INET published a paper, written by John Kay, that deals with the relationship between economics and the world we live in. The Map Is Not the Territory: An Essay on the State of Economics spells out methodological critiques of economic theory in general, and of DSGE models and rational expectations in particular.￼INET forwarded Kay's paper to a handful economists and invited them to respond. Here we offer a perspective by Paul Davidson, Editor of the Journal of Post Keynesian Economics, and Visiting Scholar at the Schwartz Center for Economic Policy Analysis.Davidson takes issue with the “classical” axioms, in particular with what he calls the "ergodic axiom": the notion that the future is predetermined by the past and present state of affairs, that past and knowable probability distributions govern future events. He praises rigor, consistency, and the deductive approach, but says the classical axioms are inapplicable to the world we live in: “The financial crisis of 2007-2009 should have been sufficient empirical evidence to indicate that the axiomatic basis of the mainstream theory needs to be replaced.”
Read Davidson's response to John Kay at INET.
(h/t Edward Harrison)