How do economists know what they know? In a call for a new empiricism, Barbara Bergmann asserts that economists mainly make it up. Her column, Needed: A New Empiricism, is published in The Economists' Voice Volume 4, Issue 2. Nice to see her mention Truman Bewley's pathbreaking work on wages and recessions:
The most intensive interaction with business people so far seems to have been carried out as a solo venture by Truman Bewley who interviewed about 300 business managers, asking why they don’t lower wages in a depression. The failure to do so, which may (or may not) be an important reason for the failure of unemployment to dissipate rapidly, has long been a subject of speculation among economists. Bewley’s book lists no less than 25 published theories that economists had invented to explain thephenomenon, 24 of which were wrong. Bewley was the first who dared to go out and ask those making the decisions what they did and why. They told him that to lower wages would create severe morale problems, and so would interfere with the operations of their firm.
This study was indeed daring. As if business people could know better than economists why they behave. The presumption! (For more details see Bewley's book, Why Wages Don't Fall During a Recession, and discussion papers). Bergmann concludes:
While observation-less theorizing is still the most common way economists think to advance the science, the new interest being shown to behavioral and experimental methods at places like Princeton and Harvard is an encouraging sign. But actual observation of business behavior has barely started. Whether it will flourish depends on whether an ever increasing corps of economists willing and able to do the work of observation gets trained and then finds jobs.
A few years ago I had occasion to ask Truman Bewley whether he was training students at Yale to carry on research like that he did on wages. His answer, I am sorry to report, was, “No, that would ruin their careers.”