size is decisive,” I wrote. Accumulation naturally leads a firm to gigantism, to oligopoly (or monopoly) status.

(iii) I affirmed that the real capitalist economic system proceeds from one state of disequilibrium to another, without ever “tending toward equilibrium.” Each of the successive states of disequilibrium results from working-class struggles, from conflicts among capitalist sectors, and from actions of nation-states within the globalized system—with all these factors modifying the conditions under which the accumulation process proceeds.

(iv) I deduced from the preceding proposition that it is useless and pointless to seek out the conditions for general market equilibrium. I criticized Walras for his attempt to do so and pointed out that the “Auctioneer” he specified as prerequisite to his solution amounted to a veritable God knowing in advance everything about the reactions of market participants and all the effects of those reactions. General Equilibrium would thus be the instantaneous effect of such perfect knowledge about all the participants in the over-all market.

(v) I subsequently sharpened that observation by calling attention at least to the distinction between two sorts of markets: the market for real investment goods (production and purchase of new machines) and the market for titles to the ownership of capital (such as equities).

There exists no generalized market allowing someone to confound the two,  unless it be a someone by whom money would be deemed nonexistent. Financialization is an immanent characteristic of capitalism.

(vi) I likewise sharpened my critique of conventional economics by ridiculing its having resort to “expectations” and, to boot, to “rational expectations,” which, taken to its limit, leads to Debreu’s preposterous notion of a society of Godlike individuals with foreknowledge of the entire future. Only thus would the decisions of each and of all result instantly in general equilibrium—the best, because the only possible, of all equilibria.

(vii) I treated with equal ridicule the hypothesis, necessary to the conventional theory of general equilibrium, that postulates an original “layout of the cards” (the asset distribution determined by individual property rights); with, behind that hypothesis, the hypothesis of a “righteous despot” who decides, though nobody can ever know how, the moral definition of justice to be expressed in that layout.

All of these fundamental considerations simply stem from my refusal to treat economics as an atemporal, transhistorical, science. As did Marx, I considered historical materialism—historical reality—to be the source from which flows the analysis of the economic forms proper to the successive epochs and various locations in the framework of which those economic forms were operative. “Theory is history,” I wrote.

3. The convergence between Steve Keen’s writings and my own extends beyond the brief comments in the preceding section.

(i) I pointed out—already in l’Accumulation—and subsequently made more explicit my understanding of what I termed “the active role of [credit] money in the accumulation process.” For each of the stages of its unfolding (corresponding to the time required for existing capital equipment to wear out to the point where it has to be replaced with new and more effective equipment) the process requires the borrowing of funds, and I have given the formula by which their quantity can be calculated with precision. The supply of [credit] money determines the demand for it. The money supply does not exist independently from the demand for credit.

(ii) I disclosed the relationship linking the real-wage rate apparently needed to allow accumulation to proceed in accordance with the allocation of labor and capital goods between Department I (production of capital goods) and Department II (production of consumption goods). From this I deduced that conformity to this proportionality does not result in any tendency of the profit-rate to fall. Having made that point, I immediately added that strikes, etc., (struggles to maintain or increase the real-wage rate) do not act like a magic dial showing what real-wage rate is really needed (a counterpart, thus, to the invisible hand invoked by apologists for the market). On this I made my own the analyses of Baran and Sweezy; the normally dominant tendency of capitalism is to prevent real wages from increasing in proportion to the productivity of social labor, and, because of this, to the two Departments of Production in Marx’s model must be added a Department III of surplus absorption. Capitalism cannot function otherwise.

(iii) I made Marx more complete (and even “revised” him) in two respects: that which concerns the level of ground rent and of mineral rent; and that involving the determination of the rate of interest, as distinct from the rate of profit. But those two subjects are not directly of concern in my evaluation of Steve Keen, which is the topic of this note.

4. On one basic point I disagree with Steve Keen and intend to stick to my positions, unconvinced by Steve Keen’s arguments that criticize Marx by citing supposed logical inconsistencies.

The transformation of values into prices of production, if carried out properly (i.e., by denominating the contribution of productive inputs in terms of prices of production rather than of values) precludes equality between the rate of profit calculated in terms of prices of production and the rate of profit calculated in terms of values. All the bourgeois critics of Marx—Böhm-Bawerk followed by all the neoclassics—concluded on such basis that this was  “Marx’s error” and signaled the failure of his attempt to treat labor as the source of the values from which prices can be determined. Sraffa and Keen, though themselves critics of neoclassical economics, share this viewpoint with Sraffian Marxists (Ian Steedman, Ronald Meek, Arun Bose) whose arguments are repeated by Keen.

