Kevin Hassett, is, I believe, the epitome of the mainstream economist: Phd, Univ. of Penn, former Fed economist, American Enterprise Institute, etc. This article actually started out promising, because he pointed to flawed Keynesian theory. But, it appears that Hassett is saying that theory itself is what is flawed, so what was needed instead was empirical data with correlations. He never mentions alternative economic theory (i.e. Austrian theory), only Keynesian theory.
His point is that Congress and the President did not implement policies based on the “new” empirical correlation methods, but rather they continued to use old Keynesian theory.
I think this article provides insite into how mainstream economics swerved into empirical study as opposed to theoretical study in the 1970’s, and thus ignored the correct theory of the Austrian school. Was this the “new classical” theory that is spoken of in connection with Keynesian economics?
From the article: “Economists went on to refine techniques that correlate the way things move with each other over time, relying on hard evidence rather than Keynesian theory. These techniques generally find that policies like last year’s stimulus have much smaller effects than the macro models would suggest…Yet the analysis of job creation of the stimulus bill essentially ignores this vast literature.”
It also ignores the vast literature of the Austrian school.
I’m glad you mentioned that. I was thinking the same thing. It sounds like Hassett is implying that theory is the problem, ie, we need facts, nothing but the facts, good data, etc. And when the data changes, we’ll change too, etc. My understanding is the Historical School abandoned economic theory and just looked at historical context (and that Menger spent much of his time refuting and defending against it). There is always something standing in the way of sound economic theory.
Indeed. To me, one of the fastest ways to sum up the Austrian position on methodology is “facts do not come with their own interpretations for free.” Another is “theory comes before observation, it tells us how to make sense of data.” The Menger debate with the Historical School was the source of the first neoclassical consensus - the neoclassical school was united in its support of Menger on the existence of theory. Of course, the agreement is not complete - in particular, we disagree quite strongly on the nature of economic theory - is it a mathematical structure, or is it simply reasoning done properly on a few axioms? Is it formal or informal? And so on. The new neoclassical consensus, of course, was formed around Keynes, and excluded the Austrians, and our notion of how theory works, but we still all agree that theory exists. Now it seems they’re starting to doubt that…it makes sense, really. The mainsteam of economics is no longer interested in truth, but in selling policy. They failed to do so on Keynesian grounds, leading to the breakup of the Keynesian consensus in the 70’s. After that, the reigning orthodoxy became a mix of monetariam, neoliberalism, and neoKeynesianism. That didn’t work either, resulting in the 2008 crisis. They tried to pawn off the failures on monetarism, and keep the neoliberalism and neoKeynesianism, but people haven’t been buying. So why not just throw away theory, if the only other choice is Austrianism, and we surely can’t have that…
First, if this were true, I could think of worse things than being stuck forever with a correct theory built from undoubtable premises. Second, there are ways to challenge a theory, such as by other theoretical points, just not by empirical points.
Empirical data is useful only to the extent that causal relationships can be inferred from them. This necessitates a method by which all variables must be controlled for. Controlled experimentation is the basis for the scientific method and not empirical data as such. scineram does’t seem to understand this part.
The field of Economics does not render the use of controlled experimentation. It is not to say that empirical data can never be of any use. But it simply cannot be used to refute a theory and certainly not to infer causal relationships.
Most mainstream economists are no more scientists then were Pharo’s magicians who turned sticks into snakes.
I don’t know why it is so hard to understand this point. If they can’t control their variables, then they are not dealing with science just because they collect data and run statistics on them. They are a mockery to the scientific community.
Which is why science is a never ending process, however, it does yield results. The proof is this thread!
Economics that deals with real humans does not allow for any such controlled experimentation at all. This is not to say that the subject of economics cannot be studied in a scientific manner. It’s just that the subject under observation is a totally different beast then that typically found in the physical sciences. Different methods must be applied.
So, Katz, I’m just wondering, not trying to be a dick or anything, what happens if the data doesn’t coincide with the apriori theory? Do you try to revise the theory?
The difficulty here is, I’m not clear on what it would mean for the data to fail to coincide with the theory. The theory is just a framework into which the data is placed, it is explanatory, not predictive. It doesn’t say “the CPI will fall” or even “if A, then the CPI will fall.” It might say “if A, then there will be price deflation.” If A happens, and there is no price deflation, that would seem at first to be an instance of what you’re talking about. But, in fact, it might well be that CPI is a poor measure of price deflation, that A didn’t actually happen, properly understood, or the fact that the theory talks about “all else being equal” and other effects dwarfed the price deflation that was occurring. So rather than tell what I’d do in such a case, I will just point out that it is a category error to talk about this happening.
Take a case that actually can be observed - status symbols. That is, quantity demand for a status symbol can rise (in boom times) as price goes up. This looks like a clear case of theory (law of supply and demand) being violated by empirics. Yet, the proper conclusion to draw would be totally different - that there is psychic income, and when you consider psychic income, you realize that you don’t have the same car evaluated at two different prices, but rather two different goods evaluated at two different prices. Or, even better, subtract the psychic income from the value of the money paid and you see that the curve returns to looking like it should look.
Theory is knowable a priori and explains the data. Our task is to understand how they fit together, not to try to ‘compare’ two different things.