From the Institute for New Economic Thinking:
The latest evidence is from German business magazine Wirtschaftswoche, which recently published an article arguing that economic theory is detached from reality.
The article suggests that economists had only realized recently that the “homo oeconomicus” paradigm is misleading, when other social sciences such as philosophy and sociology had come to that conclusion long ago. Journalist Dieter Schnaas writes(all quotes translated from German):
“The economists are still hesitating to depart from the classic theory of market harmony – even though Adam Smith (in this regard) has seen Schumpeter put the final nail in his coffin. They still cling to their desire to explain markets according to natural laws, although word should have got round by now that no market has ever been immune to political influence and that people are not entirely predictable, rational beings. At the same time we see Robert Shiller, George Akerlof and Daniel Kahneman being celebrated as innovators in the field for precisely this "finding" and honored with Nobel prizes for the "discovery" of irrationality. Why is this? Because they no longer reduce people to bundles of rationality, but instead to stimulus response machines?
Schnaas continues his criticism of economics by noting seminal thinkers in other disciplines that economics has too long ignored:
“Ultimately the guardians of the temple of individual freedom, of self interest, of the Homo economicus: could it really be that the world of economics has systematically bypassed the relevant literature on sympathy (Adam Smith), pity (Jean-Jacques Rousseau), the division of labor in society (Émile Durkheim) and recognition (G.W.F. Hegel)? Haven't the economists heard that community, friendship, family and couple relationships have been established since the time of Aristotle as meaningful alternatives to the methodological individualism that continues to dominate their theoretical models?”
It is long past time for economics to include the wisdom of other social science, and Schnaas looks to past economic thinkers who recognized this, including Hayek, for inspiration:
“For Hayek it is clear that ‘truly fertile research requires a very diverse combination of different kinds of knowledge and understanding,’ and that economics is above all a life science that should not only work with formulas, but also make use of herneutic (interpretational) methods.