In my opinion, this criticism of Marx is meaningless. I have always contended that the difference between those two versions of the profit rate is normal, reflecting capitalism’s characteristic phenomenon of economic alienation (sometimes termed market alienation). For those two profit rates to be equal would render transparent the phenomenon of exploitation of labor by capital—as, for example, was the exploitation of an enserfed peasant who had to work three days for himself on his allotted land and three for the enfieffed lord and master. The distinctive nature of capitalism is precisely that it overclouds exploitation, since the wage-worker who sells his labor power thinks that he is selling his labor.  The above criticism of Marx results from an empiricist philosophy, dominant in Anglo-Saxon culture, that recognizes and considers only the immediate appearance of phenomena—in this case, the market prices known to prevail.

Having made this criticism his own, Keen falls back on Sraffa’s model of a generalized market directly denominated in prices. Unfortunately, Sraffa’s model (see my criticism of it in The Law of Worldwide Value) proves nothing; it merely exhibits the unmediated reality. In Sraffa’s model prices are elucidated on the basis of a system in which they depend on the distribution of income between wages and profits; however, in Marx’s model the values are independent of that distribution.

For Sraffa, of course, commodity production (and the price-mechanism whose elucidation it allows) is indeed a sort of production whose operative factors are labor and commodities (capital equipment and raw materials). A trivial observation. Marx never thought labor was like a set of magic words whose enunciation, as if by a sorcerer, would by itself produce “things.” Labor operates with other commodities—capital equipment and raw materials—that it transforms into new use values (consumer goods and other capital goods).

Sraffa’s argument is that, in the last analysis, “transformation” (deducing prices from the starting-point of values) involves an endless regress. For the capital goods in current use were produced at a previous time, and by use of capital goods that were themselves produced still earlier. And so forth, right back to Adam and Eve. Once given their place in such a limitless chain, commodities are indeed objects that are always produced by means of other objects and of labor. A correct remark, but trivial: yes we today would be incapable of producing what we today produce, absent the contributions of our ancestors. That observation is not much help in understanding the ways in which commodities are produced currently, in the framework of capitalism’s specific social structures—ways that are very different from the ways regulating, ten thousand years ago, the social organization of a hunting community that likewise used objects, arrows for example, in their hunts.

Sraffa’s argumentation is no different from the professedly timeless and transhistorical argument of vulgar economics. It is directly perceptible that labor, equipment, and nature really do contribute to production. I here add-in nature, since no more than the other factors is it exterior to the results of labor: the same work, with the same tools, will yield more wheat on a field receiving abundant rainfall than on an arid, unirrigated, plot. But, again, this trivial ahistorical comment says nothing about how agriculture currently functions under capitalism.

Böhm-Bawerk was the first to have seen that Sraffa’s model (which, of course, he never saw; he was speaking, in the manner of his time, about a general model of the market) implied, in the last analysis, resort to a series projected into a past of unlimited duration. One must “date” labor, must compare the value of current labor to its value yesterday, the day before yesterday, the day before that….And to do that we need a rate by which to discount the past or, if we are looking forward, to discount the future. But how are we to choose the rate to be used? Going back to Adam and Eve rates of .1 or .01 percent might seem suitable. Looked at that way, “time” is “productive” in the banal sense that it is the past which makes the present possible. Yet another trivial observation: it takes time to make anything, production is never instantaneous, as it would be if done through the magical words of a sorcerer. Or should we set the rate at which we discount according to what the current set of humans think right: perhaps 10 percent, perhaps 50 percent? But here again there exists no rational rule, valid for all now-existing human beings, that would allow determination of a single precise and universal measurement of that discount-rate. For a starving man a loaf of bread now is worth more than a thousand loaves after his death; for the rich man, with no need to care for his future, one loaf today is worth exactly the same as one loaf tomorrow.

Marx stays clear of any resort to such trivialities of  coffee-house anthropology. Therefore he chooses to examine how, in contemporary capitalism, production is organized according to the distribution of labor and of capital equipment between two concomitant series of productive activities: that of consumption goods and that of the capital goods required for their output under today’s conditions.

