Abstract
Economists used to present themselves as rigorous social scientists and they were recognized as such by the hard sciences. In the early 2000s, macroeconomic theory was perceived as quasi-complete, concerning, for instance, the monitoring of business cycles. America’s subprime credit crisis, which went global, called this into question: mainstream economists had been unable to predict the coming crisis. This chapter provides a historical analysis of the epistemology and methodology of economics and argues that the reductionism typical of economists has failed: the profession had been proposing a coherent, but fictional, analysis of contemporary capitalisms. Similarly, mathematical finance went wrong in postulating that modern statistical techniques could extract accurate forecasts from the past, whereas market-led capitalism is, in fact, moved by storytelling, in an attempt to reduce uncertainty and complexity.
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Notes
- 1.
This is the name given to the early 2000s when the new monetary policy and financial innovations delivered growth and a low inflation rate simultaneously, unlike the previous period when the control of inflation had been associated with growth slowdown (Blanchard 2008).
- 2.
- 3.
This is an abbreviation for quantitative analysts. Usually, these quants came from physics; some of them have shared their experience in books written for the general public (Derman 2007). Some statistical physicists address stern critiques to financial economists for their lack of rigor (Bouchaud 2008).
- 4.
The second is the Correspondence Principle between comparative statics and dynamics.
- 5.
This criterion relates to static efficiency, i.e. the full utilization of resources to better satisfy consumers: improving one individual’s situation should not mean making another individual’s situation worse (but it does).
- 6.
By contrast, when some powerful actors have a significant influence upon price formation, they are said to be price makers. Monopoly, i.e. the supply by only one agent or firm is an extreme example.
- 7.
This means that the production is strictly proportional to the volume of factors of production involved (by contrast with many productive processes which do exhibit increasing returns to scale, i.e. when output increase exceeds proportional change in inputs).
- 8.
Transactions take place during each period of time but in the first period actors have to determine what their decisions will be in terms of supply/demand in response to any possible event occurring during the successive period. The theory assumes that the contingent markets are complete for each good. This hypothesis is not fulfilled in contemporary economies in spite of the creation of a significant number of future markets, mainly for natural resources and financial instruments.
- 9.
- 10.
Each of these issues relaxes one of the seven conditions that are required for the existence of an equilibrium in GET.
- 11.
The reference is from the French edition (2010); the translation is the responsibility of the present author.
- 12.
Assuming a Gaussian distribution, the collapse of the Wall Street stock market is only likely to happen once in a century. In the second distribution such a collapse is liable to occur every decade.
- 13.
This famous and long-lasting model was proposed by Hicks (1937) as a pedagogical formalization of some mechanisms pointed out by Keynes. A macroeconomic equilibrium is at the intersection of the investment-saving (IS) and liquidity preference-money supply (LM) curves, where the interest rate is the key variable. Assuming the price level to be constant in the short run, this model explains the evolution of the national income and by extension involuntary unemployment. This tool generated the hope of a complete control of business cycles by monetary and fiscal policy.
- 14.
The reader of General Theory is surprised at the variety of mechanisms and potential modeling inspired by the various chapters. It is even difficult to find a coherent justification of the IS/LM models , proposed by Hicks: the macroeconomic equilibrium equalizes investment and saving, demand and supply of money in a totally deterministic framework.
- 15.
Real Business Cycle theory.
- 16.
From 1984 to 2007, the author opened his doctoral seminar with a comparison of the OECD’s Economic Outlook forecasts published in June on the basis of data collected until the previous month of January with the observation available by November of the same year. None of the forecasts were able to anticipate a turning point, either a recession or recovery.
- 17.
In the pharmaceutical and biotech industries, between 10 and 15 years are required to go from the discovery to the delivery to the healthcare system and the investments required are higher and higher. This explains the ups and downs of the valuation of biotech start-ups because the time of innovation is far longer than the time of finance (Boyer 2013).
- 18.
Assessing the relevance of this contemporary strategy is beyond the scope of the present chapter. The interested can compare the hopes raised by the Cowles Foundations (1952) and the reality of everyday applied econometric research (Ziliak and McCloskey 2007). The reevaluations of the ambitions are quite similar for empirical and theoretical approaches (Boyer 2012). It is interesting to stress the convergence between the sociology of financial markets (MacKenzie 2006), heterodox analyses of financial markets (Orléan 1999) and the search for micro-foundations of capitalism (Beckert 2015). All these approaches are currently applied to the core issue of value and price (Beckert and Aspers 2011; Orléan 2012, 2014). As pointed out by Bourdieu (2005), goods and pricing are social constructions that should be formalized as such.
- 19.
This was the term invented by Keynes in order to stress the subjective and contingent formation of pessimistic or optimistic expectations about the future of the economy. “Animal spirits” are presented as an alternative to rational choice theory, unable to deal with radical uncertainty and the emotional component of any economic decision -making (Akerlof and Shiller 2009).
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Boyer, R. (2020). From Economics as Fiction to Fiction-Led Capitalism. In: Coste, JH., Dussol, V. (eds) The Fictions of American Capitalism. Palgrave Studies in Literature, Culture and Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-36564-6_2
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