• Quote: The rise of applied, observational economics

    As is the case with epidemiologists, the fundamental challenge faced by economists — and a root cause of many disagreements in the field — is our limited ability to run experiments. If we could randomize policy decisions and then observe what happens to the economy and people’s lives, we would be able to get a precise understanding of how the economy works and how to improve policy. But the practical and ethical costs of such experiments preclude this sort of approach. (Surely we don’t want to create more financial crises just to understand how they work.)

    Nonetheless, economists have recently begun to overcome these challenges by developing tools that approximate scientific experiments to obtain compelling answers to specific policy questions. In previous decades the most prominent economists were typically theorists like Paul Krugman and Janet L. Yellen, whose models continue to guide economic thinking. Today, the most prominent economists are often empiricists like David Card of the University of California, Berkeley, and Esther Duflo of the Massachusetts Institute of Technology, who focus on testing old theories and formulating new ones that fit the evidence.

    Raj Chetty, NY Times

    @afrakt

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    • “If we could randomize policy decisions and then observe what happens to the economy and people’s lives, we would be able to get a precise understanding of how the economy works and how to improve policy.”

      No, we would not. We would get a snapshot in time, but the coefficients attached to those models would still be variable. Human knowledge of the relationships we’ve discovered, once exploited, would alter human behavior and change the measured relationships. My emphasis here is on “measured.” There are of course unmeasured relationships between variables describing human behavior that one might call laws and are derived from premises using logic and mathematics (see: accounting identities and rational-agent equilibrium economics).

      The quantified law (with operationalized variables) is the white whale of economics and the social sciences generally. Except, the white whale actually existed.

      • “Human knowledge of the relationships we’ve discovered, once exploited, would alter human behavior and change the measured relationships.”

        I see this argument a lot but I always find it somewhat hard to believe. For one, in some economic scenarios, there’s no reason to believe that knowing an average treatment effect will change my behavior. For example, if we do a perfect policy experiment on cost-sharing, and measure without a doubt that the elasticity of demand for healthcare with respect to cost is so and so, do you really think that knowledge will change how people respond to cost-sharing?