UCLA Capitalism in American Economy Multiple Choice Questions

Question Description

I’m working on a economics question and need guidance to help me learn.

4 attachmentsSlide 1 of 4attachment_1attachment_1attachment_2attachment_2attachment_3attachment_3attachment_4attachment_4.slider-slide > img { width: 100%; display: block; }
.slider-slide > img:focus { margin: auto; }

Unformatted Attachment Preview

Keynesian Economics
Keynesian economics is a theory of total spending in the
economy (called aggregate demand) and its effects on
output and inflation. Although the term has been used (and
abused) to describe many things over the years, six
principal tenets seem central to Keynesianism. The first
three describe how the economy works.
1. A Keynesian believes that aggregate demand is
influenced by a host of economic decisions—both public
and private—and sometimes behaves erratically. The public
decisions include, most prominently, those on monetary and
fiscal (i.e., spending and tax) policies. Some decades ago,
economists heatedly debated the relative strengths of
monetary and fiscal policies, with some Keynesians arguing
that monetary policy is powerless, and some monetarists
arguing that fiscal policy is powerless. Both of these are
essentially dead issues today. Nearly all Keynesians and
monetarists now believe that both fiscal and monetary
policies affect aggregate demand. A few economists,
however, believe in debt neutrality—the doctrine that
substitutions of government borrowing for taxes have no
effects on total demand (more on this below).
2. According to Keynesian theory, changes in aggregate
demand, whether anticipated or unanticipated, have their
greatest short-run effect on real output and employment,
not on prices. This idea is portrayed, for example, in phillips
curves that show inflation rising only slowly when
unemployment falls. Keynesians believe that what is true
about the short run cannot necessarily be inferred from
what must happen in the long run, and we live in the short
run. They often quote Keynes’s famous statement, “In the
long run, we are all dead,” to make the point.
Monetary policy can produce real effects on output and
employment only if some prices are rigid—if nominal wages
(wages in dollars, not in real purchasing power), for
example, do not adjust instantly. Otherwise, an injection of
new money would change all prices by the same
percentage. So Keynesian models generally either assume
or try to explain rigid prices or wages. Rationalizing rigid
prices is a difficult theoretical problem because, according
to standard microeconomic theory, real supplies and
demands should not change if all nominal prices rise or fall
proportionally.
But Keynesians believe that, because prices are somewhat
rigid, fluctuations in any component of spending—
consumption, investment, or government expenditures—
cause output to fluctuate. If government spending
increases, for example, and all other components of
spending remain constant, then output will increase.
Keynesian models of economic activity also include a socalled multiplier effect; that is, output increases by a
multiple of the original change in spending that caused it.
Thus, a ten-billion-dollar increase in government spending
could cause total output to rise by fifteen billion dollars (a
multiplier of 1.5) or by five billion (a multiplier of 0.5).
Contrary to what many people believe, Keynesian analysis
does not require that the multiplier exceed 1.0. For
Keynesian economics to work, however, the multiplier must
be greater than zero.
3. Keynesians believe that prices, and especially wages,
respond slowly to changes in supply and demand, resulting
in periodic shortages and surpluses, especially of labor.
Even Milton Friedman acknowledged that “under any
conceivable institutional arrangements, and certainly under
those that now prevail in the United States, there is only a
limited amount of flexibility in prices and wages.” In current
parlance, that would certainly be called a Keynesian
position.
No policy prescriptions follow from these three beliefs
alone. And many economists who do not call themselves
Keynesian would nevertheless accept the entire list. What
distinguishes Keynesians from other economists is their
belief in the following three tenets about economic policy.
4. Keynesians do not think that the typical level of
unemployment is ideal—partly because unemployment is
subject to the caprice of aggregate demand, and partly
because they believe that prices adjust only gradually. In
fact, Keynesians typically see unemployment as both too
high on average and too variable, although they know that
rigorous theoretical justification for these positions is hard
to come by. Keynesians also feel certain that periods of
recession or depression are economic maladies, not, as in
real business cycle theory, efficient market responses to
unattractive opportunities.
5. Many, but not all, Keynesians advocate activist
stabilization policy to reduce the amplitude of the business
cycle, which they rank among the most important of all
economic problems. Here, however, even some
conservative Keynesians part company by doubting either
the efficacy of stabilization policy or the wisdom of
attempting it.
