Economics with Feet of Clay

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Much of modern economic modelling may be characterised as "art for art's sake" in that ithas little connection to reality. But it is more than that, for it is as important to the neoliberal paradigm guiding contemporary economic policies as is the holy mass to the Catholic church. It is what keeps the creed alive in the minds of the people, experts and layfolks alike, making them think of it as true and authoritative, a standard to be observed under any circumstances. It is the mantra machine that distracts us from a critical assessment, making us feel there is no sensible alternative. However, it is an exercise not in good economics but in voodoo.

Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution … and the New Keynesian theorizing) … have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works – let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck … the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling … excludes everything relevant to the pursuit of financial stability.

The source. 

See also my The Bad Conscience of an Economist.