Former Nature and New Scientist editor Buchanan (The Social Atom: Why the Rich Get Richer, Cheaters Get Caught, and Your Neighbor Usually Looks Like You, 2007, etc.) offers his take on why economic theory breaks down when it comes to making predictions.
The author focuses on the increasingly evident failures of contemporary economic theory to offer either useful or timely predictions of future problems. He proceeds from the assumption that “merely predicting what is possible and likely can be hugely valuable, giving us warnings of specific dangers.” He compares the failures of the still-dominant school of economics—which failed to predict the 2008 crash—with weather forecasting. Prior to World War I, weather forecasting, as a predictive discipline, was in roughly the same shape that economics is in now. Modern predictive capabilities, including tornado and hurricane warnings, still stem from work done in the late 1950s. During the same time period, economics was going in the opposite direction, elaborating a theory based on self-stabilizing equilibrium. Buchanan summarizes the theory as it developed from the work of Kenneth Arrow and Gérard Debreu and shows how mechanisms associated with positive feedback were ignored. He provides some intriguing documentation on how Nobel-winning economists like Milton Friedman and others have resorted to verbal games to defend “unrealistic assumptions.” Buchanan also features other economists who reject empirical data that doesn’t fit their theoretical models or represent “the reverse attitude that rejects theories that do fit the data if they don't fit the theoretical orthodoxy.”
The author's stimulating deconstruction of contemporary economic theory parallels a treatment of major positive developments in physical sciences and pays due respect to the functions of government and law.