This does not mean that Keynesians advocate what used to
be called fine-tuning—adjusting government spending,
taxes, and the money supply every few months to keep the
economy at full employment. Almost all economists,
including most Keynesians, now believe that the
government simply cannot know enough soon enough to
fine-tune successfully. Three lags make it unlikely that finetuning will work. First, there is a lag between the time that a
change in policy is required and the time that the
government recognizes this. Second, there is a lag between
when the government recognizes that a change in policy is
required and when it takes action. In the United States, this
lag can be very long for fiscal policy because Congress and
the administration must first agree on most changes in
spending and taxes. The third lag comes between the time
that policy is changed and when the changes affect the
economy. This, too, can be many months. Yet many
Keynesians still believe that more modest goals for
stabilization policy—coarse-tuning, if you will—are not only
defensible but sensible. For example, an economist need
not have detailed quantitative knowledge of lags to
prescribe a dose of expansionary monetary policy when the
unemployment rate is very high.
6. Finally, and even less unanimously, some Keynesians are
more concerned about combating unemployment than
about conquering inflation. They have concluded from the
evidence that the costs of low inflation are small. However,
there are plenty of anti-inflation Keynesians. Most of the
world’s current and past central bankers, for example, merit
this title whether they like it or not. Needless to say, views
on the relative importance of unemployment and inflation
heavily influence the policy advice that economists give and
that policymakers accept. Keynesians typically advocate
more aggressively expansionist policies than non-
Keynesians.
Keynesians’ belief in aggressive government action to
stabilize the economy is based on value judgments and on
the beliefs that (a) macroeconomic fluctuations significantly
reduce economic well-being and (b) the government is
knowledgeable and capable enough to improve on the free
market.
The brief debate between Keynesians and new classical
economists in the 1980s was fought primarily over (a) and
over the first three tenets of Keynesianism—tenets the
monetarists had accepted. New classicals believed that
anticipated changes in the money supply do not affect real
output; that markets, even the labor market, adjust quickly
to eliminate shortages and surpluses; and that business
cycles may be efficient. For reasons that will be made clear
below, I believe that the “objective” scientific evidence on
these matters points strongly in the Keynesian direction. In
the 1990s, the new classical schools also came to accept
the view that prices are sticky and that, therefore, the labor
market does not adjust as quickly as they previously
thought (see new classical macroeconomics).
Before leaving the realm of definition, I must underscore
several glaring and intentional omissions.
First, I have said nothing about the school of thought. Like
Keynes himself, many Keynesians doubt that school’s view
that people use all available information to form their
expectations about economic policy. Other Keynesians
accept the view. But when it comes to the large issues with
which I have concerned myself, nothing much rides on
whether or not expectations are rational. Rational
expectations do not, for example, preclude rigid prices;
rational expectations models with sticky prices are
thoroughly Keynesian by my definition. I should note,
though, that some new classicals see rational expectations
as much more fundamental to the debate.
The second omission is the hypothesis that there is a
“natural rate” of unemployment in the long run. Prior to
1970, Keynesians believed that the long-run level of
unemployment depended on government policy, and that
the government could achieve a low unemployment rate by
accepting a high but steady rate of inflation. In the late
1960s, Milton Friedman, a monetarist, and Columbia’s
Edmund Phelps, a Keynesian, rejected the idea of such a
long-run trade-off on theoretical grounds. They argued that
the only way the government could keep unemployment
below what they called the “natural rate” was with
macroeconomic policies that would continuously drive
inflation higher and higher. In the long run, they argued, the
unemployment rate could not be below the natural rate.
Shortly thereafter, Keynesians like Northwestern’s Robert
Gordon presented empirical evidence for Friedman’s and
Phelps’s view. Since about 1972 Keynesians have integrated
the “natural rate” of unemployment into their thinking. So
the natural rate hypothesis played essentially no role in the
intellectual ferment of the 1975–1985 period.
Third, I have ignored the choice between monetary and
fiscal policy as the preferred instrument of stabilization
policy. Economists differ about this and occasionally change
sides. By my definition, however, it is perfectly possible to
be a Keynesian and still believe either that responsibility for
stabilization policy should, in principle, be ceded to the
monetary authority or that it is, in practice, so ceded. In
fact, most Keynesians today share one or both of those
beliefs.
