The mechanistic approach to economics has failed. We need to embrace creativity

Very thought-provoking piece by larry Elliott in today's Guardian. He considers whether we are on the brink of a 'depression', concludes that we just don't know and points the finger at economist who have come to rely on mechanistic models with flawed assumptions. 'One reason we are in this mess is that we assumed far greater foresight than actually existed. All the fancy models purporting to show only a minuscule risk of financial blow-out were flawed. They assumed the complexity could be captured by mathematics and pseudo-science. One silver lining to the storm cloud over the global economy is that there will now be an overdue revolution in how we do economics. Already, the cutting edge of the profession is looking to other disciplines - biology and psychology in particular - to explain why models that work in theory come a cropper in practice.' He draws on a new book by Richard Bronk to support his view. 'As Richard Bronk notes in his fascinating new book (The Romantic Economist): "Standard economics assumes that economic agents are perfectly rational; that is the basis of its predictive equilibrium-based models. Modern versions generally allow for certain types of information problem and market failure, and recognise that institutions and even history play a role; but they still assume that these factors do not call into question the underlying model of agents as rational utility maximisers within those constraints... There have been many economists down the years who have expressed scepticism about reducing their discipline to a mechanistic subject. Malthus told Ricardo to be wary of becoming too attached to abstract hypotheses; Schumpeter talked of creative destruction; Hayek saw the market as a voyage of discovery; Keynes stressed the importance of "animal spirits".

The models rely on past behaviour for their predictive ability and 'What we now know is that even the very recent past is an unreliable guide to the future; that risks are not distributed in a linear and predictable way; that human beings do not always act rationally even when they think they are; and that shocks are much more likely than economic orthodoxy would suggest. All of which explains why it is virtually impossible to say where the global economy goes from here. '

Read the article (Link) and consider reading the book!

How does it make you think about the models we use in economics?