"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The speaker critiques traditional university economics education, calling it outdated and misleading.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• 📉 University-level economics education is outdated and misleading, teaching concepts that are empirically false.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• 📈 Many textbooks, like Alan Blinder’s, still teach outdated theories like diminishing marginal productivity, despite evidence showing firms often have constant or decreasing marginal costs.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technology for broader application across fields, as it better reflects the real world, contrasting sharply with outdated equilibrium-based economics.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.

Outlines

00:00

🤔 Why University Economics Education Falls Short

The speaker critiques university economics education, stating that it continues to teach outdated and empirically disproven concepts, despite evidence showing they are false. He emphasizes learning System Dynamics as a better alternative, as it deals with real-world, dynamic, non-equilibrium systems. He also highlights the work of Steve Keen, an economist critical of modern economics, and questions why university courses persist with outdated ideas.

05:01

💼 The Real Cost Structure of Firms and Profit Maximization

The speaker explains that firms do not follow the traditional economics model of rising marginal costs. Instead, firms typically experience constant or declining per-unit costs and price their products to maximize profits by selling as many units as possible. He criticizes economics textbooks for teaching the obsolete idea that firms should match marginal cost with marginal revenue to maximize profits. Real-world firms focus on factors like fixed costs, production capacity, and market competition to set prices and expand profit margins.

10:01

📈 System Dynamics: A Better Approach to Economics

The speaker introduces System Dynamics, developed by Jay Forester in the 1950s, as a superior method to understand economic systems compared to neoclassical models. Forester's system focuses on feedback loops, nonlinear equations, and dynamic behavior. The speaker argues that traditional economic models rely on outdated equilibrium concepts, which fail to capture the complex, ever-changing nature of economies. Forester’s work emphasized the importance of feedbacks and time delays, which are often neglected in mainstream economics.

15:03

💻 Visualizing Dynamic Systems with Minsky Software

The speaker discusses his own software, Ravel (formerly Minsky), which allows users to model economic systems visually using double-entry bookkeeping and dynamic equations. Unlike traditional system dynamics tools, Ravel makes the equations visible on the canvas, allowing for real-time simulation of complex systems. He explains how this tool can be used not only in economics but also in other fields, and demonstrates its use in simulating dynamic economic models. The speaker stresses that learning System Dynamics can provide a better understanding of real-world systems.

Keywords

💡System Dynamics

System Dynamics is a methodology for understanding and modeling complex systems, particularly their feedback loops, time delays, and non-linear behaviors. In the video, Steve Keen promotes learning System Dynamics as a practical and more realistic alternative to traditional economics education, claiming it better reflects the real-world dynamics of non-equilibrium systems.

💡Neoclassical Economics

Neoclassical Economics is a dominant school of thought in economics that focuses on supply and demand, equilibrium, and rational behavior. The video criticizes this approach, stating that it relies on outdated assumptions like equilibrium and rising marginal costs, which are not reflected in real-world business practices, as demonstrated by research ignored by mainstream economists.

💡Marginal Cost

Marginal Cost refers to the cost of producing one additional unit of a product. The video challenges the traditional economic teaching that marginal costs rise with output, citing studies showing that most firms experience constant or declining marginal costs, contrary to what is taught in standard economic textbooks.

💡Diminishing Marginal Productivity

Diminishing Marginal Productivity is the economic theory that adding more inputs to production eventually yields less output per input. The video critiques this concept, arguing that it underpins the faulty teaching of rising marginal costs, despite empirical evidence from firms showing stable or decreasing costs with increased production.

💡Equilibrium

Equilibrium in economics refers to a state where supply equals demand, and all market forces are balanced. Steve Keen criticizes this idea, calling it unrealistic for understanding dynamic and ever-changing real-world economies, likening it to outdated scientific models like Earth-centric astronomy.

💡Feedback Loops

Feedback Loops are cyclical flows of information or materials that influence a system's behavior. In System Dynamics, feedback loops are critical for understanding complex systems. The video emphasizes how neoclassical models ignore feedback loops, which are essential for accurately modeling real economic behaviors.

