by Gene Callahan
In a physical science, such as, say, astronomy, if the physical world disagrees with our model, we correct the model. For instance, imagine that our model predicts that Venus will be at a certain place in the sky tomorrow night. Tomorrow night we turn our telescope to that place in the sky and find that Venus is nowhere near there. What we do is we go back to the drawing board and devise a new model.
Now let us look at this economics paper that our friend Bob Murphy over at Free Advice alerted us to. Two economists examine the issue of whether Irving Fisher was correct to claim, before the crash of 1929, that stocks were undervalued at the time. If undervalued is going to have any objective meaning at all, it is going to have to mean something like “Gee, I really regret not having invested in stocks at that point because they did very well from then on out.” On the other hand, stocks being overvalued, to be an objective statement, must mean something like “My God, investing in stocks at that point sure would have been stupid.”
But look at what these two economists conclude — “The evidence strongly suggests that Fisher was right. Even at the 1929 peak, stocks were undervalued relative to the prediction of theory.” So, in other words, faced with a disagreement between their model and reality, these chaps conclude “our model is right; reality will have to be corrected.” And look at what they term “the evidence” — not reality, but “the prediction of theory”! Their model is evidence that reality was off the mark.
Methinks there is something seriously amiss here.