Keynesian theory was much denigrated in academic circles
from the mid-1970s until the mid-1980s. It has staged a
strong comeback since then, however. The main reason
appears to be that Keynesian economics was better able to
explain the economic events of the 1970s and 1980s than
its principal intellectual competitor, new classical
economics.
True to its classical roots, new classical theory emphasizes
the ability of a market economy to cure recessions by
downward adjustments in wages and prices. The new
classical economists of the mid-1970s attributed economic
downturns to people’s misperceptions about what was
happening to relative prices (such as real wages).
Misperceptions would arise, they argued, if people did not
know the current price level or inflation rate. But such
misperceptions should be fleeting and surely cannot be
large in societies in which price indexes are published
monthly and the typical monthly inflation rate is less than 1
percent. Therefore, economic downturns, by the early new
classical view, should be mild and brief. Yet, during the
1980s most of the world’s industrial economies endured
deep and long recessions. Keynesian economics may be
theoretically untidy, but it certainly predicts periods of
persistent, involuntary unemployment.
According to the early new classical theorists of the 1970s
and 1980s, a correctly perceived decrease in the growth of
the money supply should have only small effects, if any, on
real output. Yet, when the Federal Reserve and the Bank of
England announced that monetary policy would be
tightened to fight inflation, and then made good on their
promises, severe recessions followed in each country. New
classicals might claim that the tightening was unanticipated
(because people did not believe what the monetary
authorities said). Perhaps it was, in part. But surely the
broad contours of the restrictive policies were anticipated,
or at least correctly perceived as they unfolded. Oldfashioned Keynesian theory, which says that any monetary
restriction is contractionary because firms and individuals
are locked into fixed-price contracts, not inflation-adjusted
ones, seems more consistent with actual events.
An offshoot of new classical theory formulated by Harvard’s
Robert Barro is the idea of debt neutrality (see government
debt and deficits). Barro argues that inflation,
unemployment, real GNP, and real national saving should
not be affected by whether the government finances its
spending with high taxes and low deficits or with low taxes
and high deficits. Because people are rational, he argues,
they will correctly perceive that low taxes and high deficits
today must mean higher future taxes for them and their
heirs. They will, Barro argues, cut consumption and increase
their saving by one dollar for each dollar increase in future
tax liabilities. Thus, a rise in private saving should offset any
increase in the government’s deficit. Naïve Keynesian
analysis, by contrast, sees an increased deficit, with
government spending held constant, as an increase in
aggregate demand. If, as happened in the United States in
the early 1980s, the stimulus to demand is nullified by
contractionary monetary policy, real interest rates should
rise strongly. There is no reason, in the Keynesian view, to
expect the private saving rate to rise.
The massive U.S. tax cuts between 1981 and 1984 provided
something approximating a laboratory test of these
alternative views. What happened? The private saving rate
did not rise. Real interest rates soared. With fiscal stimulus
offset by monetary contraction, real GNP growth was
approximately unaffected; it grew at about the same rate as
it had in the recent past. Again, this all seems more
consistent with Keynesian than with new classical theory.
Finally, there was the European depression of the 1980s, the
worst since the depression of the 1930s. The Keynesian
explanation is straightforward. Governments, led by the
British and German central banks, decided to fight inflation
with highly restrictive monetary and fiscal policies. The antiinflation crusade was strengthened by the European
monetary system, which, in effect, spread the stern German
monetary policy all over Europe. The new classical school
has no comparable explanation. New classicals, and
conservative economists in general, argue that European
governments interfere more heavily in labor markets (with
high unemployment benefits, for example, and restrictions
on firing workers). But most of these interferences were in
place in the early 1970s, when unemployment was
extremely low.
About the Author
Alan S. Blinder is the Gordon S. Rentschler Memorial
Professor of Economics at Princeton University. He was
previously vice chairman of the Federal Reserve’s Board of
Governors, and before that was a member of President Bill
Clinton’s Council of Economic Advisers.
Further Reading
Blinder, Alan S. “Keynes After Lucas.” Eastern Economic
Journal 12, no. 3 (1986): 209–216.
Blinder, Alan S. “Keynes, Lucas, and Scientific Progress.”
