19.0 Conclusion

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

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

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

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

Multiple variable regression analysis – Powerful statistical tool Used to show effects of many variables Scientists can easily manipulate variables to fit the predictions Social sciences are not exact These 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?