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Article

What’s Wrong with Today’s Economics? The Current
Crisis Calls for an Approach to Economics Rooted More
on Data Than on Rationality

Sergio M. Focardi and Frank J. Fabozzi
The Journal of Portfolio Management Spring 2012, 38 (3) 104-119; DOI: https://doi.org/10.3905/jpm.2012.38.3.104
Sergio M. Focardi
is a professor of finance at EDHEC Business School in Nice, France.
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  • For correspondence: sergio.focardi@edhec.edu
Frank J. Fabozzi
is a professor of finance at EDHEC Business School in Nice, France.
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  • For correspondence: frank.fabozzi@edhec.edu
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Abstract

Focardi and Fabozzi argue that current mainstream economics is not a science in the sense of the physical sciences, and they draw some conclusions from the point of view of asset management. Their key point is that economics as embodied in the general equilibrium theories describes an idealized rational economic world as opposed to one based on empirical data. Although this argument has already been made, it has been virtually ignored by economists. The current crisis, however, requires an economic understanding anchored on a solid empirical basis. The authors review a number of facts, including the following: 1) market efficiency is a quantitative concept, with efficiency defined in terms of the magnitude of realistic profit opportunities; 2) the dynamic vector-like nature of inflation challenges current theories about inflation and the generation of money, making growth path-dependent; 3) economic conservation laws are key to understanding growth; and 4) a market economy cannot support an unbounded level of wealth and income inequality because they become a destabilizing factor. The overall lesson for asset management is that economics matters and that the culture of pure speculation would be replaced profitably for society as a whole with a true culture of investment.

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The Journal of Portfolio Management: 38 (3)
The Journal of Portfolio Management
Vol. 38, Issue 3
Spring 2012
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What’s Wrong with Today’s Economics? The Current
Crisis Calls for an Approach to Economics Rooted More
on Data Than on Rationality
Sergio M. Focardi, Frank J. Fabozzi
The Journal of Portfolio Management Apr 2012, 38 (3) 104-119; DOI: 10.3905/jpm.2012.38.3.104

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What’s Wrong with Today’s Economics? The Current
Crisis Calls for an Approach to Economics Rooted More
on Data Than on Rationality
Sergio M. Focardi, Frank J. Fabozzi
The Journal of Portfolio Management Apr 2012, 38 (3) 104-119; DOI: 10.3905/jpm.2012.38.3.104
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  • Article
    • Abstract
    • THE DEVELOPMENT OF MODERN EMPIRICAL SCIENCE
    • THE DEVELOPMENT OF MODERN ECONOMICS
    • ECONOPHYSICS AND ALTERNATIVE ECONOMIC THEORIES
    • IS ECONOMICS A SCIENTIFIC THEORY IN THE MODERN SENSE?
    • ABSENCE OF ARBITRAGE AND MARKET EFFICIENCY IN A FINITE MARKET
    • INFLATION
    • ECONOMIC GROWTH
    • INVERSE POWER LAWS
    • IMPLICATIONS FOR ASSET MANAGEMENT
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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