thegreatdivide
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(cont)
Two decades later, despite the failure of Neoclassical “Dynamic Stochastic General Equilibrium” models to anticipate the biggest economic crisis since the Great Depression, and despite Nobel Laureates like Paul Romer and Joseph Stiglitz rubbishing them, DSGE models are still the workhorses of Neoclassical economics.
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Unfortunately, in economics (which is not a pure science), anomalies are historical and transient, rather than eternal and reproducible (as in pure science). The Great Depression, WWII, the post-War “Golden Age of Capitalism”, the 70s Stagflation, the 80s stock market bubble, the 90s recession, the Great Recession, now the post(?)-Covid boom and inflation… Each new crisis knocked the previous one off its pedestal. The fact that Neoclassical economics can’t explain the Great Depression—or that it has an explanation which is an insult to anyone who lived through it (Prescott 1999)—doesn’t matter to any modern economist who is working on today’s issue of inflation. Old failures can be forgotten.
Just as importantly, the underlying Neoclassical vision of capitalism is a highly seductive one. It is a meritocracy in which what you earn is what you deserve, where harmony rules because of equilibrium, and which is free of coercion: there’s no need for government control when the market works “perfectly”. Therefore, even if some students break away from Neoclassical economics because of one of its failures, enough “true believers” can be found in the student body to replace existing “true believers” when they retire.
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The final factor that enables economics to escape the revolutionary change it desperately needs is rather ironic: myths in economics survive because, despite the dominance of our politics by economic ideas, you don’t need economic theory or economists to have an economy. The economy exists independently of economists, and would probably function a lot better if economists simply didn’t exist. In contrast, engineering doesn’t exist independently of engineers: you need engineers to create the technological marvels the rest of us take for granted, and when something goes wrong with the things that engineers create, engineers face real consequences: a collapsing bridge fingers the engineers who didn’t take account of its harmonics, a crashing plane implicates the engineers (or their managers) who approved a faulty design.
To use Nicholas Taleb’s phrase, economists don’t have any “skin in the game”: they don’t suffer any serious consequences when their advice is badly wrong, and there is a myriad of complicating factors that they can point at to explain away any failure. Ironically, the fact that economists aren’t strictly necessary is something that gives them great power. They are the witchdoctors of capitalism, holding the leaders of our society in their thrall as they read the entrails of their Dynamic Stochastic General Equilibrium models, while at the same time they have no idea how that society actually works.
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Neoclassical economists do not use mathematics: they abuse it. I coined the neologism “mythematics” to describe what they do, and my colleague Asad Zaman coined the equally apt “mathemagics”. What Neoclassicals do appears to be mathematics to the uninitiated, but they either use the wrong mathematical tools, or start from ludicrous assumptions, or make even more ludicrous assumptions when the results they reach don’t have the properties they desire.
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Add the existence of a banking sector that creates money when it lends (Moore 1979), and replace the assumption that capitalists invest all their profits with the more realistic assumption that capitalists invest more than profits during a boom, and less than profits during a slump, and you get Minsky’s “Financial Instability Hypothesis” (Minsky 1982)—see Figure 13. Include government deficit spending and you get a complex-systems version of Modern Monetary Theory (Kelton 2020).
Keen's completed publication will be available in mid 2025.
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