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April 12, 2010

Economists don’t know everything

"The big lesson in economics from Keynes is that we know less than we think we do, and that there is a vast difference between the output of economic models and the actual behaviour of individuals.

"Our basis of knowledge for estimating the yield 10 years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing," Keynes wrote. He was unimpressed by the argument that decisions were "the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities".

This, though, is where mainstream economics has ended up. It is possible to construct beautifully precise models if you start from the assumption that rational economic agents with perfect information are operating in free markets that always return to equilibrium. But since none of these assumptions holds true in the real world, this is a classic case of "rubbish in, rubbish out".

Even more worryingly, there has been no room in this view of the world for the heterodox. The prestigious economics journals have been cleansed of all but the purveyors of highly technical algebra. Economic history has been removed from the syllabus, because those who yearn for economics to be a hard science believe the past can teach them nothing. Truly, the lunatics have taken over the asylum."

- From "Rescuing economics from its own crisis" by Larry Elliot in The Guardian

Posted by Julie at April 12, 2010 10:05 AM

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This is a wonderful wording:

"We have not succeeded in answering all our problems. The answers we have found only serve to raise a whole set of new questions. In some ways we feel we are as confused as ever, but we believe we are confused on a higher level and about more important things.

(quoted from ksendal's Stochastic Di erential Equations, 6th Ed).

Posted by: Pål at April 12, 2010 3:12 PM

That is so true!

Posted by: Martine at April 12, 2010 6:06 PM