Economists have become Data Scientist

Source:

How Economics Went From Theory to Data

Data Geeks Are Taking Over Economics

Most of What You Learned in Econ 101 Is Wrong

 

Theory’s dominance peaked in 19831x-114

From 1960s to 1980s, the majority of the articles published in the field’s most influential journals [1], were works of theory.

 

Reasons for the shift:

  1. personal computers became commonplace
    crunching data became much easier, which impulsed the biggest shift toward empirical work which benefits from a huge stock of untested theories
  2. the subsequent rise of the Internet and digitization
    a huge new array of data to crunch
  3. the grand models — particularly the macroeconomic ones — didn’t explain the world very well
    Economic theory may have become so abstruse even for editors

 

Session title from nowadays: “Data Gold! Exploiting the Rich Research Potential of Lifetime Administrative Earnings Data Linked to the Census Bureau’s Household SIPP Survey.” / Or study linked data from the European Patent Office, the Finnish statistical agency and the Finnish military to research “whether people with high IQs invented more things and made more money than others”

 

The data can’t tell us everything

  • Economics in the U.S. had an earlier empirical heyday in the 1920s and 1930, but flummoxed by the Great Depression.

 

Econ 101 theories are found wrong now,

as the core of economics theory is based on individual optimization.

For example:

A.

In the last two decades, empirical economists have looked at a large number of minimum wage hikes, and concluded that in most cases, the immediate effect on employment is very small.In reality, employment probably depends on a lot more than just today’s wage level.[2]

B.

Recent empirical studies have shown that rather than negative effect, occasionally, welfare programs even make people work more. [3]

  1. For professional theorists, empirical failures simply mean more work to do.
    Many labor economists are now working on complex theories that model the process of employees looking for work and employers looking for people to hire.
  2. But for Econ 101 classes, leaving economic majors thinking that the theories they learned are mostly correct isn’t good.

 

 

(As I once discussed, complicated model along with mathematical skill won’t make economics more convincible as they are not working on solid objects from which one can grab some basic laws)

 

A new way of empirical economics

Instead of a complicated model about optimization and utility functions to compare model to data (structural estimation),

  • a so-called natural experiment [4] just look for a case where some kind of random change in the economy
    E.g. you could study a random influx of refugees to answer the question of how immigration affects local labor markets. You don’t need a complicated theory of how workers and companies behave — all you need is a simple linear model of how X affects Y.

1x-115

(It increased, but is still minority. Contrary to Noah Smith’s expectation, I doubt the future of this method as economists need sophisticated math to appeal their value. And  this method is actually close to the way of economic historian, whom have been long contempt by the mainstreams.)

 

[1]

American Economic Review, Journal of Political Economy and Quarterly Review of Economics

[2]

Theory tells us that minimum wage policies should have a harmful impact on employment.Basic supply and demand analysis says that in a free market, wages adjust so that everyone who wants a job has a job. If you set a price floor, a bunch of low-wage workers would be put out of a job as their productivity is lower than that price floor.

The problem is that employment also depends on predictions of future wages, on long-standing employment relationships and on a host of other things too complicated to fit into the tidy little world of Econ 101.

[3]

Theory assumes welfare gives people an incentive not to work. If you subsidize leisure, simple theory says you will get more of it.

[4]

This approach are promoted by economists Joshua Angrist and Jörn-Steffen Pischke. Also called quasi-experimental methods — the “credibility revolution.” And their book about the subject is titled “Mostly Harmless Econometrics.”

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