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Monday, August 20, 2012

How to Get Empirical?

Daniel Kuehn worries that I don't have a single empirical test in mind to see whether liquidity preference or the market for loanable funds is more important in determining the interest rate.

Well, he is right to worry: I don't. But he was interpreting my call for "empirical" work more narrowly than I meant it. I consider this paper a "test" of Austrian Business Cycle Theory, in that it looks in fair depth at the facts about a particular boom-and-bust cycle, and asks if ABCT can help us understand it. (The answer was "yes," by the way.)

The Keynesian cycle and the Hayekian cycle are ideal types. And having studied Keynes more the last few years, in order to teach him properly, I am convinced they both have explanatory adequacy.* The question then becomes, how much do they fit the facts on the ground, i.e., in Weber's terms, do they have empirical adequacy? Econometric tests are a way to examine the empirical adequacy of an ideal type, but they are not the only one.

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* To clarify what this means, here is another theory of the business cycle that would have explanatory adequacy: I postulate that, every few years, a large number of the most crucial people in society's productive process fall into a period of hibernation. This causes the economy to crash. When, after a few months or years, they wake back up, they are filled with zest and energy, and the economy experiences a boom.

This is explanatorily adequate because, if people really acted as the ideal type describes them doing, we (probably -- I really haven't thought this "theory" out much!) would get a boom-and-bust cycle. Of course, the theory is empirically nonsense: people just don't hibernate. This is likely a good theory of bear productivity, but it is a lousy one for human productivity. The point here is that it fails not because it doesn't make sense -- a long period of hibernation really would put quite a dent in one's productivity! -- but because it has the facts wrong.

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