Home > Uncategorized > What’s wrong with economics?

What’s wrong with economics?

from Lars Syll

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!

  1. thomasntunstallyahoocom
    March 27, 2021 at 9:26 pm

    Many thanks. I just purchased the book as it appears an excellent read. https://www.amazon.com/dp/1982920610/?coliid=I1WZ7N8N3CO77R&colid=3VCPCHTITCQDJ&psc=1&ref_=lv_ov_lig_dp_it

  2. Ken Zimmerman
    March 29, 2021 at 1:00 am

    My God, have we forgotten the ‘Recession-Depression’ of 2008? And what the ‘Economist’ said about it?

    A few years ago economics was “…acclaimed as a way of explaining ever more forms of human behaviour, from drug dealing to sumo wrestling. Wall Street ransacked the best universities for game theorists and options modellers. And on the public stage, economists were seen as far more trustworthy than politicians. John McCain joked that Alan Greenspan, then chairman of the Federal Reserve, was so indispensable that if he died, the president should ‘prop him up and put a pair of dark glasses on him.’” This was then and is now nonsense. But economists duped the world and most importantly policy makers into believing it. This may be economists’ greatest advantage. It certainly is not their theories or their solid and useful policy advice.

    But then came a relatively ‘ordinary’ event in the world of modern economics – an economic bubble burst in 2008. Suddenly economists were everyone’s scapegoat and bungler. “In the wake of the biggest economic calamity in 80 years that reputation has taken a beating. In the public mind an arrogant profession has been humbled. Though economists are still at the centre of the policy debate—think of Ben Bernanke or Larry Summers in America or Mervyn
    King in Britain—their pronouncements are viewed with more scepticism than before. The profession itself is suffering from guilt and rancour. In a recent lecture, Paul Krugman, winner of the Nobel prize in economics in 2008, argued that much of the past 30 years of macroeconomics was ‘spectacularly useless at best, and positively harmful at worst.” Barry Eichengreen, a prominent American economic historian, says the crisis has ‘cast into doubt much of what we thought we knew about economics.’”

    The Economist goes on, however, to defend economics. Saying, “..the current backlash has gone far too far.” The Economist argues, “And if economics as a broad discipline deserves a robust defence, so does the freemarket paradigm. Too many people, especially in Europe, equate mistakes made by economists with a failure of economic liberalism. Their logic seems to be that if economists got things wrong, then politicians will do better. That is a false—and dangerous—conclusion.”

    The Economist is wrong on both counts. As a social science economics lacks a solid empirical foundation. It is more like the mythology that unites a group as culturally distinct, like Washington at Valley Forge or 9-11 does for the United States. In both these cases the mythology little resembles the facts of the situations used. Culturally speaking mythologies are important. But they should never replace the facts as revealed by social science research. The Economist’s critique of macroeconomics and financial economics in the 2008 crisis unfortunately leaves the mythological status of economics unchallenged.

    It is my experience that most bankers from outside the mainstream banks understand how useful/useless economics is. For example, Dr. DeLisle Worrell, Governor of the Central Bank of Barbados said this in 2010. “Back in the sixties, when I began my career in economics, we were all too aware of the limitations of the discipline: it was static where the world was dynamic, it assumed competitive markets where few existed, it assumed rationality when we knew full well that economic agents were not rational (at least not by the definition economists use), the choice of first principles was always arbitrary and culture bound, economics had no way of dealing with changing tastes and technology, and much else besides. Econometrics was equally plagued with intractable problems: economic observations are never randomly drawn and seldom independent, the number of excluded variables is always unmanageably large, the degrees of freedom unacceptably small, the stability of significance tests seldom unequivocally established, the errors in measurement too large to yield meaningful results (when we could estimate their magnitude at all, that is), the proxies we always have to use instead of the theoretical variables unacceptably distant from the variables they are meant to represent.

    So we understood that we could not rely entirely – or even mainly – on theory and tests to say anything useful about the real world. I love numbers, and it is obvious that to gain any insight about how an economy works you need to start with a theory, so theory and tests are part of the armoury I would expect to use. However, the writers who attracted me to economics – Arthur Lewis was a prime example – understood that theory was more than a set of equations and some algebraic manipulation, and that empirical economics was not about “proving” a theory, but rather about using data to enrich one’s intuition about how the economy works. Also, they understood that most of what explains economic processes and interactions cannot be captured by the algebra and calculus that economists have at their disposal.

    Over the past 4 decades I have become increasingly dismayed as I have observed the economics profession being taken over by a generation of economists who have lost sight of the limitations of what they can know, with the help of the tools and techniques available to us. We write as though anything that we can set down in a theoretically “correct” specification of an equation has to be true, even when the evidence to the contrary is right before our eyes, and obvious to everybody who is not an economist. When our empirical tests fail to yield expected results we do not take our theory back to the drawing board, but we fudge some explanation that we think might be plausible.”

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