Wednesday, May 16, 2007

Daniel Hausman On One Aspect Of The CCC

"Demand theorists know there are few Giffen goods. They know why there are Giffen goods. They can successfully predict that certain goods in certain economies (potatoes in Ireland, rice in China, or yams in New Guinea) are likely to be Giffen goods. Capital theorists, on the other hand, do not know whether capital reversing is common or rare. Until recently they possessed no theory which made sense of the phenomenon. The status of that fundamental theory remains, moreover, questionable. From the perspective of the Austrian theory or of Clark's theory, capital reversing is nothing but a disconfirmation. Capital theorists are also unable to predict when capital reversing will occur. They cannot point to some feature of an economy and say, 'Ah, we can see that this is one of the exceptional cases in which we should not expect our simpler capital theories to work.' There is no justification for the claim that capital reversing demands only minor qualifications in simplified capital theories." -- Daniel M. Hausman (1981). Capital, Profits, and Prices: An Essay in the Philosophy of Economics, Columbia University Press
Hausman makes a distinction in this book between Models and Theories. Those interested in how Hausman's draws his lines are probably better advised, though, to read his later The Inexact and Separate Science of Economics.

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