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  • Writer's pictureSergio Focardi

Economics can no longer accept methodological errors.

Economics is not a law of nature, but it is a theory that describes human artefacts, the economies. As a consequence, economic theories must change when the real economies change. But mainstream economics has not been able to follow the evolution of economies that have progressively become evolving complex systems.

In the last four decades, mainstream economic theory has produced idealized models. These models assume that economies output one final good used for consumption or capital and that there is a simple relationship between capital, labour and output, the Production Function. In addition, they assume dynamics is given by rationality and optimization of agents endowed with rational expectations.

The adoption of these unrealistic assumptions has produced poor economic predictions. Economists have accepted that economic theory can only make gross approximations and have focused instead on fine theoretical details. Economics have evolved into a highly sophisticated mathematical theory.

It is time to change the methodological point of view of economics. Economics should be able to explain basic facts and be ready to change if predictions are far from reality. We cannot accept an economic theory that pretends to represent the quantity of output and capital, given the level of heterogeneity and innovation of goods; that ignores qualitative changes and qualitative growth; that ignores complexity and its consequences; that ignores the fundamental role of money. We risk accepting a gross misrepresentation of economic phenomena and poor decision-making.

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