American Economic Review 77, no. 2 (1987): 130–136.
Reprinted in Mark Blaug, ed., John Maynard Keynes (1833–
1946), vol. 2. Brookfield, Vt.: Edward Elgar, 1991.
Gordon, Robert J. “What Is New-Keynesian Economics?”
Journal of Economic Literature 28, no. 3 (1990): 1115–1171.
Keynes, John Maynard. The General Theory of Employment,
Interest, and Money. London: Macmillan, 1936.
Mankiw, N. Gregory, and others. “A Symposium on
Keynesian Economics Today.” Journal of Economic
Perspectives 7 (Winter 1993): 3–82.
Footnotes
“The Role of Monetary Policy,” American Economic Review
58, no. 1: 13.
American Economic Association
The Pretence of Knowledge
Author(s): Friedrich August von Hayek
Source: The American Economic Review, Vol. 79, No. 6, Nobel Lectures and 1989 Survey of
Members (Dec., 1989), pp. 3-7
Published by: American Economic Association
Stable URL: https://www.jstor.org/stable/1914347
Accessed: 07-02-2020 02:03 UTC
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at

American Economic Association is collaborating with JSTOR to digitize, preserve and extend
access to The American Economic Review
This content downloaded from 128.97.245.59 on Fri, 07 Feb 2020 02:03:43 UTC
All use subject to https://about.jstor.org/terms
The Pretence of Knowledge
Nobel Memorial Lecture, December 11, 1974
By FRIEDRICH AUGUST VON HAYEK*
necessarily limited and may not include the important
ones. While in the physical sciences it is generally assumed, probably with good reason, that any important
factor which determines the observed events will itself
be directly observable and measurable, in the study of
such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a
process, for reasons which I shall explain later, will
hardly ever be fully known or measurable. And while in
the physical sciences the investigator will be able to
measure what, on the basis of a prima facie theory, he
thinks important, in the social sciences often that is
treated as important which happens to be accessible
to measurement. This is sometimes carried to the point
where it is demanded that our theories must be formulated in such terms that they refer only to measura-
The particular occasion of this lecture, combined with
the chief practical problem which economists have to
face today, have made the choice of its topic almost
inevitable. On the one hand the still recent establishment of the Nobel Memorial Prize in Economic Science
marks a significant step in the process by which, in the
opinion of the general public, economics has been
conceded some of the dignity and prestige of the physical sciences. On the other hand, the economists are at
this moment called upon to say how to extricate the
free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about
by policies which the majority of economists recommended and even urged governments to pursue. We
have indeed at the moment little cause for pride: as a
profession we have made a mess of things.
It seems to me that this failure of the economists to
guide policy more successfully is closely connected
with their propensity to imitate as closely as possible
the procedures of the brilliantly successful physical
sciences-an attempt which in our field may lead to
outright error. It is an approach which has come to be
described as the “scientistic” attitude-an attitude
which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it
involves a mechanical and uncritical application of habits of thought to fields different from those in which they
have been formed.”1 I want today to begin by explaining how some of the gravest errors of recent economic
policy are a direct consequence of this scientistic error.
The theory which has been guiding monetary and
financial policy during the last thirty years, and which I
contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in
the assertion that there exists a simple positive correlation between total employment and the size of the
aggregate demand for goods and services; it leads to
the belief that we can permanently assure full employment by maintaining total money expenditure at an
ble magnitudes.
It can hardly be denied that such a demand quite
arbitrarily limits the facts which are to be admitted as
possible causes of the events which occur in the real
world. This view, which is often quite naively accepted
as required by scientific procedure, has some rather
paradoxical consequences. We know, of course, with
regard to the market and similar social structures, a
great many facts which we cannot measure and on
which indeed we have only some very imprecise and
general information. And because the effects of these
facts in any particular instance cannot be confirmed by
quantitative evidence, they are simply disregarded by
those sworn to admit only what they regard as scientific
evidence: they thereupon happily proceed on the fiction that the factors which they can measure are the
only ones that are relevant.
The correlation between aggregate demand and
total employment, for instance, may only be approximate, but as it is the only one on which we have quantitative data, it is accepted as the only causal
connection that counts. On this standard there may
thus well exist better “scientific” evidence for a false
theory, which will be accepted because it is more
“scientific”, than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it.
