#EconomicTheory #SelfStudyEconomics #AvoidingBadEconomics
Hey fellow econ enthusiasts! 👋 Let’s talk about how to identify bad economic theory so we can avoid falling into those traps. Here are some tips to keep in mind:
– Look at the assumptions: Make sure the assumptions of the theory align with real-world scenarios. Unrealistic assumptions can lead to flawed conclusions.
– Check the data: Make sure the theory is backed up by empirical evidence. Data-driven analysis is key to sound economic theory.
– Consider alternative perspectives: Be wary of theories that only present one side of the story. A well-rounded approach considers multiple viewpoints.
– Evaluate the methodology: Understand the methods used to develop the theory. Flawed methodologies can lead to inaccurate results.
– Stay critical: Always question the validity of the theory and seek out different sources to compare and contrast.
As a solution, I recommend starting a blog or journal to document your thoughts and analyses. Sharing your insights with others can lead to valuable discussions and feedback, helping you refine your understanding of economics. Let’s keep learning and growing together! 📚💡 #EconBlog #ContinuousLearning
There are some established economic fallacies e.g. lump of labour fallacy a.k.a ‘x took my job’.
This article discusses some of them.
https://econ.economicshelp.org/2007/03/7-common-economic-fallacies.html?m=1
It’s as simple in theory as it is difficult in practice – a theory is only as good as the empirical evidence supporting it.
That’s the big weakness of the old books – you won’t find any serious empirical studies in them. In fact, they don’t even really express their ideas in ways that translate into testable hypotheses. As such, even when their ideas have survived into the modern mainstream, a lot of work has been done to reformulate them into models that can be tested. For example, the IS-LM model is derived from Keynes’ ideas, but you won’t find anything resembling an IS-LM model in his writings. If you already understand the IS-LM model, can trace the origins, but you can’t read Keynes then go sketch out the IS-LM model. From personal experience, I read the Wealth of Nations both before and after my econ degree. It didn’t really help me learn any of the economic concepts I studied, but after studying them, I could recognise the embryos in his work.
Something that I personally keep in mind is this: assume that most people act in a way that is rational towards *some* goal/meaning. It’s not always true, but it is true enough that you’ll be right most of the time. Some things that are seemingly irrational can be very, very rational.
I was trained by Steven Landsburg who is a very die hard rational choice kinda guy so I am biased (though we’ve had our disagreements via email). I recommend reading some of his work. It is very accessible, logical, and humble. He will never say that people are *always* rational. One of the chapters in his book, [The Armchair Economist](https://www.amazon.com/Armchair-Economist-Economics-Everyday-Life/dp/1451651732), is actually about the misuse/misunderstanding of economic theory as told by many journalists.
I also recommend his book, [Can You Outsmart an Economist?](https://www.amazon.com/Can-Outsmart-Economist-Steven-Landsburg/dp/1328489868/)
You can also listen to some podcasts that he has been on just by looking up his name on a podcast app or YouTube.
I think there are a few ways to evaluate economic theory.
First, a minimum criteria is that economic theory should:
1. be internally coherent.
2. make sharp predictions.
3. be empirically falsifiable.
1 means that, before any evidence is presented, the argument is theoretically possible. The simplest example would be that if you have a math proof of a theorem, that proof should be correct.
2 and 3 are related to falsification. Economics likes its theories to make sharp predictions about the world, typically in the form of comparative statics (if you change thing X, there will be Z reaction from thing Y). It should then be possible to check whether an exogenous change in thing X does indeed cause Z reaction from thing Y. Sharpness means that it’s very clear what exactly the theory is predicting; if it’s not clear how a theory could be wrong, it’s probably a bad theory.
Second, there should be empirical evidence that supports the theory’s predictions. If a theory says thing X should cause thing Y, that should be apparent in the data. The tricky part with this is that no one theory will be right about everything, so there’s an art to knowing what exactly a good theory is. This is the “all models are wrong but some models are useful”.
Rosen Roback is “wrong” in all sorts of ways, but it’s a very good model for understanding why some places are more expensive than others, as well as for understanding how changes like remote work affect US labor and housing markets.
Lastly, as a minor note about economic models: everyone has a model. Your cousing who thinks 5G causes inflation has a model. The businessman on TV talking about tax cuts has a model. It might not be written down or thoroughly fleshed out, but it exists. There’s a subset of people who write economic criticism that economists should abandon their models. Maybe! But the alternative is not no-model, it’s whatever default model the policy maker will have in their mind. Most of the time, these mental models suck.
https://steg.cepr.org/sites/default/files/2022-08/Lecture%2011%20-%20Melanie%20Morten%20-%20Slides.pdf
I have a rule of thumb for macroeconomic history – if it only discusses US experiences, it’s probably bad. Exception for papers published in a reputable economic journal.
There are all sorts of causal claims that sound very convincing if you have only one case study.