The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction

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The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction
By Richard Bookstaber
Princeton University Press, 2017
240 pp.
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Bookstaber criticizes modern economic theory, especially its reliance on the idea of a natural equilibrium in human affairs and its use of models that assume that households will always maximize their utility based on unchanging preferences. As aesthetically pleasing and occasionally useful as such theoretical constructs may be, human life does not conform to them. In particular, they fail to account for the crises that all too frequently plague modern economies. Bookstaber’s cogent and accessible book explains the financial crisis of 2008 in great detail, demonstrating how people’s reactions to events—sometimes emotional, sometimes rational—influenced the behavior of other people, which then reverberated back to the initial actors. This is what the philanthropist and investor George Soros has called “reflexivity.” To better understand such dynamics, Bookstaber endorses a pragmatic, inductive “storytelling” approach and recommends that analysts eschew deductive, theoretical approaches.