Let me illustrate this by a brief sketch of what I regard
as the chief actual cause of extensive unemployment
-an account which will also explain why such unemployment cannot be lastingly cured by the inflationary
policies recommended by the now fashionable theory.
This correct explanation appears to me to be the existence of discrepancies between the distribution of demand among the different goods and services and the
allocation of labour and other resources among the
production of those outputs. We possess a fairly good
“qualitative” knowledge of the forces by which a correspondence between demand and supply in the differ-
appropriate level. Among the various theories advanced to account for extensive unemployment, this is
probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we
now experience, as very harmful.
This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics
and other disciplines that deal with essentially complex
phenomena, the aspects of the events to be accounted for about which we can get quantitative data are
*Hayek received the 1974 Nobel Memorial Prize in Economic Science.
Copyright (c) THE NOBEL FOUNDATION 1974
1 “Scientism and the Study of Society”, Economica, vol. IX, no. 35,
August 1942, reprinted in The Counter-Revolution of Science,
Glencoe, III., 1952, p. 15 of this reprint.
3
This content downloaded from 128.97.245.59 on Fri, 07 Feb 2020 02:03:43 UTC
All use subject to https://about.jstor.org/terms
4 THE AMERICAN ECONOMIC REVIEW DECEMBER 1989
ent sectors of the economic system is brought about,
of the conditions under which it will be achieved, and
of the factors likely to prevent such an adjustment. The
separate steps in the account of this process rely on
facts of everyday experience, and few who take the
the various distinctive properties of the elements. But
this is true only where we have to deal with what has
been called by Dr. Warren Weaver (formerly of the
Rockefeller Foundation), with a distinction which ought
to be much more widely understood, “phenomena of
trouble to follow the argument will question the validity
of the factual assumptions, or the logical correctness
of the conclusions drawn from them. We have indeed
good reason to believe that unemployment indicates
that the structure of relative prices and wages has
been distorted (usually by monopolistic or governmental price fixing), and that to restore equality between
the demand and the supply of labour in all sectors
changes of relative prices and some transfers of labour
will be necessary.
But when we are asked for quantitative evidence for
the particular structure of prices and wages that would
be required in order to assure a smooth continuous
sale of the products and services offered, we must
unorganized complexity,” in contrast to those
“phenomena of organized complexity” with which we
have to deal in the social sciences.2 Organized complexity here means that the character of the structures
admit that we have no such information. We know, in
other words, the general conditions in which what we
call, somewhat misleadingly, an equilibrium will establish itself: but we never know what the particular prices
or wages are which would exist if the market were to
bring about such an equilibrium. We can merely say
what the conditions are in which we can expect the
market to establish prices and wages at which demand
will equal supply. But we can never produce statistical
information which would show how much the prevailing
prices and wages deviate from those which would secure a continuous sale of the current supply of labour.
Though this account of the causes of unemployment is
an empirical theory, in the sense that it might be proved
false, e.g. if, with a constant money supply, a general
increase of wages did not lead to unemployment, it is
certainly not the kind of theory which we could use to
obtain specific numerical predictions concerning the
showing it depends not only on the properties of the
individual elements of which they are composed, and
the relative frequency with which they occur, but also
on the manner in which the individual elements are
connected with each other. In the explanation of the
working of such structures we can for this reason not
replace the information about the individual elements
by statistical information, but require full information
about each element if from our theory we are to derive
specific predictions about individual events. Without
such specific information about the individual elements
we shall be confined to what on another occasion I
have called mere pattern predictions-predictions of
some of the general attributes of the structures that will
form themselves, but not containing specific statements about the individual elements of which the structures will be made Up.3
This is particularly true of our theories accounting for
the determination of the systems of relative prices and
wages that will form themselves on a well-functioning
market. Into the determination of these prices and
wages there will enter the effects of particular information possessed by every one of the participants in the
market process-a sum of facts which in their totality
cannot be known to the scientific observer, or to any
other single brain. It is indeed the source of the superiority of the market order, and the reason why, when it
is not suppressed by the powers of government, it
regularly displaces other types of order, that in the
rates of wages, or the distribution of labour, to be exresulting allocation of resources more of the knowlpected.
