The Antiquated Public Paradigm of Economics

Robert Waldmann at Angry Bear goes on a considerable rant about the way that the state of contemporary economics is represented (“What’s Wrong with Economic Theory as Presented to the Public?,” 3 October 2008). It turns out that everything you may have learned in Econ 101 and 102 was representative of the state of the science circa 1950 and that things have become much more complicated since then.

The conclusions of economic theory as presented by many or perhaps most economists do not follow from current economic theory, but rather from the 50 year old efforts at mathematical economic theory.

… the worse problem is that economists who are also libertarian ideologues are lying about the current state of economic theory, not only its very weak scientific standing, but the fact that, even if it were all absolutely true, their policy recommendations do not at all follow from current economic theory.

You mean to tell me that those hoary old supply-demand curves, the very paradigm of economic thought, have been replaced by game-theoretic concepts like Nash equilibrium?

Part of me reads this and thinks “Great! We’re free. We are no longer bound in our policy aspirations by the dictates of the dismal science!,” but then I think that economic policy is way too important for us to just do what we will, without any ability to anticipate probable outcomes or any concern therefor. Surely some portion of what goes on in at least some sectors of economics is on solid ground, right? They sure act like it is at the Federal Reserve or the Congressional Budget Office or the Office of the Chief Actuary of the Social Security Administration.

It would be nice to know Mr. Waldmann’s assessment of the various areas of economics. It would seem that the general equilibrium theory of the microeconomy, any simple notion of market clearing and the possibility of straightforward optimization are all out. Perhaps the macroeconomy is easier? Perhaps social scientific descriptions work better over aggregate social phenomenon? Or perhaps the Federal Reserve Chairman is L. Frank Baum’s proverbial Wizard of Oz, just eyeballing it, but dazzling us munchkins with his light and numbers show?