💡Alan Blinder

Alan Blinder is a prominent economist whose work is criticized in the video for continuing to teach outdated economic models despite his own research contradicting those models. Specifically, Blinder found that firms often operate under constant or declining marginal costs, yet his textbook still promotes the traditional rising marginal cost theory.

💡Jay Forester

Jay Forester is the founder of System Dynamics, a methodology for modeling complex systems. The video highlights Forester's contributions to management and economic theory, particularly his critique of traditional economic models that fail to capture dynamic, non-linear processes like feedback loops and time delays.

💡Prototype Costing

Prototype Costing refers to the process by which companies estimate the cost of producing a new product based on initial designs and inputs. The video uses Tesla as an example, explaining how companies calculate variable costs and markups to determine profitability, in contrast to the simplistic cost models taught in economics.

💡Double Entry Bookkeeping

Double Entry Bookkeeping is an accounting method that records both sides of financial transactions. In the video, Steve Keen introduces Minsky (now Ravel), a program designed to model complex economic systems using double entry bookkeeping, allowing for a more accurate representation of financial dynamics than traditional flowchart methods.

Highlights

Economics as taught in universities is based on obsolete theories and models that have been empirically disproven, yet continue to be taught.

Modern economic textbooks still teach the concept of diminishing marginal productivity and rising marginal cost, despite 70 surveys showing that firms experience constant or declining marginal costs.

Only 11% of GDP is produced under conditions of rising marginal cost; almost half is produced under constant cost, and 40% under declining cost.

Neoclassical economists continue to teach outdated theories despite evidence contradicting them, highlighting a gap between academic economics and real-world business practices.

Firms typically set list prices with a markup and try to sell as many units as possible, contrary to the neoclassical theory of equating marginal cost with marginal revenue.

Steve Keen advises against studying economics in universities, recommending instead learning System Dynamics to understand real-world dynamic, non-equilibrium systems.

System Dynamics was developed by Jay Forester in the 1950s, originally applied in engineering and management but later adapted to analyze economic systems.

System Dynamics uses feedback loops and nonlinear equations to better represent real-world systems, in contrast to the linear algebraic models used in traditional economics.

Forester criticized economic models for ignoring the feedback loops and dynamic interactions that are fundamental to real-world behavior.

The assumption of equilibrium in economic models is unrealistic; real-world economies operate in perpetual motion and change, making dynamic models essential.

Jay Forester’s System Dynamics models have been used to study industrial systems, identifying how time lags, delays, and feedbacks cause cyclical behavior in production.

Minsky, a program designed by Steve Keen, builds on System Dynamics to simulate dynamic economic systems with visible equations, allowing users to model the economy more transparently.

Minsky's unique feature is its use of double-entry bookkeeping to model monetary systems, making it easier to simulate financial flows and economic dynamics.

System Dynamics can be applied not just to economics but to any system with complex feedbacks, including weather forecasting, where it has become foundational.

Keen encourages students to learn System Dynamics, which is widely applicable across various fields and better reflects the complexity and dynamism of the real world.