edge of particular facts will be utilized which exists only
Why should we, however, in economics, have to
dispersed among uncounted persons, than any one
plead ignorance of the sort of facts on which, in the
person can possess. But because we, the observing
case of a physical theory, a scientist would certainly be
scientists, can thus never know all the determinants of
expected to give precise information? It is probably not
such an order, and in consequence also cannot know
surprising that those impressed by the example of the
at which particular structure of prices and wages dephysical sciences should find this position very unsatismand would everywhere equal supply, we also cannot
factory and should insist on the standards of proof
measure the deviations from that order; nor can we
which they find there. The reason for this state of affairs is the fact, to which I have already briefly referred, statistically test our theory that it is the deviations from
that “equilibrium” system of prices and wages which
that the social sciences, like much of biology but unlike
make it impossible to sell some of the products and
most fields of the physical sciences, have to deal with
services at the prices at which they are offered.
structures of essential complexity, i.e. with structures
whose characteristic properties can be exhibited only
by models made up of relatively large numbers of variables. Competition, for instance, is a process which will
produce certain results only if it proceeds among a
2 Warren Weaver, “A Quarter Century in the Natural Sciences”,
fairly large number of acting persons.
In some fields, particularly where problems of a similar kind arise in the physical sciences, the difficulties
can be overcome by using, instead of specific information about the individual elements, data about the relative frequency, or the probability, of the occurrence of
The Rockefeller Foundation Annual Report 1958, chapter 1,
“Science and Complexity”.
3 See my essay “The Theory of Complex Phenomena” in The
Critical Approach to Science and Philosophy. Essays in Honor of K
R. Popper, ed. M. Bunge, New York 1964, and reprinted (with additions) in my Studies in Philosophy, Politics and Economics, London
and Chicago 1967.
This content downloaded from 128.97.245.59 on Fri, 07 Feb 2020 02:03:43 UTC
All use subject to https://about.jstor.org/terms
VOL. 79 NO. 6 HA YEK: THE PRETENCE OF KNOWLEDGE 5
Before I continue with my immediate concern, the
effects of all this on the employment policies currently
pursued, allow me to define more specifically the inherent limitations of our numerical knowledge which are
so often overlooked. I want to do this to avoid giving
the impression that I generally reject the mathematical
method in economics. I regard it in fact as the great
advantage of the mathematical technique that it allows
us to describe, by means of algebraic equations, the
general character of a pattern even where we are ignorant of the numerical values which will determine its
particular manifestation. We could scarcely have
achieved that comprehensive picture of the mutual interdependencies of the different events in a market
without this algebraic technique. It has led to the illusion, however, that we can use this technique for the
determination and prediction of the numerical values of
those magnitudes; and this has led to a vain search for
quantitative or numerical constants. This happened in
spite of the fact that the modern founders of mathematical economics had no such illusions. It is true that
their systems of equations describing the pattern of a
market equilibrium are so framed that if we were able
to fill in all the blanks of the abstract formulae, i.e. if we
knew all the parameters of these equations, we could
calculate the prices and quantities of all commodities
and services sold. But, as Vilfredo Pareto, one of the
founders of this theory, clearly stated, its purpose cannot be “to arrive at a numerical calculation of prices”,
because, as he said, it would be “absurd” to assume
that we could ascertain all the data.4 Indeed, the chief
point was already seen by those remarkable anticipators of modern economics, the Spanish schoolmen of
the sixteenth century, who emphasized that what they
called pretium mathematicum, the mathematical price,
depended on so many particular circumstances that it
could never be known to man but was known only to
God.5 I sometimes wish that our mathematical economists would take this to heart. I must confess that I still
doubt whether their search for measurable magnitudes
has made significant contributions to our theoretical
understanding of economic phenomena-as distinct
from their value as a description of particular situations.
Nor am I prepared to accept the excuse that this
branch of research is still very young: Sir William Petty,
the founder of econometrics, was after all a somewhat
senior colleague of Sir Isaac Newton in the Royal Society!
There may be few instances in which the superstition
that only measurable magnitudes can be important has
done positive harm in the economic field: but the
present inflation and employment problems are a very
serious one. Its effect has been that what is probably
the true cause of extensive unemployment has been
4 V. Pareto, Manuel d’economie politique, 2nd. ed., Paris 1927, pp.
223-4.
5 See, e.g., Lu