Tag Archives: Ken Arrow

Neoclassical economics and the failure of predictions



In my book “Science and the Economic Crisis”  I dedicate a chapter to discuss the roots of neoclassical economics and the comparison of its predictions against reality. In summary my thesis is the following :

1. Predictions in science are used to test theories, that is, the hypotheses and the assumptions underlying these theories;
2. There has been a failure in the prediction of all recessions that occurred from 1989 to 2012 (see here and  here). But the most spectacular failure occurred for the 2008 crisis (which was instead predicted by some economists belonging to different schools than the neoclassical).
3. Models used to make predictions are based on the neoclassical theory;
4. Neoclassical economics rests therefore on hypotheses and assumptions that are not consistent with reality and for this reason it is a pseudo-science;
5. Indeed neoclassical economics has given support to the idea that free markets should naturally finds an equilibrium state and by deregulating and liberalizing the markets would increase the efficiency of the economic system. On the contrary, by doing so one has created the conditions for the unstable regime that gave rise to the crisis. Continue reading Neoclassical economics and the failure of predictions