why the classical theory of economics system failed
Answers
Explanation:
Atlantic Correspondent Richard Posner has good piece out this morning about British economists trying to explain to the Queen why economics failed so miserably to predict the financial crisis. He suggests, as many others have, that economists must admit they don't know everything when it comes to business cycles, and should refocus their efforts so to learn from their mistakes here. I think he's right, but I worry it won't help much.
Back in college I took a rather wonderful approximately graduate-level seminar called "Economics Meets Science Studies." The main purpose of the course was to examine the question of whether economics was more of a hard science or social science. By the end of the semester, I found the argument that economics was more like physics than anthropology completely unconvincing. (Though the course, ironically, counted towards my physics major, not my economics major.)
This view would anger many economists. Most generally believe that their discipline is more than a mere social science. After all, it involves lots of fancy math -- just like physics and chemistry. It also doesn't appear to involve as much mere documentation and interpretation as something like history. They believe that economic theory can use real world assumptions to derive legitimate predictions. I think they're right about very simple questions, but the more complex the system, the more I believe economics just fails.
It might be sacrilegious for me to admit this, but I am wholly unconvinced most macroeconomic theory can ever hope to make consistently accurate predictions. There are entirely too many variables, and people just aren't as rational as economists like to assume they must be. Here's an excerpt from Posner's piece that begins to touch on this assertion:
This failure was I think due in significant part to a concept of rationality that exaggerates the amount of information that people have about the future, even experts, and to a disregard of