Food takes a back seat to economics, economics and more economics when Steven Keen goes to Lunch With The AFR.
![Economist Steve Keen, a long-time critic of mainstream economics, has grown increasingly influential since leaving ...](/content/dam/images/g/u/d/j/6/7/image.related.afrArticleLead.620x350.gu88uz.png/1487302700233.jpg)
Early on in my lunch with Steve Keen, it's clear that food is going to take a back seat to economics, economics and more economics. Equations will be scribbled down on my notebook, and, yes, the table will be temporarily cleared to demonstrate a computer model of Hyman Minsky's theories.
As we settle in to our table on the balcony of Café Sydney, overlooking Circular Quay's glittering waters and bustling ferries, it's easy to forget that the affable Keen was the target of some vitriol after he suggested in the wake of the GFC that the source of Australians burgeoning wealth and self-confidence - the booming housing market - was not only built on shaky foundations but was due to come one hell of a cropper.
Property prices, of course, never crashed; at least not in the big east-coast cities like Sydney and Melbourne. Some years ago Keen accepted and lost a bet on that basis, and in 2010 paid by undertaking a famous 224-kilometre walk from Canberra's Parliament House to the top of Mt Kosciuszko.
This became the defining story that stuck to the former University of Western Sydney professor.
![Economist Steve Keen at the summit of Mount Kosciuszko after losing a bet, in 2010, that house prices would plummet 40 ...](/content/dam/images/1/m/9/o/7/9/image.imgtype.afrArticleInline.620x0.png/1427621819741.jpg)
Two and a half years ago, Keen left for London's Kingston University and he fell off my radar. That changed early in 2016. On a brief stint in the city, two high-powered investment strategists separately suggested I look up a certain academic who was doing interesting research. His name was Steven Keen.
So here we are on a sunny Sydney summer day. Keen, in town on holidays, had jumped on an early train from NSW Central Coast town The Entrance to be here. His Thai girlfriend had wanted to see the gang of pelicans that flock to a spot in the coastal town for their daily feed, he explains.
With the photographer snapping away, we accept the waiter's suggestion of a glass of champagne each.
Early on, I make it clear that he is free to choose what he likes and the tab is on Fairfax, a fact that Keen – in the spirit of academics (and journalists) the world over – embraces with gusto.
As we toast, Keen talks of his time as an education officer at not-for-profit Freedom from Hunger in the late 1970s and early '80s. The waiter interrupts with the day's specials and is set to withdraw to allow us time to ruminate, but Keen is ready to order; somehow he has managed to talk virtually non-stop since we sat down, and also peruse the menu.
I beg for more time and we discuss our options. I say I feel compelled to order oysters. Keen says he, equally, feels compelled to have the Moreton Bay bug, and he plans to order suckling pork belly for main. I opt for the John Dory.
"My doctor has recommended I eat, of all things, more fatty food," he explains. Oh he has? Doesn't like you much, your doctor? But my quip goes ignored or unheard as he barrels on.
(Later, when he pauses to turn up his hearing aid in an increasingly noisy restaurant, I realise it's probably the latter.)
We talk about his economics studies at University of Sydney, when in his first year he began to sniff something wrong with the "neo-classical" school of economic theory – a status quo that remains among academic and central bank economists, despite its obvious inability to foresee, forestall or explain the global financial crisis.
This has left academic economists out of touch with the real world and unable to explain the failures of the GFC, Keen argues. And he's not alone. None other than the new chief economist of the World Bank, Paul Romer, last year admitted "for more than three decades, macroeconomic theory has gone backwards".
"Theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as 'tight monetary policy can cause a recession'," Romer lamented. That caused quite a stir, and was a fillip to rebels like Keen.
I suggest that practitioners use the complex theories as a way to hoodwink people into thinking they have a better grasp on what is going on than non-cognoscenti. Maybe, I dare, there's too much maths in economics?
Keen is having none of that.
"No. It's misused by the people who do it. Have you heard of teleology? It's from the Greek word, telos. It's an objective towards which you want to go.
"Neo-classicals and Marxists are the same – their mathematics is teleological. They want to reach an end conclusion and they twist the mathematics to get there. There are many, many times when a mathematical result comes out which contradicts what neo-classicals want and they simply gloss over the top it.
"My favourite is the Sonneschein-Mantel-Debreu theorem" of the early 1970s," Keen says.
"It asked the question: 'Can we derive a market demand curve from individual demand curves'?".
I nod. Even I know, thanks to my long distant undergraduate days at ANU, that this is basic Economics 101.
"Guess what the answer was? 'No'," Keen says. "That screws microeconomics," he adds with some satisfaction.
"The reaction to that result was to twist it and say, 'These are the special conditions under which you can derive demand curves: there's one consumer, consuming one commodity'. "
Keen's look of disgust tells me what he thinks of that.
I suggest that economics has a tendency to be mixed up with politics, which sullies the results. Keen agrees. Not only that, mainstream economists commit an even graver sin in his eyes: "The mathematics they do is very primitive."
Yes, Keen is all about the maths. If it wasn't for a poor science teacher, he says he would have been a physicist. In fact, in the kind of dorky enthusiasm that few would dare in a classy restaurant, Keen stands up to mimic the comical swinging gait of the brother at his Catholic high school that failed to instil in him an early love of science.
He is interrupted by the arrival of the wine list. "Why not?" Keen cheerily asks, and suggests we get a bottle of red.
