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The problem in economics is that it's very hard to invalidate a theory. What would you consider an invalidation of the theory?

RobertoG 9y ago
Not the original commenter, but, a negative correlation between government investment and economic growth?
ekidd 9y ago
The easiest way to invalidate a theory is to see what predictions it makes, and to figure out where those predictions were wrong. One recent example: the choice between austerity and stimulus, in the US and Europe, shortly after the 2008 downturn. Keynesian economic theory claimed that if your interest rate approached 0%, that you could no longer stimulate the economy via interest rates, but that the best way to improve the situation was for the government to create and spend money. And that doing so wouldn't cause sudden inflation. Another theory said that fiscal austerity measures and the reduction of government debt would improve the situation. This theory also suggested that the US should experience strong inflation in the years immediately following 2008. IIRC, the US government spent something like 1/3 to 1/2 the money that some Keynesian economists recommend spending on a stimulus. Other countries tried varying degrees of austerity. So to test the theory, you'd need to compare what happened in different countries. Note that this particular "Keynesian" theory does not necessarily recommend heavy government spending when the Fed interest rate is above 0%. Basically, it's only about emergency measures when ordinary economic theories have failed. For an easily-accessible version of this particular "Keynesian" theory, and why it's supposed to work, see this paper on the "Capital Hill Baby Sitting Co-op": http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coop.pdf http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coo... This is really more of parable than anything else, but it explains the logic. Tl;dr: At the government's scale, money is a weird abstraction and you can't always pretend that it works like grain or cars or other simple economic goods. Or to put it another way, if the economy gets bad enough, then everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give. I'm not qualified to comment on whether this theory is actually true. But that's how you might test it, and an explanation of why it's supposed to be useful under certain circumstances.
- justforFranz 9y ago
  And as we saw, despite claims from worry warts like Ron Paul, and from gold advertisers playing pump 'n dump, there was no inflation in the US to speak of. Throughout The Great Recession government bond prices remained high - which allowed the US to continue borrowing & spending without being reigned in by financial markets.
  - pishpash 9y ago
    There is an enormous amount of asset inflation, and future inflation is just "stored" there.
    - AlexCoventry 9y ago
      Do you mean inflation in financial instruments and other investment vehicles?
    - jasode 9y ago
      Exactly. The following phenomenon are all related: - the record-breaking auction prices of art pieces (Picasso, etc) at Christie's & Sothebys - the vast pools of money chasing late-stage tech startups driving up late-round valuations, - the increase in student loans for college students driving up tuition prices outpacing "official" inflation metric There's also "shrinkflation"[1] which is a form of inflation but does not count in CPI calculations. Also, many homeowners complained that their house insurance went up 20+ percent even though they don't live in a hurricane or flood zone. The pundits saying there's no inflation seem to only look at the flawed CPI statistic. If the Fed's quantitative easing creates $4 trillion in new money, that has to show up somewhere in the economy. (Unless _everybody_ coordinates to hide all $4 trillion in a mattress to negate its effect.) If citizens are seeing a reduction in purchasing power in real terms, you have inflation happening. [1] https://en.wikipedia.org/wiki/Shrinkflation https://en.wikipedia.org/wiki/Shrinkflation
      - alethiophile 9y ago
        See also, the related phenomenon of a company introducing a new, notionally superior product line at a higher price than the original, then somewhat later discontinuing the original, while never reducing the price of the new one. This results in the cheapest available product becoming more expensive, without this appearing in inflation statistics. I have the most exposure to this in the realm of medical products. A family member has Type I diabetes, and so must continually buy insulin and blood testing supplies as an everyday expense; several times, he has been forced to switch products (between varieties of insulin, from purely chemical test strips to ones with an electronic reader, &c.) by the discontinuance of the older product. The new one is always much more expensive, and never reduces in price to match the old; this has resulted in a significant increase in his expenses for these supplies, despite nothing ever occurring that would appear in inflation statistics.

RobertoG 9y ago

Not the original commenter, but, a negative correlation between government investment and economic growth?

ekidd 9y ago

The easiest way to invalidate a theory is to see what predictions it makes, and to figure out where those predictions were wrong. One recent example: the choice between austerity and stimulus, in the US and Europe, shortly after the 2008 downturn. Keynesian economic theory claimed that if your interest rate approached 0%, that you could no longer stimulate the economy via interest rates, but that the best way to improve the situation was for the government to create and spend money. And that doing so wouldn't cause sudden inflation. Another theory said that fiscal austerity measures and the reduction of government debt would improve the situation. This theory also suggested that the US should experience strong inflation in the years immediately following 2008. IIRC, the US government spent something like 1/3 to 1/2 the money that some Keynesian economists recommend spending on a stimulus. Other countries tried varying degrees of austerity. So to test the theory, you'd need to compare what happened in different countries. Note that this particular "Keynesian" theory does not necessarily recommend heavy government spending when the Fed interest rate is above 0%. Basically, it's only about emergency measures when ordinary economic theories have failed. For an easily-accessible version of this particular "Keynesian" theory, and why it's supposed to work, see this paper on the "Capital Hill Baby Sitting Co-op": http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coop.pdf http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coo... This is really more of parable than anything else, but it explains the logic. Tl;dr: At the government's scale, money is a weird abstraction and you can't always pretend that it works like grain or cars or other simple economic goods. Or to put it another way, if the economy gets bad enough, then everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give. I'm not qualified to comment on whether this theory is actually true. But that's how you might test it, and an explanation of why it's supposed to be useful under certain circumstances.

justforFranz 9y ago
And as we saw, despite claims from worry warts like Ron Paul, and from gold advertisers playing pump 'n dump, there was no inflation in the US to speak of. Throughout The Great Recession government bond prices remained high - which allowed the US to continue borrowing & spending without being reigned in by financial markets.
- pishpash 9y ago
  There is an enormous amount of asset inflation, and future inflation is just "stored" there.
  - AlexCoventry 9y ago
    Do you mean inflation in financial instruments and other investment vehicles?
  - jasode 9y ago
    Exactly. The following phenomenon are all related: - the record-breaking auction prices of art pieces (Picasso, etc) at Christie's & Sothebys - the vast pools of money chasing late-stage tech startups driving up late-round valuations, - the increase in student loans for college students driving up tuition prices outpacing "official" inflation metric There's also "shrinkflation"[1] which is a form of inflation but does not count in CPI calculations. Also, many homeowners complained that their house insurance went up 20+ percent even though they don't live in a hurricane or flood zone. The pundits saying there's no inflation seem to only look at the flawed CPI statistic. If the Fed's quantitative easing creates $4 trillion in new money, that has to show up somewhere in the economy. (Unless _everybody_ coordinates to hide all $4 trillion in a mattress to negate its effect.) If citizens are seeing a reduction in purchasing power in real terms, you have inflation happening. [1] https://en.wikipedia.org/wiki/Shrinkflation https://en.wikipedia.org/wiki/Shrinkflation
    - alethiophile 9y ago
      See also, the related phenomenon of a company introducing a new, notionally superior product line at a higher price than the original, then somewhat later discontinuing the original, while never reducing the price of the new one. This results in the cheapest available product becoming more expensive, without this appearing in inflation statistics. I have the most exposure to this in the realm of medical products. A family member has Type I diabetes, and so must continually buy insulin and blood testing supplies as an everyday expense; several times, he has been forced to switch products (between varieties of insulin, from purely chemical test strips to ones with an electronic reader, &c.) by the discontinuance of the older product. The new one is always much more expensive, and never reduces in price to match the old; this has resulted in a significant increase in his expenses for these supplies, despite nothing ever occurring that would appear in inflation statistics.