And if you want to know more on science and inference, the one book you should read is Peter Lipton‘s Inference to the Best Explanation (2nd ed, Routledge, 2004). A truly great book that has influenced my own scientific thinking tremendously.
• Archer, Margaret (1995). Realist social theory: the morphogenetic approach. Cambridge: Cambridge University Press
• Bhaskar, Roy (1978). A realist theory of science. Hassocks: Harvester P.
• Cartwright, Nancy (1989). Nature’s capacities and their measurement. Oxford: Clarendon Press
• Chalmers, Alan (2013). What is this thing called science?. 4th. ed. Buckingham: Open University Press
• Garfinkel, Alan (1981). Forms of explanation: rethinking the questions in social theory. New Haven: Yale U.P.
• Harré, Rom (1960). An introduction to the logic of the sciences. London: Macmillan
• Lawson, Tony (1997). Economics and reality. London: Routledge
• Lieberson, Stanley (1987). Making it count: the improvement of social research and theory. Berkeley: Univ. of California Press
• Lipton, Peter (2004). Inference to the best explanation. 2. ed. London: Routledge
• Miller, Richard (1987). Fact and method: explanation, confirmation and reality in the natural and the social sciences. Princeton, N.J.: Princeton Univ. Press
Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economic theory – have increased relative to Pennsylvania. However, when economists Alan Krueger and David Card gathered information on fast food restaurants in the two states, it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to neoclassical demand theory we had an anomalous case of a backward-sloping supply curve.
Lo and behold!
But of course — when facts and theory don’t agree, it’s the facts that have to be wrong …
The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the pre-supposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.
James M. Buchanan in Wall Street Journal (April 25, 1996)
[h/t Jan Milch]
Source: Statistics Sweden (2014-02-20) and own calculations
“None of this is an argument in favor of taking a road along which there is less rigorous
thinking. Our problem is much more that we have developed our models using certain
mathematical techniques and that we have become slaves to those techniques. It is
surely this more than anything else that has led us to persist with a model that, to any
outsider, seems such a poor description of what actually happens in markets. The real
world is one in which various market forms coexist, where different prices for goods are
observed, and where the individuals who participate have only very local information.
The appropriate notion of demand in such a world is certainly not close to the definition
that we find in general equilibrium theory, but this does not make it any less interesting
to analyze. The only drawback is that we may have a lot more intellectual climbing to
SVT har låtit Markus Jäntti, professor i ekonomi vid Institutet för social forskning på Stockholms Universitet, analysera Statistiska Central-byråns inkomst-fördelningsundersökning.
– På lång sikt har inkomstskillnaderna ökat ganska markant i Sverige. Både taget som ett genomsnitt över hela befolkningen men också om man tittar på enskilda grupper. Den procentuella inkomstutvecklingen har varit väldigt mycket högre i toppen av fördelningen än i botten sedan i början av 90-talet, säger Markus Jäntti …
Dessutom visar siffrorna att den tiondel som har lägst inkomster sett sina inkomster öka i genomsnitt med bara drygt en procent per år sedan 1991. Den inkomstgrupp som tjänar mest har sett sina inkomster öka med närmare 3,5 procent per år …
Enligt SCB har den så kallade Ginikoefficienten som mäter inkomstskillnader ökat kraftigt över tid i Sverige …
– Den grupp som ser ut att under en längre period klarat sig sämst är ensamförsörjande, framför allt mammor men även pappor. Den andel som har väldigt låga inkomster har tredubblats under de senaste tio – tolv åren, säger Markus Jäntti.
“To be absolutely clear, what Sonnenschein (1972), Mantel (1974), and
Debreu (1974) showed is that there is no hope of a general result for stability, since the
only conditions on the aggregate excess demand function that can be derived from even
the strongest form of the assumptions on individual preferences are the well‐known
four: continuity, Walras’s law, homogeneity of degree zero, and boundary conditions
that guarantee that aggregate excess demand “explodes” if any price goes to zero. Since
there are functions satisfying these conditions that are not stable with respect to the
tâtonnement process, and that do not have a unique equilibrium, these properties
cannot be guaranteed by the assumptions on individual characteristics.
The full force of the Sonnenschein, Mantel, and Debreu (SMD) result is often not
appreciated. Without stability or uniqueness, the intrinsic interest of economic analysis
based on the general equilibrium model is extremely limited. Morishima’s observation
about stability is well taken, but for macroeconomists uniqueness is also important.
“Comparative statics” in which one compares equilibrium and another one, predicated
on a change in the parameters, makes no sense in the presence of multiple equilibria.
The usual way out of this problem is to assume a “representative agent,” and this
obviously generates a unique equilibrium. However, the assumption of such an
individual is open to familiar criticisms (Kirman 1992; Stoker 1995), and recourse to this
creature raises one of the basic problems encountered on the route to the place where
general equilibrium has found itself: the problem of aggregation. In fact, we know that,
in general, there is no simple relation between individual and aggregate behavior, and
to assume that behavior at one level can be assimilated to that at the other is simply
If we are interested in describing a stable system, then the arguments for the general equilibrium model as one that is informationally efficient are illusory. The very fact that we observe, in reality, increasing amounts of resources being devoted to informational acquisition and processing implies that the standard general equilibrium model and the standard models of financial markets are failing to capture important aspects of reality.“
As we’ve been aware of lately there isn’t much trickle-down going on in the USA. Unfortunately we can also see the same pattern developing in many other countries. Take for example Sweden. The figure below shows how the distribution of mean income and wealth (expressed in year 2009 prices) for the top 0.1% and the bottom 90% has changed in Sweden for the last 30 years:
The Gini coefficient is a measure of inequality (where a higher number signifies greater inequality) and for Sweden we have this for the disposable income distribution:
Source: Statistics Sweden and own calculations
What we see happen in the US and Sweden is deeply disturbing. The rising inequality is outrageous – not the least since it has to a large extent to do with income and wealth increasingly being concentrated in the hands of a very small and privileged elite.
Societies where we allow the inequality of incomes and wealth to increase without bounds, sooner or later implode. The cement that keeps us together erodes and in the end we are only left with people dipped in the ice cold water of egoism and greed. It’s high time to put an end to this the worst Juggernaut of our time!