Saturday, March 21, 2015

How should we study the economy?

Schumpeter's approach:

We shall proceed as the physical sciences do in those cases in which it is impossible actually to isolate a phenomenon by producing it in a laboratory: from our historic and everyday knowledge of economic behavior we shall construct a "model" of the economic process over time, see whether it is likely to work in a wave-like way, and compare the result with observed fact. Henceforth, therefore, we shall disregard not only wars, revolutions, natural catastrophes, institutional changes, but also changes in commercial policy, in banking and currency legislation and habits of payment, variations of crops as far as due to weather conditions or diseases, changes in gold production as far as due to chance discoveries, and so on. These we shall call outside factors. It will be seen that in some cases it is not easy to distinguish them from features of business behavior.

He goes on:

All we can do about this here is to recommend to the reader to hold tight to the common sense of the distinction and to consider that every business man knows quite well that he is doing one kind of thing when ordering a new machine and another kind of thing when lobbying for an increase of the import duty on his product. It will also be seen that many of the things we list as outside factors are, when considered on a higher plane and for a wider purpose, the direct outcome of the working of the capitalist machine and hence no independent agencies. This is surely so but does not reduce the practical value of the distinction on our plane and for our purposes,

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