Transcripts

so it's not that economics is not a

discipline worth deeply studying it's

that the university education around

economics so bad is bad all of them

teach this Guff he's still teaching this

stuff even though he found out 15 years

ago it's empirically false and you'd

think he' change what he teaches in his

textbook uh-uh 70 surveys that have

found this and economists have ignored

it so I'd say learn System Dynamics

learn that technology learn how to apply

that you can apply it in any field

whatso ever it handles what the real

world actually is which is a dynamic

non-equilibrium system the influential

contrarian Economist Steve Keane

brilliant Economist that criticizes much

of modern economics the research fellow

at The Institute for strategy resilience

and security at University College in

London he is someone that each and every

one of us has to listen to whether we

agree or disagree Steve Keen why I

reckon you should not study economics at

the University it sounds ridiculous

don't study economics if you're

interested in economics but it's

genuinely realistic let's say why can

you give advice to young people in high

school and college maybe they're

interested in economics what advice

would you give them about a career they

can have that they could be proud of or

a life they can be proud of mainly in a

career I say don't do an economics

degree and say screw it to an economics

degree yeah because what what you learn

is an obsolete technology learning

economics at a university is is like

learning to make astronomy Earth Centric

equilibrium EP cyes being added to make

your models fit the data it's not that

economics is not a discipline worth

deeply studying it's that the university

education around economics so bad is bad

yeah so I'd say learn System Dynamics

I'll get a System Dynamics in the next

part of the reaction here but I want to

show you why I make that claim about

just not being worth your while to learn

economics at University this is uh one

of the slides from one of the set of

lectures I give this is an extract from

manu's textbook showing the uh cost of

production of producing lemonade this is

from Alan Blinder talking about I think

is making the cost of making a garage

this is from Nord House's textbook all

the same basic sort of idea each

actually need produce cost more to

produce because of what they call

diminishing marginal productivity so

they all got Rising per unit cost as you

increase the level of output profit

maximizing that's enough just to see

what they'll teach all of them teach

this Guff

and why is it Guff because if you

actually go and take a look at what

firms tell you they tell you this is

their cost structure they say they have

constant per unit cost in fact often

falling per unit cost average fixed cost

obviously must come down like a

rectangular hyperbola because you've got

a fixed cost dividing by larger and

larger number of units and they all set

a a list price at which they sell and

there's therefore a gap between the

variable cost and the uh money they get

for selling each unit right out from the

the start of production out to the

capacity of the plant now about 70

surveys that have found this and

economists have ignored it and the

Intriguing thing is that in the late

1990s Alan Blinder who's a very

prominent neoclassical Economist did a

survey of firms and found the result I'm

showing down in in yellow here the

overwhelmingly bad news for Theory here

is that only 11% of JDP is produced

under conditions of rising marginal cost

almost half is produced under constant

marginal cost and a 40% declining

marginal cost this is the drawing he did

rather than showing the rising marginal

cost that was on that's what they all

draw marginal cost rising and he went

out and found well actually marginal

cost is falling or constant now he

wrotes a textbook and you'd think that

after doing this research he'd change

what he teaches in his textbook uh-uh

this is what he teaches in his textbook

that was published 12 15 years after he

did that research he talks about what's

called diminishing Mar productivity

which lies behind the idea of rising

marginal cost he's still teaching this

stuff even though he found out 15 years

ago it's empirically false and what I do

in the courses that I teach is I go and

show what the actual cost situation is

for firms how actually do maximize

profits so I start from this idea which

is I said it's been found in about 70

surveys and economists continue ignoring

this work so when you put it together

and say what does that mean in terms of

cost of production what are firms

actually you find that they first of all

when they build a prototype they work

out the cost of production the variable

cost of each unit so when Tesla first

designed the model 3 they worked out

what the cost was for the variable

inputs the labor the sheet metal the

magnets etc etc and they just put that's

what they expect to pay that cost or

lower as they increase the volume then

they work out the markup they can get

away with how much price how much profit

margin can they make that depends upon

the competition from the car

manufacturers and of course they could

put a large mark up when they first

started because they were the first

electric car of and volume sales that's

the price they charge at and then they

work out what Target selles they'd like

to achieve they work out whether they

can make a factory that produces can

produce that and still make a profit at

that level of output and that's what

they do they work at break even point

and if they think they can sell more

than the break even you go ahead and

build the Factory and then as you

increase production the more you

increase production the more you make a

