Benefits and Defects of Capitalism from the Perspective of Keynes

However, Keynes did not agree with classical economist and neoclassical economist that the economy as whole will not be always at full employment level and if the market is not regulated it may go through booms and slums and unemployment may arise if the market forces determine all the allocation decisions and pricing decisions.

Identification problem is econometrics and E.J Working’s solution to identification problem

Say for a market for a product supply and demand is given by

Q = d – ep-gP where Q is the quantity supplied, p is the price P is the price of raw materials. Say the demand depends on the price and the consumer income and say the

The demand equation is Q= -j + fp+kI where p is the price I is the consumer income. These are the structural equations of the model. Say from the above structural equation one solves for the p and Q and gets an equation in the form

P = x1+ x2P + x3I and Q = x4+ x5P + x6I then they become the reduced form of the structural equation. From the knowledge of the x1, x2, x3, s4, x5, x6 one can determine the structural parameters d, e, g, j, f, and k because from x1—x6 one can arrive at unique values of the structural parameters. In this model Q and p are indigenous variables and P and I are exogenous variables. In this situation the model is exactly identified because they can be derived from the reduced form of the model.

If say in the above model if one takes away the P and I as a simple model then the four structural variables of d, e, j, f have to be identified from two reduced form of parameters. That is the model is under identified. This demonstrates the identification problem in econometrics. E. J resolves partly the identification problem by an appropriate theory relating to the economic issue at question and pre-adjust the data to solve this problem.

Paul Samuelson’s “Meaningful Theorem”

In Samuelson’s point of view the “meaning full theorem” in economics is that an economic theorem is a hypothesis of the empirical data. That is the meaningful theorem is derived on the basis of the empirical data and if mathematically derived then it predictions of economic issues cannot be refuted in normal conditions and can only be refuted in ideal conditions. However, Samuelson’s mathematical approach to economics assumes precision of prediction in the physical world and ignored the complexity of economic activity and his predicts from his economic approach has been found erroneous. For example he predicted there would be a recession after World War II and it did not materialize. His proposition of the concept of meaningful theorem and mathematical approach to economics is questionable because his predictions from his approach has found to be erroneous and many economists has highlighted many erroneous predictions of his approach and has theorems can be refuted on the basis of actual economic data. In this context Samuelson’s definition of meaningful theorem is controversial.