Mainstream Macroeconomics and Modern Finance Do Not Work in the Fields of Economic Policy and Finance

During the Great Financial Crisis of 2007-08, the financial skyscrapers fell down. The general public blamed the greed and irresponsibility of bankers for the catastrophe. Politicians and academics in economics and finance joined in on the banker bashing as it distracted attention from their own contribution to the mess. I do not want to whitewash the bankers. But in this book I shall make the case that mainstream macroeconomics and Modern Finance deserve a fair share of the blame. They produced theories which may have been internally consistent, but not applicable to the real world. Nothing would have happened, had they remained a pastime for the residents of the ivory towers. But they broke out and guided decision making in economic policy and financial activities.

What is to be done now? In this book, I argue that practitioners in economic policy and the financial sector need to go back to practical knowledge, based on common sense and experience gained from trial and error. Physical science can be successfully applied in construction, but mainstream macroeconomics and modern finance do not work in the fields of economic policy and finance. What is then left for economics and finance as sciences? Economics and finance are social sciences and follow rules that are different from those of natural sciences. They are unable to derive reliable quantitative impulse response functions for individuals, groups or societies as a whole in the way natural sciences do for objects. But they can analyze and describe the patterns of behavior of individuals, groups and societies. Based on the recognition of such patterns, they can make qualitative predictions. In this book, I shall argue that the Austrian school of economics provides a highly useful base for rethinking macroeconomics and finance from a sociological perspective.

--Thomas Mayer, introduction to Austrian Economics, Money and Finance, Banking, Money and International Finance 8 (London: Routledge, 2018), Kobo e-book.