Robert Lucas is at is again. The invisible hand will return the economy to equilibrium at full employment to the degree that it is allowed to operate by eliminating government interference. And as Lars points out, without a shred of evidence in the face of massive failure of that paradigm to foresee the crisis, which it explains as either resulting from governmental intervention or an unforeseeable shock.
The presumption of equilibrium in neoclassical economics is derived from a 195y century view of physics that contemporary economists have attempted to save using DSGE. That is is say, the assumption is that equilibrium is the guiding principle in analysis of "free" markets and distribution by price discovery.
This is reminiscent of past presumptions that affected thought in the West. The Greeks had that cosmos (order) is imposed on the original chaos (randomness) by logos (rational principle or cause – Greek αἰτία). The Greek term logos is the root of English "logic." The ancient Greeks held that the universe (cosmos) is rational. Logic is the rational structure underlying human cognition of invariant principles that order change iaw law (causality). Mathematics is an aspect of logic. The lintel of Plato's Academy was inscribed with the words, "Let no one ignorant of geometry come under my roof." Given this presupposition the discovery of irrational numbers was an earth-shaking event that initially concealed from the uninitiated lest they lose faith. Subsequently, it led to a bifurcation between arithmetic and geometry that persisted until the beginning of the modern period.
The discovery of irrational numbers caused a break in Greek mathematics between arithmetic and geometry. The Greeks could not accept the fact that some lengths were incommensurable with rational numbers. Therefore, they decided that numbers could not be associated with lengths. Unfortunately, this decision led to a division between arithmetic and geometry that was not reconciled until the time of Descartes. (Math Lair)
Similarly, Aristotle had posited that the motion of heavenly objects must be circular because of the perfect form of the circle. This presupposition was at the root of the resistance to change in astronomy from a Ptolemaic system of epicycles to the simpler heliocentric Copernican system, later explained by Kepler, who was the first to use elliptical orbits.
Modern physics also presents a parallel. Classical physics presents the universe as realistic and deterministic. The discovery of quantum mechanics shook that foundation by suggesting the bedrock on which classical physics is built is probabilistic. Einstein famously objected to this interpretation with "God does not play dice," and engaged in a running debate with Bohr for decades over this. The debate was finally resolved by time, and now a majority of physicists accept that "reality" is probabilistic at ground.
The discipline of economics is affected by a similar presumption — equilibrium. Keynes rejected the neoclassical view, but Keynesians were not able to hold the fort. Samuelson capitulated and "bastardized" Keynesianism with his neoclassical synthesis. Now mainstream economists, who call themselves "orthodox" and everyone else "heterodox," which is a euphemism for "heretical," have largely prevailed and imposed equilibrium as the "normal" paradigm in Kuhn's sense.
Until this lock on the discipline is broken, economics will be theology and lag its sister science in adherence to a dogma that has been widely discredited.
As Robert Vienneau wrote recently:
If you want to argue against mainstream economics, a mainstream economist can dismiss you as ignorant of some model variation and as attacking a strawperson. Furthermore, this dismissal could be "justified" by just checking whether you have a degree from a small number of schools, and, if you do, just mocking you as not having fully learned what they are teaching. Thus, your time can be taken up with argument about whether you know what you are talking about. The mainstream economist never need get to the point of engaging a critique.
The economics profession is broken and it cannot be fixed without replacing those who adhere religiously to discredited dogma, which looks suspiciously like a conservative preference for government as an adjunct to business rather than the ordering mechanism of society as a complex system in which emergence presents challenges that markets alone are not suited to address.
