Article Resume : The Failure of Economic Theories

Chapter          : The Failure of Economic Theories

Writer             : Hendri Tanjung,

Posted on        : The Jakarta Post on Wed, February 04 2009

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Resumed by M. Maulana Hamzah

The fundamental reason for the failure of economic theory is an assumption that people are purely selfish. In conventional theory it calls as economic man. But, in fact people actually do care about fairness and they do behave in reciprocal way. It is proved by the rejected of ultimatum game where the hypothesis predict most people accept the low offers than zero. This game also proved that both proposer and responder care about justice in transaction.  

The failure of this assumption can be seen from global crisis in 2008. The crisis began from an idea that housing investment was safe investment, high return and improbable to collapse. This idea leads people to buy many houses and led the broker to build more. This affected a very big need of loans. Then banks as the financial institution give more lending without calculated the underlying assets. In the end, bubble of housing supply made the price fall down. And expected return from investment is minus. And it causes loss domino’s effect even from consumers, brokers, banks and investors.

Another reason or this failure is having a wrong model of the world economy. Actually, one of the mistakes in Western theory is that it narrowly focuses on the observers to the exclusion of everything else. It seems the economic model as social science has emerged from imitating physical science. Both are have different objects. From this point we may say the theory and the economist have the same character, it was selfish. It is also caused many kinds of selfish behavior, like corruption, manipulation and collusion.

And the last reason is taking too much trust to mathematical approach to predict economic theory. Mathematic is an exact science meanwhile economic is originally comes from social science. So it can’t be predicted exactly only by mathematic. Because every country has their own value and habit. There is a sense of humanity that was forgotten to be calculated, such as charity and social needs.

In the end this article suggest the scholars especially who focused in study of economy to build new economic theories based on generosity.