The original study of economics was "political economy," which understood the economy as inseparable from politics, law, and history. The late 19th-century rise of neoclassical thought deliberately separated these fields, treating the economy as a natural, pre-political system, akin to a law of physics like gravity.
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The post-war dominance of mathematical economics was not a natural evolution. It was heavily influenced by US Department of Defense funding, which employed mathematicians and engineers to model weapon systems. This approach was then applied to the economy, reframing it as an optimized machine populated by rational "cyborgs," divorced from social reality.
A key measure of philosophy's historical success isn't solving its own problems, but rather birthing new academic fields. Disciplines like mathematics, physics, economics, and psychology all originated as branches of philosophical inquiry before developing into their own distinct areas of study, a point Bertrand Russell made.
Economic theory is built on the flawed premise of a rational, economically-motivated individual. Financial historian Russell Napier argues this ignores psychology, sociology, and politics, making financial history a better guide for investors. The theory's mathematical edifice crumbles without this core assumption.
Peter St-Onge argues that microeconomics, based on classical supply and demand, is largely true and useful for business. In contrast, he claims macroeconomics is dominated by Keynesian theory, which justifies government intervention and often functions as propaganda rather than objective science.
Adam Smith is often miscast as the originator of laissez-faire economics. In reality, his work viewed markets as embedded in human-created institutions like law and power structures, a perspective closer to institutionalism than modern neoclassical theory. The phrase "invisible hand" appears only once in his 800-page book.
The idea that government should "stay out of" markets is a flawed model. The government is an inherent economic actor, and choosing deregulation or non-intervention is an active policy choice, not a neutral stance. This view acknowledges politics and government are inseparable from market outcomes.
The debate between liberals and conservatives over state intervention is based on a flawed premise. Both sides accept the idea of a pre-political market that sometimes "fails." The reality is that the market is always a product of political and legal decisions. The real question isn't *whether* to intervene, but who benefits from the current structure.
Politicians often propose policies based on ideals without respecting economic realities, like aerodynamics in race car design. Ignoring factors like capital mobility or supply and demand leads to predictable system failure. Effective policy must be grounded in these "physics" rather than wishful thinking.
For a period, a perverse norm developed in economics where the 'better' academic model was one whose theoretical agents were smarter and more rational. This created a competition to move further away from actual human behavior, valuing mathematical elegance and theoretical intelligence over practical, real-world applicability.
A core methodological flaw in neoclassical economics is its deductive approach: it builds models based on axioms (e.g., perfect rationality) that don't reflect reality. In contrast, institutional economics is inductive, constructing theory from evidence-based observation. This explains why neoclassical models failed to predict the 2008 crisis and why their proponents refused to change them afterward.