The author is the founder of the economic consulting firm Smithers & Co.

Traditional macroeconomics is wrong, and its mistakes can have profound adverse effects on economic policy.

Many economists believe that central banks can stabilize the economy by changing real interest rates because Fed Earlier this month, the company raised its benchmark interest rate by 25 percentage points amid concerns about rising inflation. Interest rates are thought to determine the cost of capital and the level of investment, thereby changing the level of economic activity.

Unfortunately, these ideas have a glaring drawback: the data suggest they are wrong.

Conventional views on how the economy works were formed long before we had long-term data on returns on different categories of capital. Since these hypotheses cannot be tested against evidence, consensus theory falls on the wrong side of Karl Popper’s famous line between science and non-science.

However, long-term data on returns is available today. They exist for short-term interest rates, yields on long-term bonds, and real returns on stocks. Therefore, we can now test consensus models, which were not possible before. If we do, we will find that the underlying assumptions of these models are wrong.

If the returns on debt and equity differ and the real interest rate determines the level of investment, then the consensus theory will be correct. We just need to worry about balancing saving intentions with investment intentions to avoid high unemployment or inflation and stagflation.

But investments fluctuate with changes in nominal interest rates, not real interest rates. What’s more, the actual relationship between changes in short-term interest rates and stock prices suggests that the cost of capital changes with short-term interest rates only in the short run. Finally, since we can now calculate the cost of equity and business capital, we know that changes in the cost of capital do not drive investment.

Economics begins with our understanding of human psychology, and its theories are valid when applied to the day-to-day activities that make up microeconomics. The problem arises when the same approach is applied to macroeconomics and finance. Buying commodities is discouraged when prices rise, but it stimulates stock buying. In finance, intuitively sound ideas are often proven wrong, including the assumption that financial returns move together. This is”efficient market hypothesis”, economists have been reluctant to give up, but must now.

The difference between the short-term and long-term effects of short-term interest rate changes can have troubling consequences. It shows that if we are to prevent inflation or unemployment from becoming too high, at least two relationships must remain stable.

One is the balance between saving and investment. Another is the link between the real price of real assets and the equilibrium price. Monetary policy tools currently used to stabilize short-term aggregate demand could create dangerous imbalances in asset prices and debt ratios that could destabilize the economy in the long run.

We must stop using consensus theory because it is wrong and policies based on it often lead to financial crises. Most importantly, we need to take seriously the available data on returns on different forms of financial capital.

Many will wish to ignore this as it is incompatible with consensus theory. But it is crucial for our future that this intellectual obscurantism does not prevail. Fundamental assumptions of economic theory must be debated and discarded when proven wrong.