My belief, or observation really, is that economics as a discipline is a tautological exercise in self-referential abstractions: it explains nothing but itself, and has lost connection to the world. It fails as a science because in science, ideas are tested against reality, and adjusted. In economics, reality is adjusted to suit the doctrine. (Kind of like climate change ideology).
But I am a mere political scientist and sort of lawyer, so what do I know?
Along comes Robert Sidelsky, who has written Money and Government: The Past and Future of Economics. He is an economist and author of a definitive biography of John Maynard Keynes. The New York Review of Books carries an excellent review of Money and Government by David Graeber, from which the quotes are taken.
“Surely there’s nothing wrong with creating simplified models. Arguably, this is how any science of human affairs has to proceed. But an empirical science then goes on to test those models against what people actually do, and adjust them accordingly. This is precisely what economists did not do. Instead, they discovered that, if one encased those models in mathematical formulae completely impenetrable to the noninitiate, it would be possible to create a universe in which those premises could never be refuted….
“The problem, as Skidelsky emphasizes, is that if your initial assumptions are absurd, multiplying them a thousandfold will hardly make them less so. Or, as he puts it, rather less gently, “lunatic premises lead to mad conclusions”:
The efficient market hypothesis (EMH), made popular by Eugene Fama…is the application of rational expectations to financial markets. The rational expectations hypothesis (REH) says that agents optimally utilize all available information about the economy and policy instantly to adjust their expectations….
Thus, in the words of Fama,…“In an efficient market, competition among the many intelligent participants leads to a situation where…the actual price of a security will be a good estimate of its intrinsic value.” [Skidelsky’s italics]
“In other words, we were obliged to pretend that markets could not, by definition, be wrong—if in the 1980s the land on which the Imperial compound in Tokyo was built, for example, was valued higher than that of all the land in New York City, then that would have to be because that was what it was actually worth.”
Readers may recall the consternation of Alan Greenspan, former head of the Federal Reserve Bank, who confessed that his great error was to believe that rational information theory prevented such things as the 2007 bank blow-out. He was in a state of “shocked disbelief”. But at least he had the honesty to admit his model was at fault.
When you reach the state where, by definition, you cannot be wrong, you are doomed. How many currently unassailable ideologies will come crashing down in the passage of time? My answer, of course, is ‘all of them’.