Book Review: The New Economics, A Manifesto By Steve Keen

Oct. 15, 2021 4:00 AM ETSPY, DIA, QQQ, IWM19 Comments3 Likes
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John Lounsbury


  • Steve Keen's latest book is succinct and wide-ranging.
  • This book provides a clear direction for economics.
  • Meaningful macroeconomic models must be based on reality.
  • Equilibrium for modeling nonlinear, uncertain, and chaotic systems is not reality.
  • The known universe obeys the Laws of Thermodynamics - Economics cannot be an exception.
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Anyone who has followed Steve Keen closely as I have for the past 11+ years will not be surprised by anything in this book. But most others will appreciate the succinct summation of his life’s work in the 199+ pages of The New Economics, A Manifesto (Polity, 2021).

Steve Keen is Honorary Professor and Distinguished Research Fellow for the Institute for Strategy, Resilience, and Security at University College London. Keen was formerly the Head of the School of Economics, History, and Politics and Professor of Economics at Kingston University. Before that, he was a professor of economics at the University of Western Sydney.

Book cover, The New Economics, Manifesto, Steve KeenKeen declares that the dominant economic thinking for more than 100 years, neoclassical economics, has demonstrated repeatedly that it is not capable of addressing the dynamic changes in our economic systems. This book is a manifesto declaring changes needed to make economics credible.

Keen expressly addresses students in economics but those for whom formal student days are far behind will benefit as well. It is also excellent reading for people with little economics training. The language is largely vernacular, and references are plentiful to original sources when the language is more parochial to economics.

Money Matters (Chapter 2)

Banks create money through the extension of credit and understanding the functioning of banks is critical to macroeconomics. Neoclassical economics largely omits banking and money from macroeconomic theory and modeling, assuming banking only impacts the distribution of money, not the quantity.

The reason no mainstream economists foresaw the Great Financial Crisis of 2008 was that they were not looking at necessary financials. The key common factor for the few economists who did predict the crisis was the inclusion of money and banking in their analysis and use of the concepts of accounting in their thinking. See Dirk Bezemer 2009: “No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models”.


  • An aside: I cannot recommend this paper strongly enough. It was an inflection point for me when this came out in 2009. I had accepted the standard textbook summary descriptions of money and banking and this showed that instead of accounting being somehow an inferior discipline to economics, I suddenly came to realize that accounting principles should perhaps be a foundation course for economics students.


Four important concepts among the points presented by Keen:

  1. Keen compares the competing theories of money and banking in some detail and shows how a few economists correctly understood the subject. Among those with understanding, he emphasizes the work of Hyman Minsky (based on the theories of Keynes and Irving Fisher), Wynne Godley, A.R. Holmes, Michael Hudson, Richard Werner, Joseph Schumpeter, Michael Kumhof, and several others.
  2. He also introduces the dynamic process flow program, named Minsky in honor of the great economist, and demonstrates how the model of loanable funds fails to construct a result in agreement with how the economy is observed to function. On the other hand, money produced by credit creation does model correctly.
  3. In this chapter (pages 43-45) we see how the concept of federal government deficits “crowding out” private credit and decreasing private savings is diametrically the opposite of what is observed in the economy. Government deficits have no direct effect on private credit and directly increase private savings and investment.
  4. Also from page 45, there is the following:

“far from government deficits ‘burdening future generations’, they enrich current generations monetarily. Any impact on future generations depends on the economic and political consequences of the spending which generates the deficit, and they can be substantially beneficial to the private sector, rather than deleterious.”

In other words, deficits spent wisely are beneficial now and in the future. My list of wise deficits would include expenditures for infrastructure, education, and health care.

Finally, Keen has provided a very complete review of the entire banking process involved in the financing of federal deficits. It is made clear how federal deficits can also be a part of money creation.

Debt Jubilee

Pages 65-68 describe what is called “A Modern Debt Jubilee”. This should be read and considered carefully. Keen states (with references) that

Private debt, not government debt, is the primary source of economic crises.”

Keen cites the work of Frances Coppola and Michael Hudson in generating his proposal. Key aspects of the proposal are that it reduces household debt, protects creditors and rewards savers.

After the debt jubilee has reduced private credit to manageable levels, Keen writes:

A Modern Debt Jubilee could thus help us escape from the debt trap that Neoclassical economics led us into. The next step is to stop that trap from recurring, by taming the ‘roving cavaliers of credit’.”

