Methodological Point Illustrated

In the introduction to America's Great Depression, Murray Rothbard writes:

"Suppose a theory asserts that a certain policy will cure a depression. The government, obedient to the theory, puts the policy into effect. The depression is not cured. The critics and advocates of the theory now leap to the fore with interpretations. The critics say that failure proves the theory incorrect. The advocates say that the government erred in not pursuing the theory boldly enough, and that what is needed is stronger measures in the same direction. Now the point is that empirically there is no possible way of deciding between them. Where is the empirical "test" to resolve the debate? How can the government rationally decide upon its next step? Clearly, the only possible way of resolving the issue is in the realm of pure theory-by examining the conflicting premises and chains of reasoning."

This hypothetical empirical test is not so hypothetical in today's America. Indeed, if I didn't know better, I would have thought that Rothbard described the current debate.

The U.S. government, obedient to Keynesian theories has pursued Keynesian policies. This has not ended the economic slump and the rise in unemployment. Republican critics like Rush Limbaugh say that the failure to lift the economy proves that the policy has a mistake, while Keynesian Paul Krugman argues that this only proves that the stimulus wasn't big enough and that a second stimulus is needed.

Since we can't study some kind of alternate universe where everything is equal to this reality except there was no stimulus, or where the stimulus was much bigger, we can't based on the empirical record alone decide who is right. Combined with theory and more detailed data, however, the empirical record can however give us a hint of how big the effect is-and whether the net effect is positive or negative.