Why Many Economists Are Wrong
How Keynesian Economics Blindsided a Generation of Policy Makers
Published in Of Coin & Capital | June 2025
A Century of Economic Myopia
In the wake of the 2008 financial crisis, and again amid the structural dislocations of the post-COVID world, one question echoes through the ruins of broken models and misfired forecasts:
How did so many of the world's most powerful economists get it so wrong?
The answer lies not just in policy decisions but in the models themselves. For nearly a century, the global economic system has been governed by two frameworks rooted in Keynesian thought: the IS-LM model and DSGE (Dynamic Stochastic General Equilibrium) models. These frameworks, taught in universities and embedded in central banks, operate under the illusion of predictability, equilibrium, and linear causality.
In this report, we explore how these models took hold, what they systematically ignore, and how their blind spots have led to the fragility of the current fiat system.
IS-LM: The Original Keynesian Lever
Developed in the 1930s, the IS-LM model depicts the intersection of two markets:
The IS curve: representing goods market equilibrium (Investment = Savings)
The LM curve: representing money market equilibrium (Liquidity = Money supply)
The model assumes that fiscal or monetary policy can shift these curves predictably, stabilizing output and interest rates. But its core flaw is simplicity, it treats the economy as a linear machine where output responds proportionally to inputs.
Stimulus in, growth out. Always.
Yet the real world doesn’t behave this way. IS-LM assumes away financial instability, nonlinear feedback loops, and endogenous risk, elements that dominate real markets.
DSGE: Central Planning in a Lab Coat
DSGE models, the backbone of modern central bank forecasting, claim to be more sophisticated. They introduce forward-looking agents, stochastic shocks, and dynamic timelines. But under the hood, they linearize complex behaviors around a single equilibrium.
These models:
Assume rational agents with perfect foresight.
Often omit the financial sector entirely.
Treat systemic risk as exogenous.
Use Taylor expansions to flatten complexity into legible outputs.
In practice, DSGE models told central banks that the economy was stable and inflation was anchored in 2006 and completely missed the largest financial collapse in 80 years.
Blind Spots With Real-World Consequences
These frameworks fail not just mathematically, but philosophically. They treat people as atoms, not adaptive agents. They assume away reflexivity, power asymmetries, narrative contagion, and the chaos of liquidity flows.
Real-world examples:
2008 crisis: DSGE didn’t see leverage, derivatives, or shadow banking.
Japan's stagnation: IS-LM prescribed stimulus, but missed demographics and capital misallocation.
Bitcoin and DeFi: DSGE treats them as speculative excess, not monetary regime shifts.
From Bretton Woods to Central Bank Technocracy
After WWII, Keynesianism became the dominant economic operating system. The Bretton Woods system, designed by Keynes himself, put central banks and fiscal authorities in the driver’s seat. When Nixon ended gold convertibility in 1971, Keynesianism was unshackled.
The result? A world where interest rates are manipulated, debt is infinite, and the economy is managed like a thermostat despite evidence that the thermostat is broken.
A New Framework Is Needed
Markets are not machines. They are living, reflexive systems. We need models that incorporate:
Reflexivity (à la Soros)
Nonlinear adoption curves (Bass Diffusion, Metcalfe’s Law)
Liquidity cycles and macro regime shifts
Narrative contagion and social consensus
Bitcoin, decentralized finance, and the return of time preference are not aberrations—they are reactions to the failure of the equilibrium model. They represent a return to organic capital formation, honest money, and a repricing of risk through trustless systems.
Conclusion: From Model to Metanoia
What we’re experiencing isn’t just a monetary transition, it’s a paradigm shift. The old models have failed. The new world doesn’t run on levers and curves, it runs on code, networks, and truth embedded in transparency.
The future belongs to those who can model reflexively, think probabilistically, and build in the presence of uncertainty.
Welcome to the post-Keynesian age.
— Coin & Capital Editorial Desk