Basic economics explained for beginners: Prof. Keen and others.

What is economics? Is it a science? Non-economists are often perplexed by these questions, finding them increasingly confusing with each encounter. Without a clear definition of economics, they’ve rushed to denounce the ‘economic man’, the central figure in economic theory. The moral argument, a misconception about the use of the ‘economic man’, is that economics is the only discipline built on the notion that greed is good. Yet just as moral critiques of Darwinism don’t undermine its validity as a biological science, moral critiques of the ‘economic man’ don’t undermine its usefulness as an economic model.

To most economists, the concept of the ‘economic man’ might respond to moral arguments by saying that if economics is to be a science, the relevant question about its assumptions is whether they permit the building of a science rather than their ‘realism’. Unfortunately, the class I am handling here has labeled economics as not a science on the basis that it must have assumptions similar to those of the natural sciences, which Prof. Keen refers to as domain assumptions. The lot I am handling here seems even more childish, to the point of claiming that economic assumptions are unreal, so economics is wrong.

So then, what is economics? George Orwell remarked that sometimes the first duty of intelligent men is the restatement of the obvious. In simple terms, economics is the study of the mechanisms used to allocate scarce resources for the production and exchange of goods and services. I call your attention to the key phrase “a study of mechanisms,” which appears in different forms when defining economics, as in the aim of economics being to understand how the economy, in all its forms and shapes, works. Economics, then, is a collection of explanations that helps us understand how the economy works as a whole.

Ensuring that economic theory is reliable and useful requires it to be logically rigorous and to form a consistent whole. Without adherence to first principles or consistency with basic assumptions, explanations risk being contradictory. Contradictions, as those expressed by Prof. Keen and other MMTers, signal that something is wrong. Economic theories, therefore, must be simple to test, consistent with other theories we accept, fruitful in suggesting new lines of inquiry and answers to other problems, and applicable across a wide variety of circumstances. But why would economists pursue all of this?

Various reasons could be put forward; the overriding purpose is prediction. Prof. Keen, several times on X and YouTube, has misled the public into believing that economics is wrong, arguing that it is built on unrealistic assumptions. He continually mistakes the ‘realism’ of its assumptions for the measure of economic theory, rather than its predictive power. As a result, Prof. Keen and his misled public are inclined to dismiss theories that assume ‘pure’ competition, ‘perfect’ markets, or ‘homogeneity’ of capital, among others. Yet no economist genuinely expects such perfection in the real world; rather, the question is whether, by assuming these things, one can deduce theories that explain events.

Realism critique? The most common critique of economic theories and their role in understanding the real world, across the public, textbooks (including those of Prof. Keen), classrooms, and among economists themselves, is that economics is built on unrealistic assumptions, or, if you like, assumptions that lack ‘realism’. Unfortunately, most stop there. Very few bother to understand what realism is in its strict sense. ‘Realism’ is used to mean a ‘possibly improved but not perfect’ state. It grows out of the illusion of giving a complete account of the world, rather than simple theories that could give useful predictions, which could, in principle, be disproved by events that did not fit the forecasts.

Economists focused on “realism” get bogged down in detail. Asking Prof. Keen to create a perfect, realistic business model is absurd, as it would require questioning every businessperson about every scenario, verifying their answers, and synthesizing a coherent model. This is impractical and impossible. Instead, economic theory benefits from abstracting from this chaos. The assumption that firms act as if they maximize returns is more influential than its precision suggests. Even without firms solving cost equations, the framework reliably predicts business responses and compares policy impacts.

Consequently, this has created the greatest problem for economic theory today: a growing number of heterodox economists who take pride in the ‘realism’ of their assumptions, such that each new event must somehow be incorporated into the theory. If an event occurs that was not predicted, the theory must be extended to show the special circumstances that made it happen; another unexpected event requires another adjustment; and so on. But this robs the theory of any predictive power it might once have had, because it adjusts to suit any occurrence and becomes merely a description of what has been, rather than a forecast of what we expect to come.

As Friedman said, Keynesians and others have misunderstood the nature of economic models. A model is a simplified representation of the economy, tested to predict how the real economy will behave, like a model aircraft in a wind tunnel. It does not claim to be a perfect representation or to show how the real economy behaves in all circumstances. If economic inquiry is viewed as an evolutionary process in which new hypotheses are proposed, tested, and either accepted or rejected based on their effectiveness, then this diversity and heterogeneity should promote rapid progress. This is hardly likely to be a feature of the lumbering search for descriptive ‘realism’.

Is it a science? And how is it different from other sciences? Yes, economics is a science. It qualifies as one under a proper understanding of science as a systematic, rigorous inquiry into reality that yields reliable, testable explanations, rather than a narrow imitation of laboratory physics with its controlled experiments, quantitative predictions, and "realistic" assumptions in every detail. True science here involves understanding patterns, tendencies, and limits (e.g., how markets coordinate knowledge better than central planners, or why socialist calculation fails). Hayek's work on knowledge, spontaneous order, and the business cycle exemplifies scientific economics: logically derived, empirically informed where possible, and fruitful in explaining real-world events without claiming god-like predictive mastery. He warned that pretending otherwise leads to the "pretense of knowledge" and policy hubris.

A crucial foundation for economics as a science is the general tendency toward equilibrium. Without it, human actions would be chaotic and, in principle, unpredictable, making systematic explanation impossible. Both Mises and Hayek affirm this tendency as an empirical and theoretical reality rooted in purposeful human action and the coordinating power of the price system. Mises shows that entrepreneurial alertness and profit-seeking drive the market process toward the “final state of rest,” even though change continually disrupts it. This tendency allows economists to deduce laws, such as how prices adjust to clear markets and how resources flow to higher-valued uses, thereby providing reliable explanatory power.

In his seminal “Economics and Knowledge,” Hayek explicitly treats the “tendency toward equilibrium” as the central empirical proposition of economics: competition serves as a discovery procedure that disseminates dispersed knowledge, aligns plans, and fosters greater mutual compatibility over time. Without such an equilibrating force, there would be no basis for expecting regularities, unintended order, or predictable patterns in response to incentives and policy changes. Economics thus qualifies as a science precisely because this tendency exists: it transforms the apparent disorder of millions of individual choices into an intelligible, law-governed process, even if a final static equilibrium is never reached in a dynamic world.