What is wrong with mainstream economics? – Editor

The following notes were developed from “Five fundamental propositions about orthodox economics” which appeared recently in a blog by Asad Zaman *. The basic points listed might be startling to the general public but would be familiar to heterodox economists.

1. Modern mainstream economic doctrines are based on fundamentally disproven assumptions which are self- contradictory and easily demonstrated to be wrong:
2. The mainstream story is seriously flawed because, inter alia:
   1. The axiomatic theory of human behaviour encapsulated in homo economicus is not matched by real human behaviour.
   2. The theory of perfect competition devised to explain prices and markets has no relation to the realities ofmonopolies and oligopolies, cartels, multinationals, excess production, and the shaping of demand by advertisements and culture.
   3. The welfare theory implicit in the maximization of lifetime utility is exceedingly harmful to human welfare because welfare practices should be derived from moral considerations and social associations, rather than from the satiation of consumers’ preferences and a purely utilitarian approach.
   4. The optimization and equilibrium methodology used in mainstream economics is a complete failure. Human beings do not and cannot optimize, because they simply do not possess the information required for doing so.And dynamic systems cannot be under- stood by simply looking at their real or supposed equilibria. In addition, stand- ard econometrics techniques can be used to demonstrate anything outside of their domain.
   5. Owing to these problems the mainstream theory is fundamentally flawed, because it cannot adequately interpret and analyse economic data.
3. It appears that many leading economists are aware of the contradictions between economic theory and the simple facts of observation but choose to ignore them, writing off embarrassing observational evidence as externalities which are “too hard” to address. This type of contradiction would be address- ed as a matter of priority if economics would adopt scientific methodology.
4. The Global Financial Crisis which started in 2008 created widespread public awareness of this catastrophic failure of economics.
   1. The Queen of the United Kingdom, while visiting the London School of Economics, asked why no one saw this crisis coming, yet there has been no serious attempt to answer this simple question.
   2. The US Congress appointed a commission to study why economists not only did not foresee the crisis but, without analysis, confidently predicted that such an event could never happen.
5. Most amazing, and as documented by many, is the lack of response of the economics profession itself to the global financial crisis.
   1. The old theories which failed so miserably continue to be taught the world over and economics teachers continue to believe in, and preach, the same sermons, the practical implement- ation of which led to global disaster.
   2. Students continue to be exposed to the same poisonous doctrines that have ruined personal happiness and destroyed the possibility of building a decent society.
   3. The same DSGE models that failed to predict the volatility of stocks in the GFC continue to be used today and the same monetary policies that led to the crisis and could not prevent the Great Recession which followed are lauded, praised and continue to be practised.

Lastly, there seems to be an increasing general awareness of this failure of the profession as a whole but no serious widespread move is apparent towards obvious solutions embracing a hetero- dox approach. This lack of satisfactory analysis is a devastating indictment of modern mainstream economics.

* Source: Real World Econ Rev, 2 Jan 2019 https://rwer.wordpress.com/2019/01/02/romers-trouble-with-macro/