The Limits of Conventional Economics

Abstract

The last century has seen the ascendancy, indeed intellectual dominance, of neoclassical economics (NCE, also known as market or Walrasian or University of Chicago or, Washington consensus or, occasionally, neo welfare economics). The basic neoclassical 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 with actual human behavior. Consequently the NCE model is unrealistic and a poor predictor of people’s actions, as an array of experimental and physical evidence and recent theoretical breakthroughs demonstrate. 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 policy 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 or do what most people believe they do is rather slim and contradictory. Thus this chapter is a strong critique of economic theory, in this case NCE [1].