![]() This agent is uncertain about the future (the “dynamic” in DSGE means “over time” and “stochastic” means “uncertain”) but can nevertheless make perfectly rational choices about what to consume and produce along every possible path the economy might traverse in the future. In these models’ archetypal versions, macroeconomic outcomes arise from the decisions of a “representative agent,” a single participant in the economy exhibiting typical preferences. Throughout the twentieth century, mainstream and heterodox economists alike produced a profusion of attempts, none of which was entirely satisfactory.īookstaber argues, correctly in my view, that the standard approach of neoclassical economics, embodied in Dynamic Stochastic General Equilibrium, or DSGE, models, can never account for financial crises. It’s only fair to mention, though, that the failure to develop such a theory wasn’t for want of trying. ![]() For Jevons, among the key things economic theory needed to understand and predict were the crises that were already a well-established feature of the capitalist economy.Īs Bookstaber points out, contemporary economics might fully reflects Jevons’s mathematical approach but it has largely abandoned his search for a model of the business cycle. The key player here is William Stanley Jevons, who sought to place economics on a firm mathematical foundation. If I could agree so completely with Bookstaber’s diagnosis, but disagree so thoroughly with his proposed remedies, are the problems simply insoluble?Īfter a brief scene-setting summary of the ideas of the great classical economists Adam Smith, John Stuart Mill and Karl Marx, Bookstaber’s account starts in earnest with the rise of neoclassical economics and mathematical formalism in the late nineteenth century. Moving on to his proposed alternative, though, I began shaking my head, at first occasionally, then more and more. As I read his critique of current economic practice, I nodded more vigorously. With Bookstaber’s pithy opening summary of the mathematisation of economics in the nineteenth century, I was nodding in agreement. ![]() The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interactionīy Richard Bookstaber | Princeton University Press | $55.99Īfter reading Richard Bookstaber’s account of the failure of mainstream economics to predict financial crises, it struck me that an observer might have predicted the contents of this review by observing the movements of my head. ![]()
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