The Chicago School Circle Is Now Complete
"The ultimate goal of a positive science is the development of theory” or “hypothesis” that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed. Such a theory is, in general, a complex intermixture of two elements. In part, it is a “language” designed to promote “systematic and organized methods of reasoning.” 5 In part, it is a body of substantive hypotheses designed to abstract essential features of complex reality.
Viewed as a language, theory has no substantive content; it of tautologies"
This has served as justification for using wildly unrealistic assumptions, such as continued arbitrage activity despite the absence of any gains for such activities. When questioned these assumptions have been justified as necessary to provide for mathematical models that can be used for precise forecasts.
The problem has always been that partly because these assumptions have been unrealistic, their predictions have usually been wrong, or at least no better than the predictions of someone picking scenarios randomly.
Now that some people like Paul Krugman (whose prediction track record is hardly better BTW) pointed this out, University of Chicago professor John Cochrane turns Milton Friedman's old doctrine on its head and declares:
"It’s fun to say we didn’t see the crisis coming, but the central prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going — neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences."
But if we can't make any predictions about not yet observed phenomena’s, then how could deliberate unrealism in theoretical reasoning in order to enable theories to be expressed in the forms of advanced mathematical models be justified? The circle is now complete and the neoclassical mathematical Chicago school is exposed as having both unrealistic assumptions and useless models.
It should be noted that while this inconsistency is most blatant in the Chicago school, it is also present in almost all non-Austrian school, including Krugman's Ne Keynesianism.
BTW: The alleged conflict between realism of theories and their usefulness in predictions is of course false. No one can predict the future perfectly even with correct theories, but by using the correct theories the predictions will be true more often than not.