Europe’s Impossible Dream

by Paul Krugman

July 20, 2015

http://www.nytimes.com/2015/07/20/opinion/paul-krugman-europes-impossible-dream.html?ref=international&_r=0


Most academic economists continue to make the wrong-headed and arrogant assumption that there is a "science of economics", separate and apart from politics and other social sciences, with immutable scientific "laws", which unfailingly govern how a society and its economic activity will develop.

If you want to talk about "fantasy economics", today's mainstream academic economics is a prime example. Based as it is on largely false assumptions of "rational, fully informed decision making", it pretends to derive nicely behaving demand curves, and from that derives the myth of "self-correcting, self-optimizing" economics. This myth could be excused in the times of Adam Smith and the "Age of Reason" movements around the same time. Today there is overwhelming evidence that only a relatively small subset of human decision making is based on rational thought and full information.

The "fantasy" is even worse for macroeconomics, which assumes that individual demand curves can be aggregated to form a "market demand curve". Efforts to prove this resulted in the Sonnenschein-Mantel-Debreu (SMD) theorem, which actually disproves that adding up demand curves results in a well behaved Market Demand Curve.

What academic economists refuse to accept is that "economics" does not exist in a vacuum outside politics and other social sciences. The EU and Euro are primarily political projects; they will persist. Even today most Greeks want to stay in the Euro because they see its benefits.