I am hoping to publish this essay in my school newspaper. I would appreciate any useful edits. My hope is to annoy the econ department enough to have a professor respond to me.
Nick Sovich responded to my original letter claiming that modern economists are generally bullish on the U.S. This statement is true, most economists are, if not bullish, then not close my position, which is the imminent collapse of the American financial system. This fact, however, obscures the fact that modern economics is based on a façade. I could respond with a technical piece explaining point by point why his analysis was wrong, but unfortunately, that would take more space than I have. Instead, I will question the methodology of neo-classical economics and by extension cast doubt on the theories they formulize based on the methodology.
Modern economics is based on scientism, the belief that the methodology of the natural sciences is universally applicable. The problem with this approach to economics is that economics is fundamentally different from physics. In physics, we do not know the underlying cause of phenomena. We hypothesize, experiment, and repeat devising ever more clever experiments to ensure that everything except the variable being tested is held constant. This allows us to formulate theories describing the causal relation between entities.
This approach is entirely untenable with respect to economics. In economics we do know the underlying cause of phenomena, that is, people act in order to satisfy ends. Economics is the analysis of human action under scarce resources. In physics, everything not being tested must be held constant. In economics, there are no known constants. Different people react to the same situation in different ways, while the same people react to the same situation at different times in different ways. People also act differently when they know they are being observed. An undergraduate aware that his professor is watching will act differently than if he expects his action to be free from judgment. This makes experimentation in economics impossible because constants cannot be controlled and the results can never be extrapolated to people unobserved.
If the traditional scientific method of experimentation is inappropriate for economics, what is the appropriate method? Methodological individualism, the study of individual action through introspection is the appropriate method for understanding economics. Because the axioms are undeniable, to deny the axiom necessitates a logical contradiction (denying that one acts is an action in and of itself), all deductions from the axiom are true as well.
At the beginning of the semester my economics professor said that there are no economic truths. Though some modern economists will deny this, it necessarily follows from a positivist approach. This claim is false. For example, both parties of any trade ex-ante expect to benefit from said trade. If they did not expect to benefit, they would not partake in the trade.
Another deduction from the axiom of action is the law of marginal utility. Classical economists could not explain why bread was less valuable than diamonds. Bread, being necessary for the continuation of life is seemingly more valuable than diamonds, a luxury good. What the classical economists failed to realize, is that no one trades the class of bread for the class of diamonds. People exchange a definite amount of bread for a definite amount of diamonds. That is, people do not value things in classes, but except in specific marginal amounts.
Another deduction from the axiom of action is that people have a time preference. All other things being equal, people prefer things in the present against the future. If there was no time preference, then people would not act, because any state of affairs the action brought about would be just as desirable if the action were postponed. Because the result of the action was not desired at a specific time, the action could be postponed indefinitely. But the fact that people do act reveals this contradiction. Only from the fact that people have time preferences can we explain properly interest rates.
In short, modern economics has brought this crisis on us. It appealed to the political class as a justification for increasing government budgets and debts. It also appealed to the general populace because it promised something for nothing. The one possible benefit from the coming crisis is that is should conclusively demonstrate the hopelessness of mathematical models as a way to understand human behavior.
