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The Death of Economics

Paul Ormerod

posted on 15 January 2001

reviewed by Joe McCauley

"...there appear to be so many violations of the condition under which competitive equilibrium exists that it is hard to see why the concept survives, except for the vested interests of the economics profession and the link between prevailing ideology and the conclusions which the theory of general equilibrium provides." Ormerod, Pg. 66

In this book Ormerod, an economist, presents us with a scorching critique of orthodox, or neo-classical, economic theory. He criticizes the idea of 'equilibrium', widely believed by academic economists but found nowhere even approximately in real economic data. He argues that, in reality price levels are never determined by the matching of supply to demand. Real markets are always far from equilibrium, so that there are no clearing prices for assets or commodities. Said otherwise, the 'graphs' in Samuelson's famous textbook do not represent real data but are merely cartoons invented for inexperienced or uncritical students. Traders know that equilibrium does not prevail. Traders generally do not use orthodox economic theory in decision making.

Ormerod's summary of the neo-classical theory (which theory led to the emphasis in the west over the past 15 years to implement free market solutions regardless of circumstances) is concise and clear:

1. A free market competitive equilibrium is efficient, demand equals supply, no resources (including people) stand idle or unused. That is, Adam smith's invisible hand leads to the best of all possible worlds.

2. In equilibrium no person or unit can be made better off by altering resources without making someone else worse off (Pareto optimum). That is, redistribution of wealth will make things worse. Indeed, this is the religion of the far right in America, and elsewhere: In this phlosophy governments simply should not intervene at all (Greenspan and the Fed are unnecessary).

As is well-known, general equilbrium theory is based on the assumption of perfectly rational agents who foresee the future perfectly and all conform to the same picture of the future (pg. 89). Ormerod's message is that nothing could be further from economic reality than this picture.

Ormerod does a nice job, via presentation of empirical data, of demolishing the notion (beloved of governments) of the Phillips Curve, the idea that there is a simple relationship between unemployment and inflation (ch. 6). He shows that there is no such relationship in the data. He also argues that Adam Smith was interested in empirics and did not advocate a completely unregulated free market devoid of all moral principles, but that economic theorizing was 'highjacked' late in the last century by theorists who ignored empiricism altogether and instead tried merely to take over the physicists' notion of equilibrium, but without any idea of dynamics and nonequilibrium. Mirowski makes a similar argument about the lifting of the idea of static equilibrium from physics. Ormerod lambasts the tendency of academics to prove empirically meaningless theoems, to treat economics as a branch of mathematics rather than an empirical science. Also criticized is the hokey assertion by orthodox economists that the failure of real markets to be in equilibrium is due to governmental and other constraints, that a truly unregulated free market would approach equilibrium (i.e., the problem of unemployment is supposed to be solved by complete deregulation). The disaster of Russia is given by Ormerod as a good counterexample. The next examples of such disasters may be the entry of former E. block countries into the (price levels of) the European Union.

The text propagates some common misconceptions about deterministic dynamics, in particular about detreministic chaos. Here are a few examples: the author asserts that the behavior of a chaotic machine cannot be predicted accurately in the long run (true in nature, completely false mathematically). Analogs of phase plots (Poincare sections) are misinterpreted as showing evidence for stable cycles (elliptic points). Certainly, in contrast with what the author expects, there are no elliptic points indicated in the data that he shows (ch. 7). The search for unstable cycles would require data of high decimal precision and cannot be decided on the basis of merely staring at a scatter plot. 'Linear' is confused with 'mechanistic', as if chaotic and/or complex could not be mechanistic. Scientifically, we do not really know how to distinguish 'mechanistic' from 'organic'. Perhaps there is no real boundary in nature. These are, in context, relatively minor criticisms of a book that does a good job of emphasizing the flaws in neo-classical economic theory when compared with economic reality. --This text refers to an out of print or unavailable edition of this title.

Paperback - 256 pages No Amer edition (September 1997)

John Wiley & Sons;
ISBN: 0471180009;

Dimensions (in inches): 0.68 x 9.05 x 6.04

Amazon price: $13.56