User:LGreg/sandbox/approches to knowledge (LG seminar 2020/21)/Seminar 18/Evidence/Evidence in Economics

Evidence in economics

Overview

In general, economists are unable to perform controlled experiments due to the complexity of today’s economies as argued by John Stuart Mill . Thus, economists had to establish universal rules such as the rule of diminishing returns and deduce economic implications from those rules . Frank Knight argues that empirical evidence against universal rules of economics like the rule of diminishing returns, does not mean that economists need to change their beliefs about these rules because the rules are simply tendencies that apply in most situations but since our world is extremely complex, exceptions happen often. Thus, evidence from one situation cannot be applied universally because circumstances change rapidly.

Quantitative evidence

Quantitative methods are an extremely important part of economics because they are used to analyze economic data and build economic models , which then yield quantitative evidence. Examples of quantitative methods include statistical analysis and game theory.

Economic models

A large amount of people partake in the economy and all of their decisions have an impact. It is impossible to consider all of them, which is why economists use simplified models of the real world to gain evidence for their predictions and explanations of events Many economic models are mathematical and yield quantitative evidence . When a model is constructed, for example concerning the question of why people choose to work more in some countries than others, economists tailor the models to predict the decisions of an average consumer and extrapolate this evidence to predict trends within the general population . In an effective model, economists try to separate key elements of the question from insignificant ones . The variables deemed insignificant are summarized under the expression ceteris paribus (“all else held constant” ), meaning that all insignificant variables are held constant . Ceteris paribus assumptions usually include variables that are hard to predict (such as a sudden increase in production cost or labour costs) and whose impact is very hard to quantify , e.g. the influence of culture and politics. This means that these models do not reflect reality accurately but they make it easier to make predictions . Of course, economists need to be aware of the assumptions they are making and, when their predictions fail, they need to revise these assumptions. A big part of an economist's work, whether in trying to improve business practices or economic theories, is therefore to understand the possible flaws in the assumptions they are making when creating economic models and using their results as evidence for the prediction of possible economic developments .

Qualitative evidence

Qualitative evidence is rarely used in economics. It is regarded as unreliable and not as useful as quantitative evidence . The concerns are reasonable as, for example, people tend to manipulate undesirable information about themselves when talking to researchers and the amount of research subjects is often not large enough to be representative . However, there has been an increase in mixed qualitative and quantitative research in economics in recent years . Some methods for qualitative research are in-depth interviews, focus groups, and case studies . These methods are used in, for example, determining people’s willingness to pay for environmental interventions . The concerns about a lack of objectiveness in qualitative evidence can be remedied through careful research design. Furthermore, researchers doing qualitative research focus more on description and finding explanations for their hypotheses rather than making a definitive judgement on the validity of the hypothesis . Moreover, qualitative research highlights the perspectives of individuals, which can contribute to the economic knowledge about a research hypothesis . Additionally, qualitative research contributes to better research ethics in economics as qualitative research methods such as interviews that allow the research subjects to influence how their behaviour is represented (which influences policy and thus has a real impact on the research subjects) while traditionally, in economics, economic theory is emphasized and the insights of laypeople are mostly ignored . The above mentioned belief of John Stuart that experiments are rarely possible in economics does not mean that experiments are rarely useful. Experimentation has played a very significant role in economics in resolving the question of whether humans are solely motivated by self-interest (i.e. homo oeconomicus). In recent decades, economists have performed many experiments that prove that humans not only act out of self-interest but also out of, for example, altruism and reciprocity . This, of course, is fundamental for economists because when they make predictions, they cannot rely on the belief that all humans act based solely on their own self-interest.

Natural experiments as evidence

Another way by which economists collect evidence to explain certain correlations or causalities is by collecting data from so-called natural experiments because controlled experiments are often impossible in economics due to the complexity of today's economies. These are studies in which the researchers investigate what happens in the behaviour of people when there is a change in a certain variable in the real world , e.g. government policy changes. However, such experiments need to be treated carefully when it comes to inferring causalities because the research subjects are not randomized into different exposure groups as controlled experiments are, which can distort the results .