1/Why is the empirical revolution in economics so important?
In this post, I try to answer that, by illustrating an example of where theory-first econ lead the world astray.
bloomberg.com/view/articles/…
In this post, I try to answer that, by illustrating an example of where theory-first econ lead the world astray.
bloomberg.com/view/articles/…
2/Econ wasn't always such an empirical field.
Back in the 1980s, theory was what you did. Theory was the main thing.
Back in the 1980s, theory was what you did. Theory was the main thing.
3/In the 80s, some economists came out with theoretical results saying capital taxes (capital gains taxes, dividend taxes, etc.) should be zero.
4/How important has that conventional wisdom been in terms of getting economists to support Republicans' capital gains and dividend tax cuts? You'd have to ask a historian of econ thought, like @Undercoverhist. But I suspect it's a lot.
5/But this theoretical result should never have been as influential or as widely accepted as it was!
One main reason is that, like many (most?) theories, it relies on some highly unrealistic assumptions. Tweak those assumptions, and the result goes away.
One main reason is that, like many (most?) theories, it relies on some highly unrealistic assumptions. Tweak those assumptions, and the result goes away.
6/A second reason is that like many (most?) theories, the "capital taxes should be zero" theories were hard for even their authors to fully understand.
Decades later, some other theorists showed that OOPS, the 1980s theories didn't actually say capital taxes should be zero!
Decades later, some other theorists showed that OOPS, the 1980s theories didn't actually say capital taxes should be zero!
7/These pitfalls of theory-first econ aren't specific to this case. They are general problems.
The solution is to look at EVIDENCE. The solution is empirics.
And what do we find when we look at evidence? Surprise! Recent dividend tax cuts didn't boost investment at all!
The solution is to look at EVIDENCE. The solution is empirics.
And what do we find when we look at evidence? Surprise! Recent dividend tax cuts didn't boost investment at all!
8/Does this mean theory is useless and should be discarded? Absolutely not.
What it means is that theory should always, always be disciplined by EVIDENCE. All theories should be checked, rechecked, tested, retested, and discarded when they don't fit the facts!
What it means is that theory should always, always be disciplined by EVIDENCE. All theories should be checked, rechecked, tested, retested, and discarded when they don't fit the facts!
9/Fortunately, economics is moving strongly in this direction. bloomberg.com/view/articles/…
This is a very good thing. It will mean better understanding of the world, better policymaking, and - ultimately - a better reputation for the econ profession.
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This is a very good thing. It will mean better understanding of the world, better policymaking, and - ultimately - a better reputation for the econ profession.
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