The introductory article states that too often, economists are blamed for not being able to foresee major economic events, such as the Global Financial Crisis. However, the ability to predict such events is a poor barometer of the usefulness of economics, as the point in economic theory is to explain how the world works. Many theories that were created years ago explain current events. Keynes’ fiscal multiplier, for example, explains the struggles the euro-zone faces, such as the “self-defeating pursuit of austerity”.
However, there are many problems with economic models. For example, the body of economic theory is not complete, as there are still gaping holes in the understanding of financial markets, for example. The already existing theory, as well, is not in its final form. It is constantly being revised and rewritten.
As well, over-reliance on mathematical models makes economic theory less credible. According to the article, “models should be a means, not an end”. Thus, anyone treating models as the end would be disappointed by their inability to accurately predict economic events.
Economics is very slow to accept revolutionary models that go against the grain. As a result, the evolution of economic thinking is sluggish. Mr. Akerlof’s paper on information asymmetry, called “The Market for Lemons”, was met with great resistance by several journalists who stated that if his theory were correct, “economics would be different”.
Still, none of this diminishes the importance of economic theory. While it may not be able to foresee future events accurately, theory is needed in order to explain the world around us. This series will thus elucidate the importance of economic theory, and follow how these groundbreaking theories redefined economics entirely.
The order of the articles is:
1. Information asymmetry
2. Minsky’s financial cycle
3. The Sloper-Samuelson theorem
4. The Keynesian multiplier
5. The Nash equilibrium
6. The Mundell-Fleming trilemma