Discussion of that ‘taming’ is presented on pages 68-73. His proposals there are radical but logical.

How Economics Diverged from Reality

For me, the historical review of economic thinking was extremely interesting. I will mention some of the highlights.

Keen sees the first divergence of economics from what would have been a more logical path starting with Adam Smith in the 1770s, commonly regarded as the father of classical economics. Smith postulated that wealth was derived primarily from the production of labor and capital (capital in this sense means machinery and facilities), with the value of production nominally determined by the labor required to produce it.

Francois Quesnay ans Pierre Samuel du Pont de Nemours

Figure 1. Leaders of the 18th-century physiocracy movement. Wikipedia, Public Domain.

The relegation of land as a source of production to a secondary role is seen by Keen as a critical separation by Smith from the contemporary economic school of Physiocrats that maintained land had a primary role in the creation of wealth. It is this divergence (moving economics away from a primary role for land) that prevented what Keen thinks would have been a natural progression of economics to develop an emphasis on the biophysical sources of wealth creation, complementing labor and capital.

The second unfortunate divergence cited by Keen starts with John Baptiste Say in the early 19th century. Say introduced substantial subjectivity into economic thinking which separated him from the contemporary classical economist, David Ricardo. The classical economists were very objective in their treatment of economic activity which Keen argues was positive, but when later in the 19th century the classical economist Karl Marks used objective arguments to attack capitalism, the reaction was to fall back upon Say’s subjectivity to start what is now called neoclassical economics.

David Ricardo and Jean Baptiste Say

Figure 2. Two leading economists of the early 19th century, David Ricardo and John Baptiste Say. Wikipedia, Public Domain.

Schumpeter and Veblen in the early 20th century are two of the economists specifically mentioned by Keen who maintained objectivity in economics and were critical of the emerging neoclassical subjectivity. But, says Keen, there further developed “no truly revolutionary school of economic thought” (page 15).

Joseph Schumpeter and Thorsten Veblen

Figure 3. Two leading economists of the early 20th century, Joseph Schumpeter and Thorsten Veblen. Wikipedia, Public Domain.

For the last 100+ years, Keen suggests that there were many opportunities for economists to embrace the complexity of economic systems and leave the erroneous assumptions of equilibria. He specifically mentions work in mathematics by AJ Lotke (1920) and, most importantly by Edward N. Lorenz whose work on the mathematics of weather cycles (1963) has important relationships to economics. See pages 77-81.

During the 20th century, there were a number of seminal events which were dismissed by most neoclassical economists. Two of these highlighted by Keen were works by Richard Lester in the 1940s and Jay Forrester in the 1950s. Lester (pages 125-128) did comprehensive empirical work showing that marginal productivity increased with increasing production, contrary to the neoclassical theory.

Jay Forrester, an engineer at MIT credited with being the founder of system dynamics, submitted a paper to the MIT faculty, which outlined the non-linearities of economic systems. The paper, entitled “Dynamic Models of Economic Systems and Industrial Organizations” (1956), led to the development of a flow-chart-based program (1958) by programmer Richard Bennett called SIMPLE: “Simulation of Industrial Management Problems with Lots of Equations”. Keen says that neoclassical economists successfully repulsed this attack on the equilibrium theory of economics. See pages 143-147.

Keen also mentions that Bill Phillips’ work was also one of the pioneering efforts in dynamic modeling in economics in the 1950s and 1960s. Yes, that is he of the Phillips’ Curve. He includes the comment that his “work has been badly misinterpreted”.

Jay Forester and William "Bill" Phillips

Figure 4. Jay Forrester and Bill Phillips, two 20th-century pioneers in system dynamics for economics. Wikipedia, Public Domain.

Keen also cites John Maynard Keynes as a counterforce to neoclassical economics in the twentieth century. But that counterforce was largely extinguished with blatant misrepresentation of Keynes’ work by contemporary and subsequent economists. My summary interpretation of what Keen has written:

  1. Much of what is called Keynesian economics is not really from Keynes but is a rehash of neoclassical economics.
  2. Most of Keynes’ economics is close to what is now called post-Keynesian economics.