I wonder whether he is much of a wine buff.
"I go by the name – how about you? 'Underground Cinnabar' – that sounds weird. Or Yabby Lake, although that's pinot gris."
The waiter smoothly suggests the 2013 Moorooduc Estate, which, he assures us, at $100 is "the best value for money pinot noir" on the list. We gratefully agree.
Soon after, the entrees arrive. My oysters are predictably delicious, and I bemoan the fact I ordered only two. Keen generously offers me some of his bug, which we both agree is excellent. The gazpacho comes as a healthy portion, and Keen is clearly impressed.
But back to economics, where Keen's long battle to convince the world it needs to rethink the economics orthodoxy looks, after decades of struggle, to be entering its final stages. More evidence. A recent piece by the Bloomberg editorial board complains economists are now as lowly regarded as politicians and journalists (shock!).
In a piece that could have been penned by Keen, the Bloomberg editors rail that "too many theorists – especially in the mainstream of the discipline – have drifted far from the real world. Their ambition has been to build mathematically elegant and internally consistent models of the economy, even if that requires wholly unrealistic assumptions."
The alternative is going mainstream.
Keen is a long-time disciple of economist Hyman Minsky, who died 20 years ago. Minsky's hypothesis was that booms sow the seeds of busts, and he put credit creation at the centre of this process – something that is sadly lacking in many mainstream econometric models of the economy. As The Economist put it, Minsky "attracted a few devoted followers but little mainstream attention".
That all changed as the GFC lay waste to the world's economies and financial markets. At its core, the crisis was one of too much debt, and suddenly everyone was turning to Minsky to help understand what had just happened – and what might happen next.
"Credit growth is the destabilising influence," Keen says. Hence his conviction that economies need to control the rate of growth of private debt, which is driven higher by banks who are happy to lend ever higher amounts to homeowners who, in turn, are speculating on ever higher prices. It creates a vicious or virtuous circle, depending on your point of view, of an ever more expensive property market.
Household indebtedness in Australia has now reached its highest level ever. Keen blames the bankers rather than the borrowers.
"Banks create money simply out of the capacity of double-entry book keeping," Keen says passionately. "We treat it as though they've saved the money they are giving to you, and therefore you must pay your debt back.
"But they have created too much debt for the wrong reasons, and we have to get used to resetting that debt to a lower level."
It's an interesting angle that would be unappreciated by many in the financial sector: the banks created credit by virtue of an accounting trick, and therefore the government, via the central bank, should make use of a similar accounting trick to create money and pay down the nation's debt to more manageable levels. Then regulate lending so that it doesn't get out of control again. In a nutshell, that's Keen's advice.
It was in the wake of the GFC, perhaps flush with excitement, that Keen was loudly talking about the next debt bubble to burst – in Aussie housing – and people were listening. He said he was selling his house to avoid the inevitable bust. In retrospect, that was clearly a poor example to follow, and it tarnished his name.
I muse that Australia tends to be conservative and intolerant of dissenting voices.
"That's what I don't miss," Keen says. "There's a real tendency in this country to bully anyone who is not part of the mainstream. And partly that's why I did the walk [to Kosciuszco], to basically do this" – he sticks his middle finger up – "to the bullies.
"It's also the smugness that I find here. We managed to avoid the financial crisis, we're OK, especially in Sydney. The smugness of the RBA really rubs me up the wrong way. At least in America, England and Europe there's a realisation that something went badly wrong."
By this time the mains have arrived and they look and taste delicious. Keen continues a neat trick of shovelling food in his mouth while talking the whole time. Not in a rude way. Let's call it… efficient.
"It's mortgage debt that is driving house prices, not vice versa," Keen continues. "So if we have out-of-control mortgage debt, that's where out-of-control prices come from. We've let this happen and it's driven house prices to unsustainable levels. It's a disaster, socially."
Does he see unaffordable housing as a moral question? "Yeah, I do".
What about the suggestion, floated by our former Treasurer, that people should simply get a better paying job?
"When the price of a house is rising faster than the average income by a factor of three or four, it's saying get a job that only 10 per cent of the population can get."
By this time our plates have been cleared and we have decided that dessert is likely a step too far, and we settle on coffees: a cappuccino for him and a short black for me.
So how does Keen want to be remembered?
"I want to be the person who ends neo-classical economics, and lets economists use dynamic not equilibrium thinking."
I suggest that sounds a bit too technical, so he tries again.
"In a broader sense, my goal is to get us to be realistic about economics. Marx said 'Philosophers have hitherto only interpreted the world in various ways; the point is to change it'. My thinking is you can't change what you don't understand."
CAFÉ SYDNEY
Customs House, Circular Quay, Sydney
1 Gazpacho $29
1 Raw kingfish with finger lime, pickled cucumber, fennel, and golden trout roe $29
1 Moreton Bay bug (entrée size) $27
2 Oysters $13
1 Suckling pork belly with morcilla sausage, Pedro Ximenez, hazelnut cream, nectarine and red elk $39
1 John Dory with turnip, red leaf salad and sorrel puree $42
1 bottle of sparkling water $14.50
1 bottle of 2013 Moorooduc Estate pinot noir $100
2 glasses of Perrier-Jouët Belle Époque champagne $90
1 Short black $4.50
1 Cappuccino $4.50
Total: $392.50