Following the April webinar ‘Why actuaries need a new economics’, speakers Professor Steve Keen and William Hynes offered some reflections.
Actuaries consider risk, uncertainty, and the medium to long-term. They need economic models that reflect actual behaviours and outcomes, not abstract theories. Mainstream (neoclassical) economics is built on myths like utility-maximizing consumers, profit-maximizing firms, marginal cost-based pricing, and the idea that people are paid their ‘marginal product’.
Real-world data contradicts textbook economics. For instance, marginal cost does not rise with output in most firms, contradicting the upward-sloping supply curve myth. Money creation is misunderstood in mainstream economics. Professor Steve Keen emphasized that banks create money by issuing loans, contrary to the ‘loanable funds’ model still taught in most textbooks.
Economics is teleological and resistant to change. Economics defends ideology (‘markets are best’) rather than truth. Its theories are preserved through ‘simplifying assumptions’ rather than scientific rigor. There is little prospect for revolution within academic economics. Change must come from professions like actuaries pushing for reform from the outside.
The wide-ranging discussion covered several topical issues:
Keen criticized mainstream models like Nordhaus’ IAMs for drastically underestimating the risks of climate change. He urged actuaries to reject models that rely on equilibrium-based assumptions and instead model climate impacts using non-equilibrium, systems-based approaches.
While behavioural economics is a partial improvement, Keen sees it as tinkering around the edges. It still accepts many flawed neoclassical assumptions. He advocates for complexity economics and evolutionary models instead – where agents are adaptive, and markets are constantly in flux.
When asked about Labour’s cautious fiscal stance (for example, avoiding deficits), Keen said this reflects neoclassical fear of public debt, which misunderstands how sovereign money systems work. He called for policies that recognize government spending creates money, and that fiscal space should be assessed by real resource constraints, not arbitrary debt limits.
Keen suggested that the IFoA could play a transformative role by creating and endorsing a curriculum that teaches real-world economics. Training actuaries in systems dynamics, post-Keynesian models, and complex adaptive systems. Keen demonstrated the potential of dynamic tools such as Ravel to understand macro phenomena.