profit so if you reach your target you

make a Target level of profit but if you

manage to sell more than your target you

make a bigger profit with actually a

bigger margin between your total cost

and your price and a larger quantity as

well that's why the basic rule of any

large company is sell as many units as

you can not requate marginal cost and

marginal revenue which is what textbooks

will teach you which is the myth because

the condition that make that way

maximizing profits simply don't apply in

the real world so don't study an

economics degree they'll fall your head

with nonsense and that's why I say

forget about it if you want to learn how

to think about the economy I'd say learn

System Dynamics do a course in System

Dynamics which you can apply in any

field and then apply what you learn out

of System Dynamics to the issues of

economics if that's what interests you

so get a sort of Base engineering

education a base engineering education

that is far better than doing an

economics degree let's see what I'm

talking about with System Dynamics that

began with the work of a guy engineer

called Jay Forester back in the 1950s

Forester had been responsible for

Designing the survey mechanisms on the

gun turrets of American warships during

World War II which enabled them to shoot

accurately even though they're going up

and down in choppy Seas then became an

expert in management as you can see here

at the professor of management the MIT

SL school and in the late 1950s he

decided to take a look at economic

theory and this is the report that he

gave to his faculty seminar this is

reproduced as the most important initial

paper in assistant Dynamics in 2003 and

what he did was he WR a small part of

the literature on the economics of the

Industrial Field and he was frankly

horrified one of the Striking

shortcomings is their failure to reflect

adequate destru ual form of regenerative

Loops feedbacks that occur the flow of

models money materials Etc this has to

be shown as a set of cycles and he says

they don't do it instead they use

algebraic equations so they prent models

neglect the flows of money Goods

information and labor he carries on a

bit further here and says they use

linear equations when the essential

features of the model the system that

are being model are nonlinear they might

be suitable for long range prediction

but they use them for short run and this

is the C crucial Point here the models

are formulated in terms of systems of

simultaneous algebraic equations these

impress me as being particularly

unsuited to the kind of behavior being

studied now these are models in the 50s

what he said back then is even more true

of what models are done today by

neoclassical economists again this is

very often the model and its results are

judged by the logic with which is

derived out of its founding assumptions

whereas the failures proberbly ly on

those assumptions so on and so forth now

he's castigating neoclassical economics

but if you go back in time and take a

look at the founders of neopal economic

you'll find that they're actually aware

of the sorts of issues that Forester

raised almost a century later so let's

have a look at this we must carefully

distinguish between the Statics and

dynamics of the subject the real

condition of industry is one of

Perpetual Motion and change if we wish

to have a complete solution of the

problem in all its natural complexity we

should have to treat it as a problem of

motion a problem of Dynamics but it

would surely be absurd and this is

unfortunately where it all went wrong it

would surely be absurd to attempt a more

difficult question when the more easy

one is yet so imperfectly within our

grasp in other words Jevan and this is

quoting from jeevan's theory of

political economy saw working with

algebraic equations and equilibrium and

so on as a stop Gap until the methods to

do dynamic analysis were developed which

of course happened about a century later

and Forester played a major role in

doing that now all sorts of Reason which

you join me in my courses as to why this

happened but at the time the vision of

the economy as a short Gap a clud

necessary to just to get to make

analysis possible before we had the

tools to handle Dynamics instead it

became seen as a fundamental defining

characteristic of capitalism econ model

he strictly to the importance of

equilibrium as the part of any Theory

and this is seen as being scientific

Behavior as in the physical sciences

equilibrium is a central Concept in

economics virtually all economic

theories have a primate Des itat the

behav describe must be consistent with

some sort some notion of equilibrium

it's naive best way to describe it this

is by Ed La there who actually quite a

nice guy I met him about 15 years ago in

Australia after the financial crisis

during which he' been Bush's chief

economic advisor telling him everything

was going to be hunky dory and then the

whole world fell apart around him so he

realized there was something wrong with

his thinking but it was too late that's

what he was locked into believing notice

the title of the paper economic

imperialism this is a paper commissioned

by the quarterly Journal of Economics

which is the dominant journal in the

discipline and completely dominated by

neoclassical thought and it was his

responsibility to write a survey of

where economics was in 2000 looking

forward and I'll be a great science Etc

now this fantasy that equilibrium is a

way to describe capitalism is something

which has dominated neoclassical

economics ever since jeans's comments

unfortunately and occasionally

economists get a wakeup call when they

take their own ideas too seriously and

this is Irving fiser who was the leading

