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Let’s say we figure out “what has driven real wage growth” using empirical methods. After estimating our coefficients with backfitting, we can forecast future wage growth using our calibrated model. Bam! It predicts extraordinarily well, given the crude quality of our data collection.
 
OK great. Now: Does anybody think we have discovered a true economic law in the same way that physicists think that there are actual laws governing the behavior of matter?
 
I hope not. No matter how much “experience has confirmed” an empirical regularity in the social sciences, people still have free will (at least operationally, if we’re doing a social science rather than looking at them as collections of atoms) and so those forecasting models could go out the window tomorrow.
 
In contrast, if I logically deduce that, “The purchasing power of money will be lower, other things equal, when the stock of money increases,” then that is a genuine law of economics. If you allow me to define the terms etc. in such a way that that proposition is true today, then it will necessarily be true for all time and all cultures.

Bob Murphy

 
 
 


 
 

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