I’ve been arguing with Neoclassical economists for over fifty years, without ever getting a concession from them that I was right, even when there was overwhelming logical or empirical evidence on my side.
Recently, I’ve realised why. It’s because they don’t read—really read—critical literature. Instead, they skim it, looking for anything they can use to dismiss your argument. Once they find something that satisfies them, that’s the end of the matter: they turn off completely because, from their point of view, they’ve already won the argument. They’re not engaging with you: they’re looking for some excuse, no matter how trivial, to dismiss you.
This particular lightbulb clicked on for me in a Twitter exchange with the CATO Institute economist George Selgin. It’s a superb example of this general rule, because there are no matters of contentious economics involved. I don’t need to persuade anyone of some economic proposition, which is contrary to accepted wisdom, to expose how they behave in an argument. All you have to be able to do is comprehend English.
The back story is that George wrote a critique of the empirically realistic theory that banks are not primarily intermediaries in lending, but instead they are primarily money creators:
Banks Are Intermediaries of Loanable Funds
I read his paper very carefully, and wrote a detailed reply (with an admittedly cheeky title):
Selgin’s Hot Air on Bank Money Creation (on Patreon; on Substack)
George then wrote a tweet thread in response to my criticisms, in which he said that:
First, Steve says that I "ignore[] banks borrowing from non-banks, and then on-lending these funds to other non-bank borrowers," as if I claimed that banks fund their lending only by borrowing from other banks. (https://x.com/GeorgeSelgin/status/1788655373840248925)
In the section I’ve highlighted above, Selgin clearly interprets my statement that he "ignores banks borrowing from non-banks, and then on-lending these funds to other non-bank borrowers" as a criticism.
No, it was not! In fact, I praised him for doing that, because it removed some potential causes of confusion in the Loanable Funds versus “Endogenous Money” debate. Here’s the full quote in context, with the critical passages highlighted:
By assuming the non-existence of cash, Selgin eliminates the “Money Multiplier” explanation of money creation—which only works if all loans are in cash. By assuming that bank deposits are demand deposits—which is of course a fact—he ignores the simplistic version of Loanable Funds, in which non-bank Savers lend to non-bank Borrowers (this is the situation shown in Table 1 and Table 2). He also ignores banks borrowing from non-banks, and then on-lending these funds to other non-bank borrowers—which is what happens when banks lend from term deposits, rather than demand deposits.
These are all defensible simplifying assumptions for the case that Selgin wishes to make.
I also opened that section of my paper with an acknowledgement that I was reproducing Selgin’s simplifying assumptions, and agreeing that they were a good idea to focus the debate on the core issues:
He also makes a number of simplifying assumptions which abstract from some sources of confusion in this confusion-filled debate, and which I will also make in this response.
I wouldn’t accuse Selgin of deliberately ignoring these contextual statements by me: instead, he probably simply didn’t see them—quite literally—because he didn’t read my paper, he skimmed it to find things to object to.
Other Neoclassicals are now likely to read Selgin’s tweets, and ridicule my arguments on the basis of Selgin’s misinterpretation of my words. End of story: “George has proven that Loanable Funds is true, and boy, wasn’t Keen’s response garbage?”
George is scheduled to appear on Steve Keen and Friends on June 9th (5pm London time). It will be interesting to see whether he backs down from this particular misreading of my words, which I’ve already alerted him to. I’ll find out, one way or the other, on June 9.
Now, to show this isn’t merely the foibles of one man, but in fact is representative of how Neoclassical economists behave in general, here is another recent example of Economists Behaving Badly (I might make this into a recurring series on this blog).
Andolfatto and demand curves
An Indian high school teacher complained about having to teach mainstream macroeconomics to his students. I agreed with him, and mentioned two more falsehoods that mainstream economics promulgates.
David Andolfatto, the Chair of the Economics Department at @MiamiHerbert University of Miami, challenged me to back these claims up:
"Rising MC" is a conditional statement describing situations that may or may not hold in specific cases. Nothing wrong with studying the case. "Logical lies..." not sure what you're on about here. Can you pls send me proposition-proof statement? Thx.
