Economics Confronts the Economy.

Author:Lee, Frederic S.
Position::Book review

Economics Confronts the Economy, by Philip A. Klein. Cheltenham, UK and Northampton, MA: Edward Elgar. 2006. Cloth: ISBN 1 84064 650 0. 75.00. [pounds sterling] 396 pages.

Over the past few years arguments have been made claiming that mainstream economics has fractured and that what is now the frontier of mainstream economics is quite different from neoclassical economics. This position is advanced with a conviction of truth that is normally associated with true believers; and heterodox economists who argued otherwise are dismissed, their submission to heterodox journals rejected, and their voices silenced. Philip Klein openly challenges this argument by boldly stating that the neoclassical conception of economics, with the invisible hand, markets analyzed in terms of supply and demand curves, competitive markets used for policy benchmarks, is mainstream economics and that it dominates economic discourse. Specifically, he argues that neoclassical economics is concerned with explaining not economic events in the real world but supposedly stylized facts in a model-simulated world populated by rational economic agents. This form of economic analysis does generate model-based knowledge, but does not and cannot generate any useful knowledge about the real world. Klein goes on to note that the problem with neoclassical economics is not due to its dependence on formalism and the use of mathematics but to its theory and its proclivity to ignore the real world.

Klein applies his arguments to microeconomics, macroeconomics, and the public sector in light of public policy. That is, he argues that neoclassical economists have trivialized economic theory by making it useless for contributing to the making of public policy and thereby making public policy incapable of affecting the economy. For the last fifty years, according to Klein, progress in neoclassical microeconomics consisted of developing increasingly unrealistic models that severed the link between theory building and improving public policy; in fact, he argued, the objective of the developments in neoclassical microeconomics was to demonstrate that public policy with regard to market concentration and power, consumers, workers, and equity was ineffective or worse and hence should be eliminated. The trivialization of macroeconomic theory involved the dismissal of full employment as an objective of public policy through the introduction of Non-Accelerating Inflation Rate of Unemployment...

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