Delusional Economics
In Have Economists Gone Mad?, Paul Ormerod points out a breakdown in economic thought. He is agog at a recent article by Michael Woodford in an economics journal, which says in part
"it is now widely agreed that macroeconomic analysis should employ models with coherent intertemporal general equilibrium foundations". What does this mean in English?Ormerod is beside himself.It means (a) people and firms act in a rational, coherent manner; (b) they assess coolly and rationally the future consequences of decisions they take now; and (c) the key driving force underlying the economy is a tendency for it to revert to equilibrium.
He writes:
Yes, rub your eyes. The evidence is now so overwhelming that none of these statements are true that it is hard to see how they could even have been written.He is calling out absurdity. Conventional model-driven wisdom is now stupidity. Perhaps economists are merely in denial. Let's hope they get over it.But this madness is not just confined to university seminar rooms. These sorts of models -- so-called 'dynamic stochastic general equilibrium models' -- have become more and more influential in recent years in central banks and treasuries around the world. No wonder the policymakers received such bad advice!