neoclassical math mathematical Economist

before the Great Depression and then in

the Great Depression in the great crash

he was wiped out by the stock market

crash and then he looked back and said

what led me astray and this is his

fabulous paper called the debt deflation

theory of great depressions and the most

important thing he realized was you

should not real about the economy as if

it's an equilibrium so this this is the

of set of points he made in that paper

we may tentatively assume that almost

all variables tend in a general way

towards a stable equilibrium so still

that idea but the exact equilibrium thus

s is seldom reached and never long

maintained new disturbances are sure to

occur so that in actual fact any

variables almost always above or below

the ideal equilibrium and then he says

it is as absurd to assume that the

variables in the economic organization

will stay put in perfect equilibrium as

to assume that the Atlantic Ocean can

never be without a wave that's what we

should be understanding and that's what

Jay Forester realized and then a few

years after he wrote paper he started to

develop the methods for System Dynamics

which involv the capacity to model

Dynamic systems properly and he was

commissioned to investigate why a

particular manufacturing company found

it had Cycles in its manufacturing

system and he found out it was actually

a question of all the time lags delays

and feedbacks involved in going from

initially deciding to produce the

products through to marketing through it

to the sales and then its effect on

other elements of the system and so on

so Forester then commissioned the

writing of of the very first System

Dynamics program which is called Simple

which stands for simulation of

industrial management problems with lots

of equations very clever acronym and so

that's from that ultimately software

called venim or Stell took over the

field and this is what people learn when

they learn System Dynamics today now I

having spent 20 years of of my life

working in the computer industry I

regarded this as a very old-fashioned

and cludy user interface and if you just

take a look at the arrows going

everywhere on this system Capital etc

etc there are no equations visible there

and if you want to see the equations you

have to click on this tool and then

point at what you're looking at and you

get a box that comes up and there's your

equation so the rate of change or

capital is the integral of capital

investment minus Capital depreciation

and all the equations are like that so I

take a look at the one for fraction of

Agriculture they're all text written

equations very much like what you put in

a standard computer modeling program

putting in python or that sort of thing

so I never particularly even I like the

concept I never like the technology that

was used to do system dyamics so I

designed a program called Minsky which

is now called Ravel the major idea was

to make the equations visible on the

canvas itself you don't have to click

inside a box you see them straight away

so this very simple model here has

output divided by an output labor ratio

is labor divided by population is the

employment rate wage the rate of change

of wages is here etc etc so the

equations are all visible and if I

simulate this model which I'll just

quickly start doing now you see the

simulation running live you don't see a

static result of the model later and

that is what I teach in my courses and

the thing which is unique about Minsky

the reason Rabel now we call it that I

designed it in the first place is

because it was incredibly hard to use

this flow Shar Paradigm to model

monetary system now what do accountants

use they use double entry bookkeeping so

what this part of Ravel does is let you

build a model using double entry

bookkeeping and you simply say well

credit increases loans and increases

deposit interest payments go from

deposits to the bank the bank spend back

onto the customers there's not a single

differential equation in sight there but

they're all being generated by the

program in the background and then you

can run a model like this and you can

see what happens if have a a booster

credit or a fall in credit and so on you

can use it as a control panel and it's

not just usable for economics I think

that's where it's most important you can

simulate any system at all so this is

what's called L Ren's strange retractor

this was the very first chaotic model

discovered or the second model but the

first one simulated done by

meteorologist Edward Len in the mid

1960s and what he got out of it was he

expected to see an unstable system but

the nature of the Dynamics was a

complete surprise to him and this now is

the sort of modeling that is at the

basis of all the weather forecasting we

see these days there's much more to

weather forecasting than just this

approach but the idea that the weather

is unstable that you have feedback

effects etc etc that is commonplace in

meteorological modeling economists

haven't got the message yet they still

think I can do everything with

equilibrium so the advice is learn that

technology learn how to apply that you

can apply it in any field whatsoever it

handles what the real world actually is

which is a dynamic non-equilibrium

system go to your University they'll

teach you about equilibrium you might as

well learn epic cycles and eants you

might as well believe the Earth is the

center of the universe for how that is

to a real economy if you want to learn

50 years plus of real economics from me

in only 7 weeks go to apply. stcf

fre.com if you qualify you can attend my

lectures ask me questions personally

every week and interact with a great

group of like-minded people