When Friedrich Hayek won the Nobel Prize for economics in 1974, he embarrassed many economists by noting their failures. Speaking in the midst of a great inflation that caused a greater loss of stock-market wealth in the U.S. than the Great Depression, he noted that the inflation was "brought about by policies which the majority of economists recommended and even urged governments to pursue." He added, "We have indeed at the moment little cause for pride: As a profession, we have made a mess of things."
Hayek pronounced the failure of economics to be rooted in a "scientistic" attitude that employed the habits and methods of physical science where they were not appropriate. He faulted particularly, "the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level."
Hayek conceded that there was quantitative evidence for the assertions and beliefs adduced by John Maynard Keynes and his followers, but he warned that the evidence was not good enough: "In the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process…will hardly ever be fully known or measurable."
Economists, Hayek continued, "happily proceed on the fiction that the factors which they can measure are the only ones that are relevant. The correlation between aggregate demand and total employment, for instance, may only be approximate — but as it is the only one on which we have quantitative data, it is accepted as the only causal connection that counts. On this standard, there may thus well exist better ‘scientific’ evidence for a false theory, which will be accepted because it is more ‘scientific,’ than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it."
Hayek, of course, was on the side that had less quantitative evidence.
Second, Mark Nugent worked long and hard hours on this piece for Doublethink Online, in which he presents Austrian business cycle theory. It is an excellent presentation.