I am really interested in the idea of counterfactuals and their place in social scientific knowledge. Mapping out the space of possibilities* plays an important, explicit role in many kinds of modeling, and an implicit role in many historical accounts (such as an excellent history of economics by Yuval Yonay that I finished today and will likely write up for here soon). Today I started thinking about the connection between counterfactuals and the performativity of economics. Two examples.

In Harrison White’s famous and semi-whacky model of markets (e.g. White 1981), producers make decisions based on the observed production schedules of other firms and their own known cost functions. Producers do not, in any sense, rely on models of demand curves. Mark Mizruchi explains this modeling decision as a recognition that demand curves are “completely counterfactual” and thus not a solid basis for decision-making. A producer cannot know what the demand for a product would look like given a change in quality, cost, etc. So White’s producers don’t do that. They make decisions on observables.

I accept that demand curves are counterfacturals, but perhaps not all counterfactuals are unobservable. Perhaps the technologies (concepts, ideas, formulae, data, etc.) of modern economics allow producers to “see” demand in a curvy fashion?

Here’s a more concrete example. Right now, congress is considering another fiscal stimulus package (Brad DeLong’s “Keynesian fire alarm“). Today, Paul Krugman wrote up a justification for such a move and a suggestion for how to calculate its magnitude. Some quotes:

Wait, there’s more. Ben Bernanke can’t push on a string – but he can pull, if necessary. Suppose fiscal policy ends up being too expansionary, so that real GDP “wants” to come in 2 percent above potential. In that case the Fed can tighten a bit, and no harm is done. But if fiscal policy is too contractionary, and real GDP comes in below potential, there’s no potential monetary offset. That means that fiscal policy should take risks in the direction of boldness.

Krugman explicitly models a counterfactual – what real GDP “wants” to be, but can’t attain due to unemployment above the “natural rate”. Okun’s law tells Krugman that “every excess point of unemployment above 5 means a 2% output gap.” So, econometric data + economic theory = visible counterfactual on which to make policy. GDP “should” be a few percent higher than it will be next year, so government should make up the gap – and if it overshoots, the Fed can fix things by raising interest rates.

So, is this an example of performativity? Will economics have performed the “natural rate of unemployment” and the idea that GDP “wants” to be higher than it will be if, using justifications along Krugman’s lines, a large fiscal stimulus is passed that lowers unemployment?

*A term suggested to me by new UoM Prof. Elizabeth Bruch when we were talking about performativity, and the general problem of models that create things.