Psychologist Tom Hollenbach identifies a few flaws in the rational expectations school of economics.

As a psychologist, I see people acting irrationally, making miscalculations, and operating against their self-interest so often, that the fundamental assumption of economic theory strikes me as obviously and patently absurd. 

 

This would be very amusing except for the fact that economists make deductions about public policy based on this approach, and then convince policy makers to follow their recommendations. 

This leads directly to the second problem with economics and its practitioners, which is strongly related to the first problem.  The second problem is that many economists operate according to the rule: if the facts don't fit the theory, ignore the facts.  Some readers may find this harsh, but the history of the debate about financial deregulation clearly shows this. . . .

 

 

History has clearly shown that a capitalist economy with an unregulated financial sector is like a car with no brakes.  It crashes a lot.  In the 1930s brakes were finally installed, and the car stopped crashing.  In the 1990s some extremely smart people decided that the brakes were keeping the car from going as fast as it could have (Duh! That was the point) and succeeded in having the brakes removed.  Result: the car has crashed again (D'oh!). . . .

 

And finally, this leads directly to the third problem with economics as a discipline, which is in my area of specialty: the motivations of the economists themselves.  While I find the assumption of rational pursuit of self-interest to be not usually true for people in general, let us imagine for a minute that it is at least true of economists themselves.  Unfortunately, if economists are constantly pursuing their own economic self-interest, then that means we can't trust what they say.  Policy is constantly influenced by interest groups that are shopping in the marketplace for arguments to justify their agendas.   Economists, meanwhile, are sellers of such arguments.  According to economic theory, economists, if rationally pursuing their self-interest, will then sell their opinions to the highest bidders.  Therefore, an unfortunate corollary of economic theory is that you shouldn't believe economists.

 

Very much related to all of the above is an amazing fact: economics has no code of ethics.  Well of course not.  A code of ethics would make rational pursuit of economic self-interest much more difficult.