Pursued Economy

CHAPTER 10Rethinking Economics

Rethinking Macroeconomics

Macroeconomics is still a very young science. It began when John Maynard Keynes, who recognized the existence of fallacy-of-composition problems in the macroeconomy, conceived the concept of aggregate demand in the 1930s. Only 90 years old, it is like a toddler when compared with centuries-old disciplines such as physics and chemistry. Nicolaus Copernicus deciphered the workings of the solar system in 1530, and Isaac Newton discovered the universal law of gravity in 1687. These monumental discoveries took place 250 to 400 years before Keynes developed the concept of aggregate demand in 1936. As a young science, economics has been able to explain only a limited range of economic phenomena. Its youth also makes it prone to fads and influences.

The profession's immaturity was amply demonstrated when only a handful of economists saw the post-2008 Great Recession coming, and even fewer predicted how long it would take to recover from it. Most also failed to anticipate that zero interest rates, massive quantitative easing (QE), and inflation targeting would fail to bring about inflation within the forecast time.

These fundamental failures stem from the fact that most macroeconomic theories and models developed during the last 90 years assumed that private-sector agents always seek to maximize profits. For that to be true, it was implicitly assumed that attractive investment opportunities would always be plentiful and that private-sector ...