real-world economics review, issue no. 103 subscribe for free
Why do economists persist in using false theories? Asad Zaman [International Islamic University, Pakistan] Copyright: Asad Zaman, 2023
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It is easy to establish that many of the core theories used by Economists are false. For example, there is overwhelming empirical evidence against the theory of utility maximization; for a survey of this evidence, see Zaman and Karacuka (2011). Similarly, Romer (2016 ) documents how leading monetary economists persist in believing that monetary policy does not affect the real economy, despite very strong empirical evidence to the contrary. This failure of economic theory became obvious to all when economists failed to foresee the Global Financial Crisis (GFC) of 2007. Worse, leading economists confidently predicted continued prosperity, and dismissed warnings of trouble in financial markets After the crisis, many leading economists and practitioners realized that there were fundamental flaws in the structure of mainstream economic theories , Quotes Critical of Economics . The question we wish to address is deeper than a one-time failure of economic theory. The same models which failed spectacularly in the GFC continue to be used after the crisis. The same models of consumer behavior overwhelmingly refuted by behavioral economists continue to be exposited in microeconomics textbooks, and taught to unsuspecting undergraduates around the globe. Central Banks around the globe continue to make monetary policy decisions on the basis of models known to . Monetary Policy Without A Working Theory of Inflation , Daniel Tar , , , , of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policy. , raise interest rates to fight inflation, while the data overwhelmingly contradicts this causal link Do High Interest Rates Reduce Inflation? A . So we can repeat the question of the title: Why do economists continue to use theories, even though they are well aware that empirical evidence is in strong conflict with these theories? To answer this deeper question, we must dig deeper into the nature of economic theory itself. What is the function of economic theory, if it is not to learn the truth about how the economic system works? Once we explore economic theories within the historical contexts in which they arose, the answer becomes blindingly clear: economic theories serve to protect the interests of those in power. We provide a three examples of this below; for more, see ET1%: Blindfolds Created by Economics. The Marginal Product of Capital: All economics textbooks argue that the returns to labor and capital (wages and interest) are determined by the technology, encapsulated in the production function, and the operation of competitive markets. None of them mention that this is a concealed moral argument to . labor are determined by the workings of the market mechanism in a symmetric way, with exactly the same mathematical form, we can conclude that both parties receive just compensation for their input to production. Both capital and labor are paid in proportion to their contribution to the productive process. Once we realize that a moral argument is being made, it becomes possible to counter this on several different grounds. Anti-Textbook of Microeconomics provides a thorough discussion. One
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