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11/13/11

On faulty philosophy of economics

There is a vivid discussion of the 2008/2009 economic and financial crisis which often touches upon the failure of the mainstream economic theory to predict and describe major events.  This theory is actually a bunch of assumptions, sometimes mutually exclusive. There are common features, however, which are shared by all schools of economic thought. They do assume that economic agents (individuals or firms) have some freedom and can act according to their own rational or irrational choices. When these choices are not well coordinated, synchronized and balanced throughout a given economy slowdowns and even recessions are likely to happen.  In economic literature, these events are often introduced as shocks (to demand or supply).  The term “shock” is a euphemism of the physical realization of unknown psychological processes in the economy. Generally, the mainstream economics does not try to explain these shocks as a result of real processes.
We see an inherent problem in the conventional approach to economic processes. It skips the first and fundamental step which is a must for any theory. The basic assumption should be that economic agents do not have a free will and follow up only prescribed trajectories. This notion is supported by the observation of a “frozen” personal income distribution. The normalized income distribution is constant over time as obtained from the reports of Annual social and Economic Supplements to the Current   Population Surveys conducted by the Bureau of Census.
All in all, we assume that no economic agents can change the rate of real economic growth as expressed by real GDP per capita from inside the economy. There are no endogenous forces which can divert the economy from its predefined trajectory of inertial growth. (We do not consider here wars, pandemics and any economy-wide catastrophes.)  This system is also resilient to exogenous forces because the agents can react only the predefined way to any events. Then, the only driving force is the quantitative change in the distribution of agents. That’s why the influx of individuals is the most probable source of shocks to the economy. The outflow is stationary and cannot change the system. As a result, the evolution of real GDP per capita is driven by the number of young people entering the economy. And this is our fundamental model, which must be the basis for any model with mobile agents. For no clear reason, this model is rejected by the conventional economics. 
In classical mechanics, the most fundamental laws and models are first based on the assumption that all objects are identical and have ideal properties.  In physics textbooks, one operates with points, ideal spheres, perfect rigidity, constant coefficients, and so on. In reality, there are tangible deviations from the perfect world of classical mechanics, but all fundamental laws are always valid. Moreover, before one starts to inspect the real world s/he has to learn classical mechanics with its perfect relationships. The mainstream economics has made a trivial philosophical mistake and missed the most fundamental part of scientific approach. We have filled this gap with our book “mecħanomics. Economics as Classical Mechanics. ” It resolves the most urgent problems of economics as a science and provides a solid basis for the further development.  We use only quantities of economic agents whose only property is to exist.  In that sense they are similar to ideal rigid spheres and do not have freedom.