Tuesday, February 27, 2007

Robert Solow's review of Duncan Foley's Adam's Fallacy: A guide to economic theology is a great essay (in two   parts) full of interesting insights into the limits of economics. Here's a quick excerpt on how a model-based view gets morphed into a monstrosity:

The representative-agent device has been adopted by a significant, perhaps dominant, school of thought known as real business cycle theory, and it is applied to a problem of everyday life where it can do a lot of damage: the theory of those irregularly alternating states of affairs we call prosperity and recessions. The representative-agent device, by simply assuming away the more or less obvious differences in desires, expectations, and beliefs among groups of consumers, investors, workers and business firms, manages to convert the business cycle from a (large or small) pathology of the economic system into a sort of optimal adaptation to unforeseeable disturbances. Thus, a recession is seen as the 'rational', even inevitable, market response to an unforeseen event, not a possibly preventable reaction to excessive capital investment or financial speculation.


  1. Anonymous said...


    "Maybe it should be called Duncan’s Temptation." says Solow.

    It is pretty long. Need to read it.

    thanks for the link.