Page 75 - Global Political Economy_Understanding The International Economic Order

CHA PTER T HREE
tions of rational individuals, perfect markets, and complete informa-
tion enable economists to make accurate predictions about economic
behavior?
In principle, of course, Friedman is quite correct that what is im-
portant is the empirical testing of a theory. However, his attack on
those who call for realistic assumptions wouldbe more convincing if
economists’ predictions and forecasts were indeed as accurate as he
apparently assumes. Also, if economists really did choose among the-
ories solely on the basis of empirical evidence, Friedman’s argument
wouldbe strengthened. However, as DonaldMcCloskey has noted,
few theories are testedempirically andeconomists choose theories for
a number of ideological, philosophical, and, in his language, “rhetori-
cal” reasons. More devastating is the fact that few theories or hypoth-
eses meet the Popperian test of falsifiability. In other words, they can-
not be tested empirically to determine their validity. Moreover,
economics, like the other social sciences, is frequently hamperedby
absence of a counterfactual against which a theory may be tested. 25
In addition, economists frequently redefine the terms of a theory to
make it consistent with empirical evidence. A notable example rele-
vant to this book was the discovery by Wassily Leontief that the
UnitedStates hada comparative advantage in agriculture, which, at
the time of his research, was considered to be a labor-intensive activ-
26
ity. Prior to Leontief’s research, conventional trade theory had pre-
dictedthat the UnitedStates shouldhave a comparative advantage in
capital-intensive goods. To resolve what became known as the “Leon-
tief Paradox,” economists introduced the concept of “human capi-
tal.” According to this reformulation of the meaning of capital, the
comparative advantage of the United States in agriculture was ex-
plainedby the fact that it hadinvestedheavily in agricultural skills,
knowledge, and equipment. Broadening the concept of capital to in-
clude human capital greatly weakened the predictive power of con-
ventional trade theory based on the idea of factor endowments.
This modification of the definition of capital and, by implication,
of conventional trade theory, raises the important epistemological
25
DonaldN. McCloskey, The Rhetoric of Economics (Madison: University of Wis-
consin, 1985). On the failure to meet the test of verifiability, consult Mark Blaug,
“Disturbing Currents in Modern Economics,” Challenge 41, no. 3 (May/June 1998):
11–34; interview with Mark Blaug, “The Problem with Formalism,” Challenge 41, no.
3 (May/June 1998): 35–45.
26
W.W. Leontief, “Domestic Production and Foreign Trade: The American Capital
Position Re-examined”, Proceedings of the American Philosophical Society 97 (Sep-
tember 1953), 332–49. Reprintedin Readings in International Trade, ed. H. G. John-
son andR. E. Caves (Homewood, Ill.: R. D. Irwin, 1968).
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