19.0 Conclusion. 19.1.1 Debate over intervention vs. non-intervention goes back two hundred years Jean-Baptiste Say (1803) – market system can and does.

19.0 Conclusion

19.1.1

Debate over intervention vs. non-intervention goes back two hundred years

Jean-Baptiste Say (1803) – market system can and does coordinate effectively (Say’s law)

Market economy will produce outcomes that are analogous to a simple Robinson Crusoe Society

David Ricardo vs. Robert Malthus

Argue over non-intervention

Ricardo believes in it

Malthus says Ricardo is wrong because he believes in Say’s Law – and the nice assumptions are not realistic

Ricardo influences many others for over a century

There is a focus in the 1800’s on micro issues

John Maynard Keynes (1936)

General Theory of Employment, Interest and Money

“Error not with the superstructure, but with

a lack of clearness and a generality in the premises”

Keynes was questioning the nice assumptions

Why?

1930’s Great Depression

More Keynes

Analogy is false when moving from Crusoe to the real world

Markets are subject to distortion and failure,

as opposed to the perfect coordination in R.C.’s head

Gist - intervention may be necessary to correct breakdowns in the system

19.2.1

Why can’t economists resolve this debate?

Problem lies in the testing of data

Testing methods are imperfect, so error may escaped an unbiased observer

Often, there are no unbiased observers

Competing viewpoints, each with strong “evidence”, coexist

19.2.2 Operationalizing a model

Theoretical definition – concept that is used in the model

Technical definition – criteria we can use to measure the concept

Transforming theoretical definitions into technical definitions can be imperfect

This must be done in order for the model to be tested

19.2.3

Those working with technical definitions face problems of data collection

Ex. Expenses, availability, accessibility of data

Macro variables are so large, technical definitions are proxies (substitutes) for theoretical definitions they represent

Unemployment rate

Equals

(Number unemployed / Labor Force) X 100%

Labor force technical definition –

age 16 to 65

Not in an institution (jail)

Working, Laid off,

Or actively looking for work

If not looking – voluntarily unemployed – not in labor force

Problems with this technical definition

Ignores volunteers, housework

Those discouraged workers who stop looking are not counted in the unemployment rate

Plus, those working 1 hour a week for pay are considered employed

Ignores problem of underemployment

In a macro sense,

The question of whether or not the economy will reach full employment

Depends on what the natural rate is

Tough to measure

There are also problems with measuring GDP

4 criterion

1)Must be exchanged for money-

Ignores volunteer work, barter to avoid IRS

2)Must be legal-

Ignores large parts of the underground economy

3)Must be current production-

Used cars don’t count

4)Must be final goods-

Avoids problem of double counting

This way of measuring GDP

Ignores things not sold in the marketplace

Schools, national defense-

Not counted

Technical measure of GDP is only a proxy for the real GDP we talk about in theory

At least macro variables are measured

In micro, there are often no measures of the values of the variables in the models

Example

In trying to figure out what determines the number of hours per week a person will work,

experience might be a variable

With thousands of individuals involved

researchers might use

Age – Education – 6

as a proxy

This proxy

doesn’t account for the fact that not all years are equal

Goofing off, quality of schools, years outside the labor force all not factored in

There are all kinds of problems with

both macro and micro data

This contributes to coexistence of competing theories

Further, there are testing flaws that arise

19.2.4

Multiple variable regression analysis – Powerful statistical tool Used to show effects of many variablesScientists can easily manipulate variables to fit the

predictionsSocial sciences are not exactThese problems in testing lead to the continuing

debate in economics

19.3 Conclusion

Under the ideal conditions –

Nice assumptions and just distribution of initial endowments-

a market system can realize an efficient and just society

Smith realized that is difficult to achieve, because

vice exists

Rationality of individuals is the cause of

both virtue and vice in competition

Specialization and gains from trade can lead to self-benefit

Self-interest can also lead to rent-seeking, which distorts the distribution

This story does not provide answers

It provides tools for thinking critically about the world

It is not just about what to buy and where to work

What values to adopt, and for whom to vote will be equally important

In the U.S., you have a government that lets you choose the leaders and their policies

Challenge of a free society

that is made of lesser beings than angels

Individuals must balance between self-interest and a commitment to civic values

Society must determine the balance between individual freedom and society’s right to impose rules

What kind of society will we have?