Why Are So Many Economists Wrong?

The question is posed by a commentator on the last post, with respect to the New Keynesian N. Gregory Mankiw. The answer is that he, like the New Classical and monetarist economists, starts from fundamentally wrong assumptions about the world and the economy. In fact, these assumptions are basically the following axioms:

(1) the ergodic axiom
(2) the neutral money axiom (at least neutral in the long run)
(3) the gross substitution axiom.

These axioms are all wrong. A mainstream economist would have to reject them and start from scratch to come to the same conclusions independently as Keynes or Post Keynesians.

For why these axioms are wrong, see Paul Davidson, Financial Markets, Money, and the Real World (Cheltenham, 2002), p. 43ff.

As I noted in the last post, these are the traits of real world capitalist economies:

(1) a monetary production economy,
(2) fundamental uncertainty;
(3) subjective expectations;
(4) contracts which do not normally allow flexibility if economic variables change;
(5) inflexible or “sticky” wages;
(6) money with a zero or very small elasticity of production, and
(7) money and financial assets with zero elasticity of substitution with producible commodities.

If someone starts from principles that do not describe the real world, then one’s deductive arguments will go badly wrong and will not apply to the real world.