For anyone interested in the history of economics the presentation in this book will be much enjoyed. There are many, many more notable references (more than 350 in total) besides the few mentioned in this review.

Call for Return of the Physiocrats

Keen does not actually call for a return to the 18th century. Rather he suggests that economics should move to the logical extension (to a 21st-century position) of the emphasis on land and natural resources that was extant back then. This position he calls a biophysical perspective of economics which places primary emphasis on the “gifts of nature”, the earthly biosphere, natural resources, and energy. And of these, he places the greatest emphasis on energy.

The emphasis on energy is supported by a graphic showing a correlation of 83% between energy consumption and global GDP growth over the last 50 years.

Energy and GDP

Figure 5. Keen Figure 4.2, page 104, reproduced with permission of the author (Steve Keen).

Keen asserts that economics cannot exist in an isolated bubble independent of the physical world. In this regard, I offer two diagrams I prepared for a January 2017 post: Economics, Society, And The Environment: What's Wrong With This Picture?

Economy, Society, and Environment

Figure 6. How the economy fits in the world. John Lounsbury, author provided.

Such things as the Great Depression of the 1930s, the Great Financial Crisis of the 2000s, and many periods of high unemployment have revealed the cluelessness of neoclassical economics. Keen says all such occurrences were “fixable” to some extent with after-the-fact adjustments. He posits that there will be no suitable fixes for miscalls on the economic impacts of climate change. Incorrect economic assessments there may deliver existential challenges to society, changes that cannot be fixed with bandages.

Implications for Investing and Markets

Steve Keen does not get into a discussion of financial and equity markets but the extension of his analysis there is obvious. Specifically, I’ll mention the Efficient Market Hypothesis (EMH). A summary of the EMH includes:

  • Stock prices reflect the latest available information.
  • When new information arrives only some investors will be able to take advantage before prices adjust.
  • The implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis.
  • Use of the Capital Asset Pricing Model (CAPM) can be used to reduce portfolio risk.

From Wikipedia:

“The EMH provides the basic logic for modern risk-based theories of asset prices, and frameworks such as consumption-based asset pricing and intermediary asset pricing can be thought of as the combination of a model of risk with the EMH.[6]

Many decades of empirical research on return predictability has found mixed evidence.”

The data for the CAPM is typically taken from market performance for the most recent period, sometimes 3 or 6 months, and more often 1-3 years. Portfolio construction is done looking in the rearview mirror. If that doesn’t raise questions, then you haven’t paid attention to the disclaimer required on all published investment results by the US Securities Exchange Commission (SEC):

“Past performance is no guarantee of future results.”

There are many criticisms of EMH, some surprisingly simple. From Wikipedia:

“In his book The Reformation in Economics, economist and financial analyst Philip Pilkington has argued that the EMH is actually a tautology masquerading as a theory.[43] He argues that, taken at face value, the theory makes the banal claim that the average investor will not beat the market average—which is a tautology.”

Some criticisms are far more complex, such as those in the investment dynamics book by Clive Corcoran Systemic Liquidity Risk and Bipolar Markets: Wealth Management in Today’s Macro Risk On/Risk Off Financial Environment (2013). Corcoran shows that the assumption of static correlations between various investments is an Achilles heel for EMH. Whereas EMH and CAPM utilize average correlations over recent time periods, Corcoran shows that correlations are dynamic and sometimes change drastically in a matter of weeks. An example he gives concerns the Flash Crash of 2010, where the S&P 500 plunged over 9% in a matter of minutes.

Flash Crash May 2010

Figure 7. The Flash Crash, May 6, 2010. Wikipedia, Public Domain.

In the weeks immediately before the event, a customarily diverse range of stock correlations rapidly changed to an array of correlations very close to 100%. This was an alert many days in advance of the “crash” that an unusual situation was occurring. Namely, many stocks were ready to move “in lockstep”. And they did!

Note: There are back-tested performance models that have been very successful in capturing many above-market returns. See Seeking Alpha's Quant Performance.

The Manifesto

Keen states, quoting Elliot (2017), that

“the change needed in economics … is closer to the Reformation of a degenerate religion than a standard scientific revolution.”

With that in mind and thinking of Martin Luther’s 95 Theses which was a manifesto in protest of the corruption of the Roman Catholic Church, I have attempted to extract and infer key concepts from this book. This list is at least a starting point for discussion.

