>At best this notion "that people behave in whichever way they think is their intrest" is a reduction, a way to isolate factors. It's always understood, that this is a limiting factor whose validity has to be judged against relevance. More often than not this notion is moral principle where it is thought that people "should behave accroding their best intrest" and the best possible social organization is one where this is encouraged. The latter is not economics, but (liberal) politics.

Text so far is a much better recapitulation of what we have said so far than I could ever write.

As for the above paragraph, most of the economists will assume that the people know their interests and know which ones are the best, as if they're all economists of the same school. Which is not the case - almost everybody engages in some sort of economically insane activity - take drugs, drive cars faster than their reflexes can handle, gamble, engage in nigerian schemes, go to american hospitals, maintain a numerous class of con artists, bear the cost of advertising, take student loans, take second mortgages on interest-only schedule, defend corporate moves even when they're next on the firing line etc etc. This is the first step away from reality.

The second step is that they assume that their fiscal or other systemic moves will inevitably change the situation the way they wanted, which they assume will remain otherwise unaltered. Which is rarely the case - their move has created a new reality, and their assumption that the people will behave as if they know what's their best interest becomes partially true: there is always some reaction to that move. Unfortunately, most often it is not what they wanted to achieve. People in general aren't so smart with their money, but they will always try to be, and the number of ideas they generate is unpredictable. Which of these ideas will spread and create a following is even less predictable.

>>And then there are the übereconomists who take a step further and cherrypick the data, thus to achieve the congruence between their theory and reality at some higher level. And then there are the banksters who pay them to do so.
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>There are frauds in every discipline. Heck banks use advanced maths for their dark purposes, not to mention he use that is done of IT and software in super fast trading. The fact that a discipline can and is being manupulated does not affect the validity of that discipline. The idea that we should stop programming because of what's been done with software is as silly.

The idea that governments should listen to programmers is equally silly :). OK, sometimes they really should, but not too often.

>>The simple example is that any country which gets deep in debt will have its currency devalued, and will have high inflation. Does not happen in case of the dollar or euro. Or serbian dinar, for that matter. A nice detail about the latter: two years ago, the People's bank of Serbia took a 3 million dollars loan "to stabilize the exchange rate of the national currency". Huh? How is your currency getting any stabler when you're three notches deeper in debt? But it seemed to work - the logic must have been somewhere else, not where I was looking for it.
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>The only answer that can be given here is that there are more factors at work and that your example is not so simple.

Exactly! And when they come with a package of measures, of things to do to solve the current crisis, they somehow make it look so simple, the other factors are, what, scientifically proven to be of negligible influence? Until the failure is obvious and then they have to come up with an explanation, when these factors are revealed as actually important.

> It is difficult in econonmics to isolate certain phenomena from their context.

Yet these guys apply the same recipes across the board. Same for Greece and the rest. Or, there are announcements that the Cyprus recipe may be applied in other countries. Completely context-free. Context is required only when explaining why something didn't pan out; when it is pushed as a solution, context can be ignored.

> But the basic problem with debt is psychological. It may end up in some kind of catastrophic scenario where actors loose confidence. When that happens the economic mechanisms get stuck and that is what "we" have until now been able to avoid since 2008 ... thanks to the application of what "we" have have learned about the economy.

It's all psychological. From the very idea of a person who will behave according to some interests - which is mostly dependent on the psyche of that person, what she perceives as her interest, what can she be convinced (by advertising, propaganda, con artist, corporate or gov't pressure) that is her interest.

Back in 2008 I heard some bankster on NPR complaining about the lack of confidence of the general public in the banks and the need to reestablish it. Huh? That's in the year when it was gradually discovered that they have played every dirty trick from the book, and wrote new chapters. That a major catastrophe was avoided just shows that money will find a way to get invested, risks be damned and confidence isn't really required.

> Let's see how long this will last.

I'd suggest that as the 2nd axiom. Every new economic recipe is successful in the beginning, because it draws the enthusiasm of those who believe in it or at least see their chance in it, and they are the power that holds the cracks from appearing for a few years, when they inevitably eventually (in the american sense of the word) do. And that's about the same period of time that takes the murky players (which we call "hunters in the murky water") to learn how to work the new system.

These times, I'm not betting on anyone's enthusiasm being strong enough to prop any new economic solution, as long as these are dictated by the likes of Goldman Sachs.