What’s wrong with economics?

24 Mar, 2021 at 18:22 | Posted in Economics | 2 Comments

81wDHnOlHnLThis is an important and fundamentally correct critique of the core methodology of economics: individualistic; analytical; ahistorical; asocial; and apolitical. What economics understands is important. What it ignores is, alas, equally important. As Skidelsky, famous as the biographer of Keynes, notes, “to maintain that market competition is a self-sufficient ordering principle is wrong. Markets are embedded in political institutions and moral beliefs.” Economists need to be humbler about what they know and do not know.

Martin Wolf / FT

Mainstream economic theory today is still in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. This mathematical modelling activity is considered useful and essential. To understand and explain relations between different entities in the real economy the predominant strategy is to build mathematical models and make things happen in these ‘analogue-economy models’ rather than engineering things happening in real economies.

Without strong evidence, all kinds of absurd claims and nonsense may pretend to be science.  As Paul Romer had  it in his reckoning with ‘post-real’ economics a couple of years ago:

Math cannot establish the truth value of a fact. Never has. Never will.

We have to demand more of a justification than rather watered-down versions of ‘anything goes’ when it comes to the main postulates on which mainstream economics is founded. If one proposes ‘efficient markets’ or ‘rational expectations’ one also has to support their underlying assumptions. As a rule, none is given, which makes it rather puzzling how things like ‘efficient markets’ and ‘rational expectations’ have become standard modelling assumptions made in much of modern macroeconomics. The reason for this sad state of ‘modern’ economics is that economists often mistake mathematical beauty for truth. It would be far better if they instead made sure they keep their hands clean!

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  1. It’s true, mathematical beauty and truth may work in physical sciences but not in economics; as it now is. Among the “As” you mention, like ahistorical, apolitical and so forth, you left out that economics ascientific , meaning it ignores basic science like the influence of energy (mostly oil) and pollution in production; it ignores Entropy. I bridge this gap in my 2012 book The Energy Within Economics were I incorporate energy inside the functions of production, consumption, growth, monetary creation and ultimately World Prosperity. Other ecology based authors do something similar (Hall).
    We all conclude that all economic textbooks written before this century are obsolete. Not that they were always wrong, but they are now.
    After I finish another book on Venezuela I will start on a new textbook on 21st Century Economics

    • Energy prices are determined by momentum and noise traders in paper markets …


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