David B. Shemano wrote: > Because of the complexity of national economies, arguing that a macroeconomic > economic theory is true "all other things held equal" is like asking Mrs. > Lincoln how she liked the play, other than the shooting. I remain fascinated > and puzzled how economics fits into the science paradigm of testable > hypothesis, etc., and whether the presentation of empirical evidence has > much, if any, influence on economists' preconceived positions.<
Because economics is a social discipline, it almost never can live up to the standards of experimental science, for which a "double blind study" might be an attainable standard.[*] The closest economists get to this is in behavioral economics, which has indicated again and again that the hallowed "homo economicus" (HE) that shambles through textbooks is an inaccurate description of human decision-making. (We aren't as individualistic, for example, as economists usually say we are.) Even then, the heavy hand of ideology still dominates much of the profession, so that experimental economics rates barely a mention. In Krugman's "liberal" textbook, for example, it's only in a "box" (page 262 of the micro split of the 2nd edition) -- and teachers know that most students don't read boxes unless they're explicitly assigned. One reason why HE persists far beyond its dispose-of date is that behavioral economics hasn't presented a "simple model" that can easily be explained to students using mind-numbing math and graphs. Also, HE fits very well with the dominant ideology in economics (which is individualistic, sees the world as implicitly one big market, etc.) As another example, Frederic Mishkin's money & banking book spends almost all of its space concerning stock markets on the "efficient markets hypothesis" and almost none on behavioral finance. In the 8th edition, there was some discussion of "evidence against market efficiency" (pp. 165-7), while in the current edition, there is absolutely none. (There's no discussion of evidence in favor, either. References to real-world data now seem irrelevant. Models rule!) This change happened during a period when the efficient markets hypothesis took a dive, at least among the experts.[**] In economics, the difficulty of doing experiments (or even interpreting statistics) means that we have to rely on other means. Theories should be held up to a skeptical light on all possible levels, rather than being taken for granted. (It's perfectly okay to attack a theory's assumptions, despite Milton Friedman's attempts to make his views immune to criticism.) No theory can be considered to be even provisionally "true." Rather, we can say that one theory fits the perceived real world better than another. The basic Keynesian theory of how a macroeconomy works, for example, fits the data much better than do competing models do.[***] Barro does not object to testing his theory empirically. Nor does Mulligan. If they cite empirical data, we can too. So David is off-base to reject empirio-criticism only when it applies to Barro's theory. Specifically, David wrote: >Because of the complexity of national economies, arguing that a macroeconomic >economic theory is true "all other things held equal" is like asking Mrs. >Lincoln how she liked the play, other than the shooting. < Getting back to the original topic of the thread, Keynesian economics has a very simple equation for planned macroeconomic spending that summarizes the issue. The desired demand for GDP = Consumer Purchases + Planned Business Investment purchases + Government purchases + Net Exports = C + I + G + NX. In a situation of less than full employment,[***] a rise in G not only increases demand directly, but also (by raising incomes) boosts C. In addition, by increasing cash flow, profitability, and expected profits (while reducing the importance of unused capacity and outstanding corporate debts), a rise in G also increases I. This can be counteracted by falls in the other parts of the equation (which is where "all other things constant" comes in). The usual story here is that rising G "crowds out" I by raising interest rates or hurting business confidence. But that story works well only when the economy is already at full employment. It works poorly when unemployment is high (say, 9.5%). When business is _already_ in a funk and interest rates are very low, it's hard to imagine I being hurt. This theory fits the data of the late-1930s fiscal stimulus better than available alternatives. It also fits the period during World War II when something like "full employment" was attained, since with bottlenecks becoming general, _no_ demand-side stimulus can increase production in a sustainable way (unless there are major institutional changes). [*] the cliché is "gold standard." But we have to remember that in most cases, the gold standard has been a bad idea. [**] By the way, I read three chapters of Mishkin's draft macroeconomics textbook to earn a few bucks. Boy, is he right-wing. He simply and implicitly assumes that "government regulation" hurts overall efficiency, for example. Has he never heard of traffic laws and their benefits? [***] IMHO, the Marxian vision of macroeconomics incorporates this Keynesian story. [***] "Full employment" refers to the highest level of employment (lowest rate of unemployment) which can be sustained without the economy suffering from accelerating inflation and/or deepening shortages of goods & services. It's also been called the "inflation barrier." The fact that it involves positive unemployment reflects frictional unemployment (people temporarily between jobs), the inefficiency of the matching process in labor-power markets (matching available jobs with workers), and the need (by capitalists) to scare workers with the threat of the "sack" (along with the bottlenecks imposed by limited supplies of other inputs). Abba Lerner distinguished between "high full employment" and "low full employment." He thought that the former (with lower unemployment) could be achieved with appropriate institutional changes (incomes policies). Later thinkers -- such as Friedman -- took this theory (without citation or knowledge of others' research) and combined the two levels of full employment into one (because incomes policies were by definition anathema) and dubbed it "natural." That became the orthodoxy. -- Jim Devine / "All science would be superfluous if the form of appearance of things directly coincided with their essence." -- KM _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
