The economy is one of the most important and talked about subjects in the world. It potentially affects the well-being of hundreds of millions of people around the globe. For centuries now, man has attempted to understand and predict the movement of this great beast. Adam Smith, the grand father of all economic science, put forth the notion of the invisible hand which will always help the economy find the equilibrium between supply and demand of any market. It’s been all down hill from there.

The economist is the weatherman of the economy. These are probably the only two jobs in the world that allow you to be wrong on a regular basis and still be asked to come in to work the next day. You may find this amusing but economist's mistakes have a large impact on our lives. Inflation forecasting, gross domestic product(GDP) forecasting, unemployment figures, all have an impact on your currency, interest rates and investments just to name a few. Since these figure or estimates are usually wrong by a large margin, a direct impact is seen on, for example, the imports you consume, the vacation you planned abroad and house you may have bought. To what do we owe this flagrant incompetence? Simply stated, the models that are developed by the most influential economists of the world are, for the most part, incoherent.

The two major schools of thought, Keynesians and Classics, put forth models that explain only part of the reality. In some cases, these models do not represent any part of reality. The economic models look theoretically perfect since their author knowingly constructs hypotheses that are flawed. For example, one of the most important models of the school of thought of the new classic assumes that the prices are completely flexible. In other words, the prices of goods can change on a regular basis, up or down and guaranty the equilibrium between the demand and supply of labour. Moreover, the only unemployment that exists in the modern economy is voluntary. In other words, all the employed people of the world don’t have a job because they don’t want to work for the correct market wage. In this model, they also assume that production or output is instantaneous. This model is taught in all the universities in the western world. The worst part about it is that most professors will try to past it off as reality.

In a recent article, the former Federal Reserve vice chairman, Mr. Alan Blinder, questions the foundations of macroeconomics. He believes that most of the core beliefs in economics are impossible to prove in an empirical study. The only two models in which the empirical test has worked are the Phillips curve (relates to wage or price inflation) and the Okun’s law (relates to output and unemployment). However, these models are showing signs of divergence and as time passes, these models will become a thing of the past.

In the mean time, what should decision makers rely on for their economic policies? An answer to this question would be a welcome addition to humanity. Unfortunately, this article does not have that answer--only questions about a profession that does not seem to have any purpose in our society.

Copyright © 1999 Philippe Duford All Rights Reserved

Philippe E Duford is a student at Ottawa University majoring in Economics and Political Science. He is a proud Canadian who loathes people who spit in the eyes of unity. He considers himself a realist in every sense of the word.

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