Monday, April 11, 2011

CHAPTER 7: Economists like to qualify their theories with the "CETERIS PARIBUS" assumption.  It means other things remaining the same.  Of course other things never do remain the same since we live in a complex adaptive system called society that is always changing. 

Mainstream economists also like to express their theories using mathematical models.  This allows them to make precise predictions which of course are invariably wrong since ceteris are never paribus.

A study of history does help but in the end doesn't prove anything.  For example, although everyone agrees there was a Great Depression in the 1930s, Keynesians contend it was caused by capitalism and would have been less severe if there had been more government intervention or at least if it had been used differently.  Austrians believe the Great Depression was brought on by government intervention (Federal Reserve policies) and prolonged by more intervention (FDR's New Deal).

So who is right?  Unlike the hard sciences an appeal to the facts cannot resolve this dispute.   If Galileo had been an economist we would still be debating his theory. 

Nevertheless history cannot be ignored.  Let's take a look at what historians could learn from Austrian School economists.  Read this.

Review Questions:  Did capitalism cause the Great Depression or did government intervention cause it?  Does your paradigm influence your answer? 

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