When we, like Marx, speak of “today” we don’t signify a momentary instant (as always is supposed in the theory of general equilibrium) but a stage defined by utilization of certain types of capital equipment—those whose use is possible and effective given a society’s level of scientific and technological knowledge. In the (stationary) model of simple reproduction the values of consumer goods and of capital goods are entirely determined by that technological know-how under the prevailing distribution of capital equipment between the two Departments of Production—we are dealing with productive actions carried out simultaneously, not successively. But in an expanded-reproduction model (in which output grows over time) improvements in technological know-how allow, at the ensuing stage, for greater production of consumer and capital goods using the same quantity of direct labor in the two Departments taken together. In this sense, at each stage the successive types of capital goods invented and put into operation have different use values. On this point, Keen is entirely in the right: Marx does not slight use-value; he combines it with exchange-value.  Keen is entirely in the right when he states that a simplistic and vulgarized Marxism which ignores the existence of use value falsifies what Marx thought and wrote. Unless use value be taken into account, Marx’s sentence declaring that capitalism “constantly revolutionizes the production-process” would have no meaning.

By choosing, for the formulation of his reproduction-model, the quantity of capital-equipment objects currently available—which are owned as private property by each capitalist, which are extremely diverse (different machines having each one its specific value in use), and which are distributed suitably for the productive activities of each of the two Departments, Marx seems to avoid considering the question of the origin both of those capital goods and of their distribution among different owners. On this topic, Keen is entirely in the right to state that this question equally needs consideration by any formulator seeking to model the workings of the market. Keen is entirely in the right to point out that, to legitimize the distribution of that stock of capital goods, conventional economics has to postulate a “despot” responsible for the original distribution of cards. Marx avoids any such incongruous and fantastical hypothesis. In its place he gives an historical analysis of the ways in which some (in the course of becoming the modern bourgeoisie) dispossessed others (the former direct producers) from ownership of their means of production.  The enclosures expropriating the poor peasantry and forcing them to emigrate toward cities where they could sell their labor power, and then the effect of competition allowing some capitalists to wipe out others, constitute the warp and woof of the real historical process—in sharp contrast to those lucubrations about an original layout of the cards.

At the conclusion of my criticism of Walras, of Sraffa, and of all conventional economics I emphasized the concept—which I believe is Marx’s own—of the productivity of social labor. This does not signify the productivity of a worker as distinct from that of the machines with which he works—a laborer who is working, to boot, under given natural conditions. Marx linked together the concrete work done, the capital equipment possible under contemporary knowledge, and the natural conditions of production—all of which conventional economics breaks apart in its attempt to arrive at separate productivities for labor, for capital, and for natural resources. He knew that conventional economics is doomed to failure in trying to evaluate those separate productivities, as Keen brilliantly proves.

The linkage established by Marx among what we might agree to term “factors of production”—concrete labor, distinctive types of capital equipment, available natural resources—implies that we should continue Marx’s work on the transformation of concrete labors (involved in the production of different use-values) into abstract labor.  In this regard I have put forward an answer to that question (see Three essays on Marx’s Theory of Value).

Where Keen does fail—he fails to replace the two theories he considers erroneous, that of the neoclassics and that of Marx, with a new economic theory enabling us better to understand our world—shines forth in the latter pages of his book. His discussions devoted to Hayek, to the post-Keynesian and Sraffian schools of thought, to complexity theory, and to the evolutionist school are—in my opinion—severely impoverished. I find in them nothing important that would be helpful in letting us understand the contemporary world any better.

Of course I share Keen’s point of view: a great deal of intellectual effort is still needed to understand the actual world better; and the exegesis of Marx is no effective replacement for the critique of conventional economics. Marx’s work needs to be furthered without any reluctance to innovate. Which is what, in all modesty, I have tried to do. Chaos-theory models, linked to complexity theory (which has always been that of Marx) are worth much more study than has yet been the case. In that regard I wish Keen the best of luck.

Keen, with excellent arguments, predicted the oncoming financial crisis. I merely note that my Marxist tools likewise led me to the conclusion that a great financial crisis, inscribed in the logic of the new generalized-monopoly capitalism, was inevitable (I make reference to my 1978 book, co-authored with André Gunder Frank, N’attendons pas 1984 [Let’s Not Wait for 1984]). Answering in 2002 a question from a journalist, I foresaw the financial collapse. “When?” he asked me. “In less than ten years” I replied to him. In my analysis I distinguished the market for real capital equipment from the market for titles to capital-ownership, a distinction excluded in principle by the absurd hypothesis of “rational expectations” economics. For the same reasons I had, from the very outset, foreseen the unviability of the Euro system, which today is coming apart under our very eyes.