See Teaching Economics after the Crisis. J-C Trichet: ECB President “As a policy-maker, I felt abandoned by conventional tools.” (2010).
This may be mostly about macro-economics, but reflects fundamental inadequacies in the underlying science that afflict micro-economics and have poisoned fundamental ideas in strategy. Even the most basic tools, such as the PQ demand-curve, are hopelessly unrealistic depictions of real-world mechanisms, and attempts to adapt them end up like trying to squeeze Cinderella’s ugly sisters’ foot into a dainty shoe. Standard economic models do not deal adequately [or even acknowledge in many cases!] mechanisms we know to be powerful and ubiquitous – interdependence and feedback, stock-accumulations, and threshold effects.
The frustration is that we have known for decades how to deal with these mechanisms – together they offer a trivially simple explanation for the last recession [and just about all others]. At least some economists are open-minded to the possibility that other paradigms may be more helpful … “I would welcome inspiration from other disciplines: physics, engineering, psychology, biology… Scientists have developed sophisticated tools for analyzing complex dynamic systems in a rigorous way” J-C Trichet again [actually, you only need engineering and psychology]. Indeed they have … Unfortunately, progress is glacial, maybe because they are still trying to adapt principles that don’t work, rather than starting from scratch? I understand from the Institute for New Economic Thinking that even the “new” thinking … Dynamic Stochastic General Equilibrium (DSGE) models … build on the same old unrealisic microeconomics concepts – representative consumers, representative firms, an over-simplified financial system, perfectly rational agents, no dynamic feedback, and a reliance on exogenous shocks to cause anything to change. [It takes just 30 minutes to build a realistic, truly dynamic model of supply and demand that can generate its own cyclicality … the business sector of the economy = sum of all industry sectors].
Little hope here – friends who know about this stuff and tried applying for funding to develop useful alternatives have found that those funds have been hoovered up by – guess who – exactly the same people who have pushed the useless old models on us for decades.Share