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Unobservability, tractability and the battle of assumptions

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  • Frank Hindriks
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    Abstract

    Economic models often include unrealistic assumptions. This does not mean, however, that economists lack a concern for the truth of their assumptions. Unrealistic assumptions are frequently imposed because the effects are taken to be negligible or because the problem at hand is intractable without them. Using the Musgrave-Maki typology as the point of departure, these claims are defended with respect to theories proposed by Solow, Hall and Roeger concerning productivity growth and the mark-up. Since they are unobservable, their values need to be inferred from the values of observable variables. Assumptions such as perfect competition and constant returns to scale are used for making this inference or measurement problem tractable. Other assumptions are justified in terms of negligibility. These findings support the fecundity of the (amended) Musgrave-Maki typology of assumptions - including the notion of a tractability assumption proposed here. Finding ways of relaxing tractability assumptions turns out to be an important source of progress in economics.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13501780500223619
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Journal of Economic Methodology.

    Volume (Year): 12 (2005)
    Issue (Month): 3 ()
    Pages: 383-406

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    Handle: RePEc:taf:jecmet:v:12:y:2005:i:3:p:383-406

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    Keywords: negligibility assumption; tractability assumption; Musgrave; F-twist; unrealistic assumptions; unobservables; measurement; progress;

    References

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    1. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
    2. Thomas Mayer, 1999. "The domain of hypotheses and the realism of assumptions," Journal of Economic Methodology, Taylor & Francis Journals, vol. 6(3), pages 319-330.
    3. Hulten, Charles R., 1986. "Productivity change, capacity utilization, and the sources of efficiency growth," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 31-50.
    4. Thomas Mayer, . "The Domain Of Theories And Tests By The Realism Of Assumptions," Department of Economics 98-11, California Davis - Department of Economics.
    5. Jes´┐Ż s P. Zamora Bonilla, 1999. "Verisimilitude and the scientific strategy of economic theory," Journal of Economic Methodology, Taylor & Francis Journals, vol. 6(3), pages 331-350.
    6. D. J. Robertson, 1966. "Introduction," Scottish Journal of Political Economy, Scottish Economic Society, vol. 13(1), pages 1-4, 02.
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    Cited by:
    1. Philip R. P. Coelho & James E. McClure, 2007. "The Market for Lemmas," Working Papers 200702, Ball State University, Department of Economics, revised Apr 2007.
    2. Rezitis, Anthony N., 2010. "Evaluating the state of competition of the Greek banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(1), pages 68-90, February.

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