Somehow, this discussion reminds me of Dani Rodrik's conception of economics as a cluster of models that are compatible with many different results, and which of them we choose to explain reality depends on the assumptions that we think are at play. I think it's at that point that we can actually talk about "theories" which are falsifiable, etc. (similar to what you say about supply and demand), but I would not call a model a theory by itself. Anyway, great piece!
Hi Brian - I don't understand why checking a theory against output data - i.e what is actually happening - is "not the most ideal test of the theory". Is, then, the most ideal test of a theory its prediction ability?
Isn't the natural way to apply supply and demand to inflation to look at supply and demand for money, which is at one side of all purchase transactions? Looking at reasons a particular price went up doesn't explain inflation. If the price of eggs goes up that may mean that people are spending more money on eggs so have less to spend on bread so the price of bread goes down.
Supply and demand can explain anything. That's not great.
Somehow, this discussion reminds me of Dani Rodrik's conception of economics as a cluster of models that are compatible with many different results, and which of them we choose to explain reality depends on the assumptions that we think are at play. I think it's at that point that we can actually talk about "theories" which are falsifiable, etc. (similar to what you say about supply and demand), but I would not call a model a theory by itself. Anyway, great piece!
Hi Brian - I don't understand why checking a theory against output data - i.e what is actually happening - is "not the most ideal test of the theory". Is, then, the most ideal test of a theory its prediction ability?
Isn't the natural way to apply supply and demand to inflation to look at supply and demand for money, which is at one side of all purchase transactions? Looking at reasons a particular price went up doesn't explain inflation. If the price of eggs goes up that may mean that people are spending more money on eggs so have less to spend on bread so the price of bread goes down.