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What Does It Mean to Say That an Economist "Believes" in a Model?

Noah Smith uses the phrase "X believes" as shorthand for "X's statements are consistent with a model in which". I think that is a misleading way to think about it.

Noah Smith:

Noahpinion: The Great Ricardian Equivalence Throwdown!: Paul Krugman wrote a post about the idea of Ricardian Equivalence (the idea that the timing of taxes doesn't matter), and why it doesn't imply that fiscal stimulus can't work…. Krugman cited some remarks by uber-macroeconomist Robert Lucas:

If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that’s just a monetary policy. We don’t need the bridge to do that. We can print up the same amount of money and buy anything with it. So, the only part of the stimulus package that’s stimulating is the monetary part.


But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that…

Krugman… Ricardian Equivalence says that the timing of taxes can't matter… not that the level of government spending can't matter. Mark Thoma concurred….

Then Krugman came under fire from David Andolfatto, who says that Lucas's statement was obviously not talking about Ricardian equivalence….

[A]ll actually agree on the most important point!… Ricardian Equivalence doesn't say whether or not government spending helps or hurts the economy. Everyone agrees about that!

Lucas is restating Say's Law. Say's Law says, basically, exactly what Lucas says: If you take money from Person A and give it to Person B, then total output (GDP) will be unchanged. This is a very common argument for why stimulus can't work. Lucas is saying that A) Say's Law holds, and that B) you can't get around Say's Law by taxing people in the future instead of today…. So, Lucas is saying: (Say's Law in the static case) + (Ricardian Equivalence) = (Say's Law in the dynamic case)

I think Noah Smith is wrong here. Say's Law does not say that fiscal policy cannot affect spending but monetary policy can. Say's Law says that neither monetary nor fiscal policy can affect the level of spending because supply creates demand. Say's 1803 Treatise on Political Economy is reasonably clear on this:

Jean-Baptiste Say (1803): A Treatise on Political Economy, Book I, Chapter XV: [I]t is production which opens a demand for products…. [M]oney is but the agent of the transfer of values. Its whole utility has consisted in conveying to your hands the value of the commodities, which your customer has sold, for the purpose of buying again from you; and the very next purchase you make, it will again convey to a third person the value of the products you may have sold to others. So that you will have bought, and every body must buy, the objects of want or desire, each with the value of his respective products transformed into money for the moment only…. [T]o say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause…. Sales cannot be said to be dull because money is scarce, but because other products are so. There is always money enough to conduct the circulation and mutual interchange of other values, when those values really exist. Should the increase of traffic require more money to facilitate it, the want is easily supplied…. [M]erchants know well enough how to find substitutes for the product serving as the medium of exchange or money…

Say in 1803 does not believe that a shortage of liquidity can crimp the pace of spending: if buyers do not have cash, he says, sellers will extend credit.

Lucas, by contrast is saying that (a) monetary policy can affect spending by expanding the money supply, but (b) fiscal policy cannot. That is--if it is to be a coherent argument--a claim that (i) the government must maintain the same ratio of money balances to spending as any other economic entity (which is simply not true) and (ii) that money demand is interest inelastic (which is also simply not true).

Now there is a sense in which this is a totally fruitless exercise: there is no point in trying to set out what the coherent model underlying somebody's thinking is when in fact there is no coherent model underlying their thinking. That's what I think is going on here. And so I think that Noah has deepened the darkness when he claims that Lucas believes in Say's Law: he doesn't.

Noah concludes:

[T]he big, important point is that, Ricardian Equivalence or no, Say's Law is just not right, and Lucas was therefore making a very unorthodox and controversial claim.

I agree that Lucas is wrong. But to say "Lucas believes in Say's Law" is, I think, not quite the right way to put it, for Lucas's statements are not consistent with Say's Law.

Lucas's statements are consistent with (a) Ricardian equivalence, plus (b) either that (i) all government spending is transfers, or that (ii) the government purchases exactly the same things the private sector had purchased, or that (iii) the economy is (α) a rigid cash-in-advance economy with interest-inelastic money demand, plus (β) the government needs to maintain the same ratio of money balances to spending as the average economic agent.

But I also think it would be wrong to say that Lucas believes one of:

  • (a) and (b)(i)
  • (a) and (b)(ii)
  • (a) and (b)(iii)(α) and (b)(iii)(β)

I think the right way to say it is that Lucas's statements are consistent with the underlying model of:

  • (a) and (b)(i)
  • (a) and (b)(ii)
  • (a) and (b)(iii)(α) and (b)(iii)(β)

but that he has almost surely not thought the issues through enough to have a coherent model in his mind.