This paper is based on a long-term research program with Rachel Kranton on the implications of identity

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most parsimonious economic models are very imprecise in their specification of the independent

variable, the nature of the dependent variables, the nature of leads and lags, and the nature of

residuals.  Yet worse, almost any economic problem usually involves simultaneity (as in supply

and demand), making establishment of causality usually extremely difficult.  In almost any

instance a very large number of parsimonious models can be fitted statistically, making it

hard—if not all but impossible—to statistically reject all the variants of models without norms. 

As a result the program of positive economics—with its initial nulls of models based only on

utility with objective variables verified only by statistical hypothesis testing—has severe bias

against explanations of economic phenomena where norms play a role. 

Summers (1986) has given an example of how low the power of such statistical tests can

be.  The conventional test of the efficient markets hypothesis, that stock prices are the expected

value of future returns, looks for autocorrelations of the excess returns on stocks relative to

bonds.  Summers has shown that it would take approximately 5000 years of data with such a test

to obtain as much as 50 % rejection of an alternative model where stock prices were more than

30 % away from their fundamentals 35 % of the time.  With such lack of power nulls are

important.  When they are not rejected, alternative theories, such as those with norms, are not

even considered.  

In contrast to reliance on statistical testing, disciplines other than economics typically put

much greater weight on a naturalistic approach.  This approach involves detailed case studies. 

Such observation of the small often has been the key to the understanding of the large.  To me,

the most dramatic example of such a relation between the small and the large occurs in the

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As dramatically described by Watson (1969).

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structure of life itself.  Crick and Watson

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 conjectured correctly that if they could describe the

crystalline structure of a single DNA molecule they would have unlocked the secret of life.  The

duality between the structure of the DNA molecule and the way in which organisms are

generated and reproduced is one of most beautiful findings of human knowledge.  It indicates the

sense in which Crick and Watson were, indeed, profoundly correct.

But what are the implications for social science?  Positive economics, with its emphasis

on statistical analysis of populations, would suggest that the intensive study of a single molecule

would be an all-but-worthless anecdote.  In the case of DNA, we know that the exact opposite is

true:  because DNA is a template that determines all of the cells of the organism, and also its

reproduction, one molecule may not tell all, but it does tell a great deal.

Is there some reason to believe that economic behavior and economic units are any

different?  Economic decisions may not be as duplicable as biological processes, but the basic

reason why science intensively studies the microscopic applies to economics as well.  The

individual economic unit, be it a firm, a consumer, or an employee, behaves the way it does for a

reason.   And if these actors behave as they do for a reason, we can expect to find those reasons

from the structures that we see in close observation; and because of those structures their

behavior will also tend to be duplicated.  This duality between duplicability and structure

explains why much of science concerns very close observation, as it also explains why the study

of even a single part of a single DNA molecule may be revealing.

Standard economic methodology says that it is impossible to infer motivation of

individual actors from intensive case studies.  But shouldn’t this question be decided empirically,

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rather than a priori?  Anthropologists and sociologists listen carefully to individuals in case

studies.  When people follow the norms, they use them to explain their actions; when, on the

other hand, they violate the norms, they become the subject of the local gossip.  Those case

studies are revealing because—like a language, which dictates how one should speak—the

norms are known to all.  

X. Conclusion

This lecture has shown that the early Keynesians got a great deal of the working of the

economic system right in ways that are denied by the five neutralities.  As quoted from Keynes

earlier, they based their models on “our knowledge of human nature and from the detailed facts

of experience.”  They used their intuitions regarding the norms of how consumers, investors, and

wage and price setters thought they should behave.  There is a systematic reason why such

knowledge and experience is likely to be accurate: by their nature norms are generated and

known by a whole community.  They are known to those who abide by them, and those who

observe them as well.    

We have shown ways in which macroeconomic variables will be affected by norms.  The

five neutralities, which deny a role for norms systematically suggest that the Keynesians got it

wrong.  Consumption should have no special dependence on current income; investment should

be independent of current cash flow; wages and prices should not depend on nominal

considerations.  But the Keynesians’ initial intuitions got it right because they included norms

whose implications are widely understood.  This understanding yielded insights into behavior

that must be absent from the five neutralities, whose very construction denies the possibility that

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