Macro Critic: Crank Or Great Thinker?

As critic of modern economics, I am often contacted by other critics or fans of other critics. Alas, I often find them more right than wrong, as in 2 + zebra ÷ glockenspiel = homeopathy works!

Steve Keen was recommended, and I looked him up. Interestingly he's a huge Minsky fan. I admire Minsky, because he was intellectually honest and curious, and had some really good insights. If you read his books you'll learn a lot about U.S. macro history from a financial perspective. However, he wasn't perfect. He dismissed microeconomics as apologetics, and so basically ceded that whole field as irrelevant. He didn't try to convince his colleagues, rather, he would dismiss them as fools, and so they would dismiss him. He was forever anticipating another 1929 crash, and would get very excited if the Dow was down a lot intraday (alas, back in the 1980's it would always bounce back). His macro model he failed to concisely formulate, not in a model, but even in words.

The Eco System Approach
Minsky should have said his theory was based on endogenous instability from excessive leverage, and then one could have tested it, and found it doesn't work: aggregate leverage is not a great leading economic indicator. I too believe the economy is endogenously unstable. That is, unlike Friedman and other free-marketers who believe recessions are caused by government, I think it usually happens simply via systematic errors among private investors. But unlike Minsky, I think it's more micro-based, happening idiosyncratically in a different subsector of the economy. It's more like an eco-system of Batesian mimicry, where over time mimics fester and create a phase shift in the system as predators learn that, eg, all those poisonous snakes are actually non-poisonous, and a havoc occurs until equilibrium is restored.

The key is that the excesses occur in different industries, using different metrics, every cycle. Off the top of my head, here are the focal points for some big recessions; railroads (1893), conglomerates (1969), oil and real estate (1990), internet (2002), residential real estate (2008). What's consistent is that they are all different. Every cycle is predicated on some new 'new thing' that survived the prior two or more recessions, and thus to most participants is their entire working life.

Cranky Not Prescient
Like Minsky, he was predicting a crash, and so when one happened, he took credit. Just like others (Roubini) with a vague, persistent prediction of a crash whose reputations were burnished by the 2008 crisis. It makes me think that if something unpredictable happens, like the Mayans really do come back this Friday, those who predicted it won't be prescient, but rather, cranks. In an case, reading Keen I see he picks up Minsky's dismissal of modern economics. However, Keen takes this to the next level by saying that economics is based on a math error. Now, economists I think have made a mistake, but they are pretty good at working from assumptions to conclusions, that's brute force logic, and there are lots of really smart economists who can solve logic puzzles.

He seems fixated on the market power of firms that are small, not infinitesimal He thinks they act like monopolists, showing a math error at the root of Samuelsonian neo-classical economics. It reminds me of that guy who thinks fat tails or stochastic parameters invalidates financial theory. This is simply wrong, but as a rhetorical device I think it convinces a lot of people that he's proved the existing theory is wrong, thus in some way proved his alternative is correct (not that this is logical, just it seems to work on many readers). He then builds up a pretty standard 1970's macro model to show how money is endogenous and whips us through cycles, as if this wasn't tried for a generation and failed. His solution to current problems is to simply print money and pay off everyone's debt. Such a solution doesn't deserve much consideration, because when I have time to think of wacky theories, I prefer Ancient Alien Astronauts or stories of the Mayan Apocalypse.

Lesson Learned
Like other successful cranks, Keen does seem intelligent and makes some very good points. But net net, his Weltanschauung has more flaws than what he's criticizing. It's easy to note that existing theory is deficient, much harder to present a coherent, more attractive alternative. It reminds me of a high school class I took where we all got to give a speech criticizing some great thinker of the past, like Socrates, Nietzsche or Kant. We all did great. Then, we had to present our own new theory on something important and it was pretty humiliating. Lesson learned.

I hasten to add I don't hate all macro critics. For example, I really enjoyed Peter Schiff's The Real Crash. And of course, I think I have a rather pointed criticism of finance that doesn't throw the baby out with the bathwater, and has clear empirical implications. But, I realize I am lumped in with the numerous other critics, and that's kind of depressing.