What Steve Keen calls the “new paradigm” will:

  1. Be objective and fundamentally monetary in contrast to the false, moneyless barter model that underlies Neoclassical economics.
  2. Use the empirically observed money creation as credit by the world’s major banking systems.
  3. Treat the economy as a dynamic system, not in equilibrium.
  4. Bring energy into models of production.
  5. Be consistent with the Laws of Thermodynamics.
  6. Be grounded in empirical realism and not hypothetical assumptions.
  7. Use techniques of system dynamics and non-equilibrium approaches.
  8. Treat economic system stocks and flows using the rules of double-entry accounting.
  9. Recognize the 1:1 relationship between sovereign government debt and private equity.
  10. Realize that, far from government deficits ‘burdening future generations’, they enrich current generations monetarily.
  11. Understand that for most complex systems equilibrium tells you not where a system will end up, but where the system will never be.
  12. Model the macroeconomy with observable macroeconomic variables to obtain the simplest verifiable descriptions.
  13. Make the foundational layer of macroeconomics the processes by which the mineral, biological, and energy gifts of nature are transformed into the products we consume plus the waste dumped back into the environment.
  14. Correctly recognize the correct nature of marginal costs not rising in most cases with increasing production.
  15. Abandon for macroeconomics the demonstrably false but widely taught ‘law of supply and demand’.
  16. Cease using the concept of ‘externalities’ for factors that are endogenous to real economic systems.


I have provided a lot of detailed discussion in this review. But, in case you think I may have given away much of the content, I have barely scratched the surface.

In Debunking Economics (2001, 2011) Steve Keen developed a well-referenced critique of the failures of economics. In this new book, he has developed a succinct update to the previous book but more importantly has laid out a pathway for the future redemption of economics. The era of inappropriate attempts to build equilibrium macroeconomic models from micro-foundations should be replaced by meaningful dynamic models of the macroeconomy using macroeconomic data.

Rather than micro-foundations for macroeconomics, I conclude we should grow to understand the macroeconomic boundaries for microeconomics.

Finally, and critically important, economics must grow from an insular discipline to one that places human activity in the appropriate environment, the biophysical system within which it operates. The full range of interactions of human economic activity with all aspects of the biosphere must become indigenous to economics, including energy in economic modeling and maintaining compliance with the Laws of Thermodynamics.

This book is a critical reference for economics and should remain so for many years. It is addressed explicitly to economics students but the message is for everyone, especially for those who should most consider it but, based on past experience, will ignore it.

I place this book in a category with three short monographs in physics that are on my bookshelf:

  • Polar Molecules (Peter Debye, Chemical Catalog Company, 1929; Dover Publications, Undated)
  • The Expanding Universe (Sir Arthur Eddington, Cambridge University Press, 1932; Ann Arbor Paperbacks, 1958)
  • Atomic Spectra and Atomic Structure (Gerhard Herzberg, Prentice-Hall, 1937; Dover Publications, 1944)

All three of these books are still primary references while the textbooks of those years are long since discarded by most. They all have short texts (ranging from 126 to 234 pages) which are part of their value – they contain only essential information, as does Keen's Manifesto.


Read this book and keep it for reference. UK release is today, October 15, 2021, and in North America on December 13. The New Economics, A Manifesto (Polity, 2021, 199+ pages) can be ordered from Amazon for $16.95 paperback and $59.95 hardcover. The bibliography alone is worth the price of the book.

This article was written by

John Lounsbury profile picture
John Lounsbury is Managing Editor Emeritus and Co-founder of Global Economic Intersection. Formerly provided comprehensive financial planning and investment advisory services to a small number of families on a fee-only basis. He has a background that includes 34 years with a major international corporation, 25 years in R&D management and corporate staff positions. More recently he was a Series 6, 7, 63 licensed representative with a major insurance company brokerage from 1992 to 2001. From 2002-2010 he operated his own sole proprietorship business. Specific interests include political and economic history, econometric analysis, and investment strategy analysis. Recreational activities include hiking, non-technical mountaineering, and alpine skiing. He was also a founding partner and former managing editor of 2010-2021.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: A copy of the manuscript was provided by the publisher for me to use in preparing this review. In the last few days, I have received a preliminary copy of the paperback book (Index not yet included).

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