As a political scientist Johnathan Schlefer was appalled by the gross failures and incoherence of economics in the public arena, so he decided to try to figure out what was going on. This book is the result - a good introduction for outsiders (also mis-educated insiders) to the dysfunctional state of modern economics. Especially why it is more ideology than science and how it got there.
Yet the reader longs for a new paradigm for understanding and doing economics, not just a critique of bad models. Schlefer does marshall some elements of a new paradigm - rejecting ludicrous assumptions and concepts and even citing recent nonlinear and agent based modeling. Unfortunately he leaves us without a new vision, which I suggest should take its inspiration more from current climate science than from 19th century physics.
Climate science takes complexity seriously and relegates simplistic models to subordinate roles, eagerly taking knowledge from every relevant field and incorporating it into vast scenarios as parameters and submodels to simulate the chaotic processes that characterize climate change. Seems a good match for global economics. Yet it seems that few economists have the right training or inclination, and powerful forces care more about ideological backing for their political agendas than about what real world economics might reveal.
Schlefer has consulted a number of economists, even read their books and studied their mathematical models, so he gets off to a good start by debunking Adam Smith's "invisible hand" based on the Arrow-Debreu result that general equilibrium models are inherently unstable. That is prices, supply, demand, and the like don't naturally converge to stable values in free and competitive markets, as most economics textbooks still preach. The basic flaw is the opportunity for speculation, booms, busts, and cycles in all such markets, which can only be damped out by strong regulatory forces.
Schlefer then goes on to show how the neoclassical theory developed by Jevons, Marshall, and others arose as a pseudo-scientific, pro-capitalist response to Ricardian and Marxian socialists. Not that Marx's labor theory of value was any better than the new micro-economics. In the modern era Milton Friedman was the high priest of the pro-capitalist ideology, even going so far as to explicitly reject the scientific method in favor of what philosophers call "instrumentalism"(it doesn't matter if your assumptions seem to be wrong if your conclusions seem to be right). Friedman is easily debunked by Schlefer, especially after acolytes of market of fundamentalism like Alan Greenspan lost so much face when they were caught by surprise by the financial crash of 2008.
Schlefer also tears apart the "production function" of neoclassical economics, with its ill-defined "Solow residual" and false predictions about wages and prices. Yet he is apparently not aware that the production function does much better at predicting growth when energy is included among the input variables, not just capital and labor. In as similar vein Schlefer takes on the supposed "substitutability" among labor, capital, and other factors of production, citing empirical studies to the contrary.
Even easier targets for Schlefer are such concepts as "representative agents", "rational expectation", and "aggregate supply and demand curves", perfect examples of the false assumptions that Friedman was so fond of because they seemed to rescue textbook economics. This paradigm sees all failures of neoclassical theory as due to "market imperfections" that can be explained after the fact by tweaking the basic models in various ad hoc ways that Schlefer likens to Ptolemy adding epicycles to explain the paths of the planets.
For an insider's "Debunking Economics", read Steve Keen, but Schlefer is more accessible and has done a yeoman's job for an outsider. But I'm still waiting for development of the new paradigm.
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