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Caplan & empirical testing of economic theorem.

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Darren Webster posted on Wed, Mar 14 2012 11:57 PM

I'm sure we're all familiar with Caplan's article: "Why I am not an Austrian Economist."

After reading Walter Blocks responses to Caplan (which were largely satisfactory) there was one particular argument that Block doesn't seem to address which, I feel some of you might be able to effectively address.

Caplan, in his section entitled "Is Theory enough?" Caplan writes,

Armchair economic theorizing can be and often is a productive way of learning about the world. Mises and Rothbard clearly proclaim this, I readily concede it, and most neoclassical economists frequently "act as if" they believe it. Mises and Rothbard however err when they say that economic history can only illustrate economic theory. In particular, empirical evidence is often necessary to determine whether a theoretical factor is quantitatively significant.

Price theory shows us that a minimum wage in excess of the market-clearing price will increase unemployment. However, as Mises and Rothbard emphasize, economic theory tells us nothing about how big the increase in unemployment will be. Empirical studies of the imposition of minimum wages do more than merely illustrate economic theory; they help economists to learn which theoretically relevant factors actually matter. Paraphrasing Lord Kelvin, while economic theory is real knowledge, until you study some economic history your knowledge is of a meagre and unsatisfactory kind. An economist who attributes hyper-inflations to radically and continuing declines in the demand for money contradicts no economic theory. He is however still a bad economist, because he analysis of which factors are quantitatively significant is so far off.

Yes, it is possible for the quantitative importance of different factors to change over time and across different societies; but study of these differences is just another task to which good economists need to devote themselves. For example, population economists do more than just describe the causes behind population growth; they also generalize about why different causes matter more in different countries and times. An increase in the supply of food may greatly increase population growth in a poor country, without having any important impact in a richer country; both facts required empirical study to learn, the facts learned varied across time and place, and yet an underlying and important pattern still exists.

Mises wrote concerning something like this in Human Action,

Here we are faced with one of the main differences between physics and chemistry on the one hand and the sciences of human action on the other. In the realm of physical and chemical events there exist (or, at least, it is generally assumed that there exist) constant relations between magnitudes, and man is capable of discovering these constants with a reasonable degree of precision by means of laboratory experiments. No such constant relations exist in the field of human action outside of physical and chemical technology and therapeutics. For some time economists believed that they had discovered such a constant relation in the effects of changes in the quantity of money upon commodity prices. It was asserted that a rise or fall in the quantity of money in circulation must result in proportional changes of commodity prices. Modern economics has clearly and irrefutably exposed the fallaciousness of this statement.
 
Those economists who want to substitute “quantitative economics” for what they call “qualitative economics” are utterly mistaken. There are, in the field of economics, no constant relations, and consequently no measurement is possible. If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 per cent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or at another time. He has not“measured” the “elasticity of demand” of potatoes. He has established a unique and individual historical fact.
 
My question is: Why is Caplan wrong? I haven't been quite able to work this one out on my own: might have something to do with reading at 5AM.
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Who said Caplan was wrong?

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Well, nobody. I guess this is addressed to the Misesians in the crowd.

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Price theory shows us that a minimum wage in excess of the market-clearing price will increase unemployment. However, as Mises and Rothbard emphasize, economic theory tells us nothing about how big the increase in unemployment will be. Empirical studies of the imposition of minimum wages do more than merely illustrate economic theory; they help economists to learn which theoretically relevant factors actually matter.

Does anything Caplan said here contradict the assertion of Mises/Rothbard?  Not to my eyes.  Knowing which "theoretically relevant factors" actually matter still doesn't say how big the increase in unemployment will be.

He didn't disprove Mises/Rothbard on this point so much as he talked past them.

 

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Answered (Not Verified) Clayton replied on Thu, Mar 15 2012 11:46 AM
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Watch this:

Basically, Caplan's argument boils down to something like this: "OK, so Austrian theory claims that if you increase the minimum wage above the lowest market wage, you will increase unemployment. But we don't know what is the numerical relationship between increases in the MW and reductions in unemployment, so perhaps you can have massive increases in MW with only tiny increases in unemployment and - in this case - the MW might be 'worth it.'"

But this is really a red herring. The claim that increases in MW result in increased unemployment are in response to MW proponents who claim that MW does not increase unemployment at all and, therefore, that MW increases are an unqualified benefit. If MW does result in an increase in unemployment and you do not believe in magic (aka intersubjective utility comparisons), then someone is being hurt (whoever cannot be employed by virtue of MW) without justification. I don't think you need a critical mass of harm before it matters... if even one person is being hurt (and we can conclude that at least one person is being hurt from Austrian theory) then the policy itself is not justifiable.

Quantization is a red herring.

Clayton -

http://voluntaryistreader.wordpress.com
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The thing to notice about Kaplan is that there probably isn't a single Austrian policy prescription that he would disagree with.   His disagreement with the field is entirely methodological.   You can be as libertarian as you want, and believe positivism in economics is a good thing.

 

 

 

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 and you do not believe in magic (aka intersubjective utility comparisons)

Made me lol. cool

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