25.6.15

TAKE THEORY SERIOUSLY.

Noahpinion surveys the state of the empirical economist's art.
Empirical economics is a more and more important part of economics, having taken over the majority of top-journal publishing from theory papers. But there are different flavors of empirical econ. There are good old reduced-form, "reg y x" correlation studies. There are structural vector autoregressions. There are lab experiments. There are structural estimation papers, which estimate the parameters of more complex models that they assume/hope describe the deep structure of the economy.

Then there are natural experiments. These papers try to find some variation in economic variables that is "natural", i.e. exogenous, and look at the effect this variation has on other variables that we're interested in.
We might be seeing some attempts to explicitly test implications of theory (the flexible functional forms that I used at the beginning of my career being such: were those an evolutionary dead end or something to return to later?)  Or we might be seeing attempts to better make sense of observations where the theory is missing or conflicted.
It's possible to view structural econometrics as sort of a halfway house between the old, theory-based economics and the new, evidence-based economics. The new paradigm focuses on establishing whether A causes B, without worrying too much about why. (Of course, you can use quasi-experimental methods to test structural models, at least locally - most econ models involve a set of first-order conditions or other equations that can be linearized or otherwise approximated. But you don't have to do that.) Quasi-experimental methods don't get rid of theory; what they do is to let you identify real phenomena without necessarily knowing why they happen, and then go looking for theories to explain them, if such theories don't already exist.
The way in which economists do what they think of economics might be changing, in a way that a lot of critics of the excess mathematization of the discipline will welcome.
The rise of quasi-experimental methods shows that the ground has fundamentally shifted in economics - so much that the whole notion of what "economics" means is undergoing a dramatic change. In the mid-20th century, economics changed from a literary to a mathematical discipline. Now it might be changing from a deductive, philosophical field to an inductive, scientific field. The intricacies of how we imagine the world must work are taking a backseat to the evidence about what is actually happening in the world.
Read the essay carefully, though, there are still pitfalls confronting the researcher who is hoping for a research infrastructure supporting the downloading of information from a web-site, and a regression package to come up with the expected signs and significance.  It's never been that easy, and it isn't going to get easier.

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