I am of the opinion that mainstream economics gets most things wrong. Mainstream economists pretend to be scientists when they are not, use unrealistic assumptions to create simplistic models, confuse correlation with causation, ignore history, are biased towards action over inaction and favor the short-term over the long-term. Perhaps more importantly than anything else, mainstream economics has forgotten the lessons of Adam Smith and fails to appreciate what a free market really means, and does not mean.
My criticisms are not original. In fact, many if not all of them are held, though not widely held, by those outside the economics community. Naturally, if economists were like all other members of the social sciences, these criticisms would be, well, academic, just like economists are supposed to be.
But economists are not just academics. To paraphrase Keynes, policy makers are, “usually the slaves of some defunct economist.” Economists have escaped from the ivory tower and have become entrenched in both government and finance. In fact, economists have come to influence our world more than members of perhaps any other profession. Worse, they have become the policy makers, but with less oversight and more power.
This has not been to the world’s benefit. I will go as far to say that economists, especially through their role as central bankers, have done more damage to the world than anything since World War II. And not because they are malicious or evil like Hitler or Stalin. Economists mean well. They believe they are helping.
No, it is because they are clueless. Not simply clueless to the damage they have caused (for they will of course deny this), but clueless to even the power they possess. And not because they are dumb. On the contrary, they are mostly smart. In many cases very smart.
Modern society fetishizes intelligence. We are educated to believe and thus take for granted that smart people make the right decisions. This is wrong. It is not high intelligence that is the making of good policy, but wisdom.
Wisdom requires self awareness. You must know what you don’t know. Wisdom requires humility. You must be able to admit what you don’t know. Wisdom requires an understanding of history. You must be able to see and appreciate the bigger picture. Wisdom requires an understanding of human nature. You must be able to interpret what fundamentally motivates people.
Economists don’t lack intelligence. But they do lack wisdom. They have a false understanding of what drives decision making. They are required to learn no history in their economic studies. They act before they understand. And most importantly, they take for granted what they should question. It is not simply that they rely on assumptions that are unrealistic or wrong. It is that they make assumptions that they don’t even realize they are making.
Over the next ten posts, I will highlight, in no particular order, what I believe are the ten largest myths of mainstream economics. These are assumptions that I believe economists get wrong because they are unwise. And the world is much worse-off because they get these assumptions wrong. On many of these myths, I will have much more to say in the future. But for now, I ask you to settle for rather short explanations.
Myth 2: Market failures are common
Myth 3: Insufficient aggregate demand causes recessions
Myth 4: Central banks can micromanage the economy and prevent recessions
Myth 5: Deflation is always bad
Myth 6: Moderate inflation is good
Myth 7: Liquidity in financial markets is always good
Myth 8: There is such a thing as fundamental value
Myth 9: Equilibrium exists
Myth 10: Entrepreneurship is always good
Bonus Myth: “In the long run we are dead”