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The Assumptions Economists Make Hardcover – March 20, 2012
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The Assumptions Economists Make is a marvelous piece of political economy. Jonathan Schlefer ably contrasts the two main approaches to macroeconomics--neoclassical and classical/Keynesian--and on social, historical, and political grounds strongly endorses the latter. (Lance Taylor, author of Maynard's Revenge: The Collapse of Free Market Macroeconomics)
A marvel of clarity and elegance, The Assumptions Economists Make is the best book I've read about the ideas and practices of economists. With great respect, curiosity, insight, and wit, Jonathan Schlefer has given readers a sense of how the models and metaphors of economics inform our most important public policy debates. He manages to connect the theories that economists produce--and the assumptions that go along with the theories--to economists' varied, influential roles in public life as policy makers and public intellectuals. (Rawi Abdelal, Harvard Business School)
Not a history of economic thinkers, this is an examination of their prevailing assumptions, from Adam Smith to the present. Schlefer asserts that macroeconomic models failed to guide government policy before 2008 because economists got their neoclassical theory wrong, and he blames the economic troubles of 2008 and beyond on the instability of private financial markets. He disputes factors such as supply and demand, technology, and unionization as causes of the current recession, noting that many believed the "supply of better-educated workers increasing relative to lower-skilled workers would cause their pay premium to fall" when just the opposite happened. (Joanna B. Conrad Library Journal 2012-02-15)
A lucid, plain-spoken account of the major economic models, which [Schlefer] introduces in chronological order, creating a kind of intellectual history of macroeconomics. He explains what the models assume, what they actually demonstrate--and where they fall short. (Binyamin Applebaum New York Times blog 2012-04-16)
Fascinating...[Schlefer's] book is a tough critique of economics, but a deeply informed and sympathetic one. (Justin Fox Harvard Business Review blog)
This book is an impressive and informative analysis of the economics literature--and it presents some useful insights about how a more eclectic, catholic approach might allow economics to progress more convincingly into the future. (Michelle Baddeley Times Higher Education 2012-04-19)
The Assumptions Economists Make is a valuable book for readers who like to argue, reflect, and advance knowledge. (A. R. Sanderson Choice 2012-09-01)
The Assumptions Economists make [is] a knowledgeable...broadside against neoclassical economics...Schlefer's gripes concern model-building run amok...His criticisms of these models are original and sophisticated. (Christopher Caldwell Literary Review 2012-12-01)
About the Author
Jonathan Schlefer holds a Ph.D. in political science from MIT and is the author of Palace Politics: How the Ruling Party Brought Crisis to Mexico, as well as articles for The Atlantic and other publications. He is currently a research associate at Harvard Business School.
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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.
Jonathan Schlefer takes apart economic models, particularly the neo-classical models that the Federal Reserve and others rely on to run the big western economies, and shows the fallacy of the assumptions and the reasoning behind them. Reading between the lines a bit, the intellectual dishonesty (my words, not Schlefer's) of some of the leading lights in economics (say Milton Friedman) is a bit staggering. They get away with it, because there are few outsiders with the math skills and the energy to do a proper job of picking them apart. This book is well written and does not involve math, thankfully, but still don't expect an easy read because the topic itself is so complex. Well worth the time.