In order to properly understand capital markets, we need a sound understanding of economic developments. However, the legitimate question arises as to whether economists are really able to predict and control economic variables such as the overall behavior of unemployment and inflation in a nation’s economy.
In times of favorable economic developments, such as the mid-1960s or the two decades before the financial crisis of 2008, economists were convinced that they had the right models and solutions to economic problems. In 1980, however, after a decade of high inflation and unemployment – a combination economists had previously thought impossible for extended periods – The Public Interest magazine published a special issue titled “The Crisis of Economic Theory.”
And confidence in the economic sciences was then shaken again, at the latest, with the financial and economic crisis from 2008 onwards. Economists had predicted not the deepest crisis since the Great Depression of 1929, but years of stability and growth.
University economics, exemplarily represented by Paul Samuelson’s standard textbook “Economics”, sticks to its basic principles on which all economics is based. These are seen as those enduring truths imposed in 21st century will be just as significant as they were in the 20th century.
In addition, capital market efficiency as well as long-term market equilibria are assumed at all times and it is assumed that economics is a purely positivist science, i.e. free from normative value judgments.
Regardless of this dogmatic state of affairs, however, there are new scientific currents that are quite capable of analyzing economic crises and considerable upheavals on the capital markets using realistic models and empirically checking them without using exaggerated mathematical methods.