Tuesday, July 4, 2017
Book Review: 'The Rise and Fall of Homo Economicus: The Myth of the Rational Human and the Chaotic Reality' by Yannis Papadogiannis
Review by David Wineberg
You might think enough has been said about the 2007 financial crisis, and economists’ shameful role in it. Yannis Papadogiannis has spent two decades covering them as an economics reporter, and he seems to think they need to be hit over the head with the evidence. Because they’re just continuing on their merry way. His book is an evenly-paced, logical and engaging condemnation of the insularity, arrogance, and willful blindness of the profession. Economics pretends to be science, while ignoring the principles that make up a science.
It is all about pride and not looking back. Papadogiannis says no school of economics has ever offered a course like “The History of Financial Crises” or “Failure and Economic Policy”. All schools of economics teach and disseminate certainties, he says. Ironically, certainties are the only thing we can be certain there are none of in economics.
After examining the history and philosophical beginnings of economics, the book racks up failure after failure, both in the theory and in the practice. Economists agree on very little. Mountains of theories accurately predict the past without being applicable to the present or the future. Once in a million year disasters have been occurring with alarming frequency lately. Natural disasters are not accounted for. Luck plays no part.
The biggest false assumption is that people are predictable. But people are not “rational”. Papagogiannis spends an entire section reviewing the social science literature showing how we make incorrect assumptions and decisions, time and time again. That we will continue to do so is the only conclusion we can possibly draw from it all. Yet economics continues to build from the base that all our decisions are rational, well thought, and evidence-based. Nothing could be farther from the truth. Like markets being fair and rational, Homo Economicus is fantasy.
It boils down to the realization that economics should be a behavioral science, not a physical science. But that is the opposite of what is happening. Despite the complete and utter failure of neoclassical models, economists have simply battened down the hatches and moved farther into the mathematical and theoretical, making even more complex (yet glaringly incomplete) models, incomprehensible to all but themselves. They don’t work, they can’t work, and “improving” them after they all totally failed to predict the gigantic financial crisis is doomed to fail. They are busy fertilizing the next crop of failures now.
Editor's note: This review has been published with the permission of David Wineberg. Like what you read? Subscribe to the SFRB's free daily email notice so you can be up-to-date on our latest articles. Scroll up this page to the sign-up field on your right.