"Don't Study Economics" Top Economist Warns Students

Summary

The speaker critiques traditional university economics education, calling it outdated and misleading. They argue that modern economics still teaches disproven theories, particularly around cost structures and equilibrium models, despite evidence from industry surveys. Instead, the speaker advocates for learning System Dynamics, a methodology developed by engineer Jay Forester, which accurately reflects the real-world dynamic, non-equilibrium systems. The speaker emphasizes the need for a more practical, engineering-based approach to understanding economics, and promotes a software tool called Minsky (now Ravel) that visualizes economic systems and models monetary dynamics.

Takeaways

• 📉 University-level economics education is outdated and misleading, teaching concepts that are empirically false.
• 📊 Steve Keen advocates learning System Dynamics, a framework better suited to understanding the real-world economy as a dynamic, non-equilibrium system.
• 📈 Many textbooks, like Alan Blinder’s, still teach outdated theories like diminishing marginal productivity, despite evidence showing firms often have constant or decreasing marginal costs.
• 📉 Surveys show that only 11% of GDP is produced under conditions of rising marginal cost, while the majority is produced with constant or declining marginal costs.
• 🚗 Firms like Tesla determine pricing based on variable costs and market competition, not the profit-maximizing models taught in traditional economics.
• 📉 Neoclassical economics' focus on equilibrium models is unrealistic, and economists ignore real-world feedback loops and time delays in production systems.
• 📉 System Dynamics, developed by Jay Forester, offers tools to model nonlinear, dynamic systems and provides a more accurate way to understand economic behavior.
• 🔄 System Dynamics modeling highlights how feedback loops, delays, and flows impact economic systems, making it a superior approach compared to static algebraic equations.
• 💻 Steve Keen developed software like Minsky (now Ravel) to visualize and simulate dynamic systems, including economic and financial models using double-entry bookkeeping.
• 🌍 Keen encourages learning dynamic systems technology for broader application across fields, as it better reflects the real world, contrasting sharply with outdated equilibrium-based economics.

Q & A

Why does the speaker criticize university education in economics?

The speaker criticizes university economics education for teaching outdated and empirically false theories. He claims that universities still focus on concepts like diminishing marginal productivity and rising per-unit costs, despite evidence showing that these ideas do not accurately reflect how firms operate in the real world.

What alternative does the speaker suggest to studying traditional economics?

The speaker suggests learning System Dynamics instead of traditional economics. System Dynamics is a technology that models the real world as a dynamic, non-equilibrium system, offering a more realistic approach to understanding economic behaviors.

Who is Steve Keen, and what is his stance on modern economics?

Steve Keen is an influential contrarian economist and a research fellow at The Institute for Strategy Resilience and Security at University College in London. He criticizes modern economics for clinging to outdated theories and ignoring empirical evidence that contradicts these theories.

What does the speaker mean by 'rising per-unit cost' and why is it considered 'guff'?

Rising per-unit cost refers to the idea that as production increases, the cost of producing each additional unit also increases due to diminishing marginal productivity. The speaker considers this 'guff' because real-world firms often report constant or even falling per-unit costs, contradicting the traditional economic theory.

What does the speaker mean by 'System Dynamics'?

System Dynamics is an approach to modeling complex systems, such as economies, as dynamic and non-equilibrium systems. It focuses on feedback loops, delays, and nonlinear behaviors to simulate real-world processes more accurately than traditional linear economic models.

Why does the speaker reference Alan Blinder's research, and what contradiction does he highlight?

The speaker references Alan Blinder's research to highlight the contradiction between what Blinder found empirically and what he continued to teach. Blinder's research found that firms often operate under constant or declining marginal costs, contrary to the rising marginal cost theory taught in textbooks. Despite this, Blinder's textbook continued to teach the outdated theory.

What is the primary flaw in traditional economic models, according to the speaker?

The primary flaw in traditional economic models is their reliance on equilibrium assumptions and algebraic equations that do not capture the dynamic and nonlinear nature of real-world economic systems. This leads to models that fail to reflect actual economic behaviors, such as the constant or falling per-unit costs observed in many firms.

What role does Jay Forrester play in the development of System Dynamics?

Jay Forrester is credited with pioneering System Dynamics in the 1950s. He developed techniques for modeling complex systems with feedback loops and delays, which he initially applied to industrial management problems. His work laid the foundation for a more dynamic approach to understanding economic systems.

Why does the speaker suggest getting an engineering education over an economics degree?

The speaker suggests an engineering education over an economics degree because engineering focuses on dynamic, real-world systems, which aligns more closely with System Dynamics. This approach provides the tools needed to understand the economy as a non-equilibrium system, unlike the static equilibrium models taught in traditional economics.

What is the Minsky (now Ravel) program, and how does it relate to System Dynamics?

Minsky (now Ravel) is a software program designed to model economic systems using System Dynamics principles. It allows for the visualization of equations and dynamic simulations, making it easier to understand complex economic behaviors. The program emphasizes the use of double-entry bookkeeping to model monetary systems, providing a more realistic representation of economic dynamics.