Neoclassical economics — purchasing validity at the cost of empirical content19 October, 2015 at 15:12 | Posted in Economics | 3 Comments
The fact that the economics profession was caught unawares in the long build- up to the 2007 worldwide financial crisis and substantially underestimated its dimensions once it started to unfold can be attributed to two factors … first, the lack of an empirical motivation in the essential modelling assumptions, combined with questionable ceteris paribus assumptions; and second, a blatant disregard for the complete absence of the empirical fit of macroeconomic research. Indeed, the deeper roots for this are found in what has been termed the ‘systemic failure of the economics profession’ to design models that take into account key elements that drive economic outcomes in real-world markets. Half a century of research that conveniently disregarded essential institutional and behavioural characteristics of the markets that it supposedly modelled has left its (hardly surprising) imprint on financial market regulation and ultimately on the world economy. Instead of letting theories die, economists preferred experimentation on a worldwide scale.