3. Problems with How We Do Economics Today

The first chapter of this book summarized how we undertake economics, and our explanation for that approach in the modern Western world. The second chapter introduced the idea that this contemporary view of understanding economics is just one of many ways that humans have understood how the economy operates. The last century has seen the ascendancy, indeed intellectual dominance, of neoclassical economics (NCE, also known as Walrasian economics). The basic NCE model represents the economy as a self-maintaining circular flow among firms and households, driven by the psychological assumptions that humans act principally in a materialistic, self-regarding, and predictable way. Unfortunately, the NCE model violates a number of physical laws and is inconsistent actual human behavior, rendering it to be an unrealistic and a poor predictor of people’s actions. Recently, an array of experimental and physical evidence and theoretical breakthroughs demonstrate the disconnect between evidence and neoclassical theory. Despite the abundance and validity of these critiques, few economists seriously question the neoclassical paradigm that forms the foundation of their applied work. This is a problem because policy makers, scientists, and others turn to economists for answers to important questions. The supposed virtues of «privatization,» «free markets,» «consumer choice,» and «cost-benefit analysis» are considered to be self-evident by most practicing economists, as well as many in business and government. In fact, the evidence that these concepts are correct is rather slim and contradictory. Thus, this chapter is a strong critique of economic theory, in this case NCE.