03 November 2011

Learning (again) from Nobel Prize

Learning (again) from the Nobel Prize in Economics
The Nobel Prize in Economic Sciences 2011 has been awarded jointly to Thomas J. Sargent and Christopher A. Sims "for their empirical research on cause and effect in the macroeconomy"
See how their discussion “on cause and effect” can be enlightening for other sciences:
“Let us discuss a couple of examples in economics and political science to discuss causality and directionality of the relationship between variables.
Consider an economic law, traditionally represented by the so-called Phillips curve, which postulates a trade-off between inflation and unemployment.
There are two ways to read the Phillips curve. The ‘classical’ or ‘monetarist’ point of view implied that a decrease in unemployment would produce higher inflation, leading thus to the invitation to regress change in inflation on unemployment. A Keynesian reading, however, implied the opposite. If the government increases the quantity of money (through monetary of fiscal policy), while inflation may rise, it will reduce unemployment. The mathematical consequence is that different parameters can be obtained in the relationship between the two variables depending on which direction is used. The slope of the Phillips curve will be different if unemployment is regressed on inflation rather than inflation on unemployment. The Phillips curve appears to be flatter under the Keynesian direction (for instance, a decrease of 5 percentage points in unemployment may produce an increase of 5 points in inflation, but, under the same circumstances, only an increase of 10 points in inflation may be able to produce a 5 point decrease in unemployment; see Thomas Sargent, The Conquest of American Inflation, Princeton University Press, 1999).
The long-lasting controversy in the past between ‘monetarists’ and ‘Keynesians’ suggests that lack of appropriate statistical techniques probably hindered both sound understanding and efficient policy-making in this important field.”
Excerpt from:
Josep Colomer, ‘What Other Sciences Look Like’, European Political Science, 2007: 134-142.
For the article: CLICK


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