My alleged “logical lie” was an assertion you can find in any Neoclassical economics textbook, which is that market demand curves can be derived from individual demand curves, and that they retain the property that Marshall called “The Law of Demand”, that:
The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price. {Marshall, 1890 [1920] #2984, p. 64}
This proposition sounds reasonable, and it can be the rule for many commodities in the real world for the simple reason that, when something gets cheaper, more poor people can afford to buy it. But when mathematical economists tried to prove this using the Neoclassical model of individual behaviour, they found they could not. The frankest statement of this, for Neoclassicals, disappointing result, was made by Shafer and Sonnenschein:
The importance of the above results is clear: strong restrictions are needed in order to justify the hypothesis that a market demand function has the characteristics of a consumer demand function. Only in special cases can an economy be expected to act as an "idealized consumer". The utility hypothesis tells us nothing about market demand unless it is augmented by additional requirements. {Shafer, 1982 #6082, p. 672. Emphasis added}
In my reply to Andolfatto, I cited the earliest papers that discovered this result: Gorman in 1953 {Gorman, 1953 #1491} and Samuelson in 1956 {Samuelson, 1956 #1495}:
It's a condition that applies in <5% of cases, and probably much lower, while economics ignores the 95-99% of firms with constant or falling marginal cost. And see Samuelson 1956 http://jstor.org/stable/1881864 or Gorman 1953 http://jstor.org/stable/1906943
[1] So, you admit it's not an empirical falsehood.
[2] Am interested in empirical evidence you have for saying <5%.
[3] Not sure how Sam. & Solow justify your claim.
[4] Gorman establishes conditions that refute your claim.
[5] Modern macro does not rely on representative agent
And it’s true: Gorman did establish conditions that refute that claim. They were, to quote Gorman, that:
there is just one community indifference locus through each point if, and only if, the Engel curves for different individuals at the same prices are parallel straight lines. {Gorman, 1953 #1491, p. 63}
What does that economic jargon mean? Gorman provides a translation into English, along with the comforting observation that the “condition quoted above is intuitively reasonable”:
It says, in effect, that an extra unit of purchasing power should be spent in the same way no matter to whom it is given. {Gorman, 1953 #1491, p. 64}
“Intuitively reasonable”? That’s intuitively rubbish!
If you give “an extra unit of purchasing power” to an unemployed single mother, there is simply no way that she will use it to buy what Jeff Bezos would have bought, had he been given the “extra unit of purchasing power” instead. Since Gorman’s condition does not apply in reality, his ridiculous attempt to sidestep this logical conundrum deserves the moniker I gave it of being a “logical lie”.
It’s highly unlikely that Andolfatto actually critically considered Gorman’s conditions. All he was looking for was a way to be able to dismiss my criticism. Gorman found “conditions that refute your claim”, and that was good enough for Andolfatto. The fact that the conditions were ludicrous did not occur to him.
Defending the paradigm
Again, this isn’t to single out Andolfatto for criticism—no more than I’m targeting Selgin for misreading my response to his paper. This is just what believers in a paradigm do when they are confronted with contradictory evidence. The physicist Max Planck reported the same phenomenon:
It is one of the most painful experiences of my entire scientific life that I have but seldom—in fact, I might say, never—succeeded in gaining universal recognition for a new result, the truth of which I could demonstrate by a conclusive, albeit only theoretical proof. This is what happened this time, too. All my sound arguments fell on deaf ears. It was simply impossible to be heard against the authority of men like Ostwald, Helm and Mach. {Planck, 1949 #6105, p. 21}
Things are even worse in economics, because the political and ideological appeal of Neoclassical paradigm gives the minds who have fallen for it even more reason to defend it against criticism.
The Anarchists who defend Capitalism
The reason why Neoclassicals and Austrians cling so strongly to their paradigm is that they are closet anarchists.
The Neoclassical (and Austrian) economics vision of free market capitalism is one of an anarchist utopia. When free of non-market distortions—government intervention, unions and externalities—and bereft of monopolies, the Neoclassical model of capitalism achieve “Pareto Optimality”: a point at which no-one can be made better off without making someone else worse off. It is a meritocracy, where everyone receives as income what they contribute to production—their “marginal productivity”. It requires no overarching coordination, and there is no source of power coercing individuals to behave as power desires. It is a utopia on this planet.
It is an incredibly seductive vision of capitalism, and I speak from personal experience, since I fell for it as well, until, luckily, my eyes were opened to flaws in the logic before I was fully trapped in that paradigm.
But for those who’ve swallowed the Blue Pill of Neoclassical Economics, there’s no escaping the Matrix of its logical lies.
"closet anarchists"' well said Steve.
The purpose of capitalism is not just to produce goods and services effectively; but to perfect an economic system that in times of war can extract vast amounts of free labour from the population.
Surplus labour remains the aim of capitalism. A role for the state in mitigating these tectonic forces is self evident.
Keynes is wrong international clearing is too weak. King dollar.