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PROBLEMS WITH MODERN APPLIED ECONOMICS
Vinod Anand | 25 Aug 2013

PROBLEMS WITH MODERN APPLIED ECONOMICS [Vinod Anand] In many ways the modern movement to applied modeling is laudable. It is empirical and is an attempt to avoid the pontificating which characterized earlier periods. Modern applied modeling looks to the empirical evidence through models. But it also has problems. Since the connection with general equilibrium theory has been eliminated, there is no theoretical core that limits assumptions. New Classicals criticized the lack of a theoretical core in Keynesian macro; that criticism led to its success. Put bluntly, modern applied economics is essentially data mining with some semblance of “scientific empirical testing” added to make it seem less ad hoc. Don’t misinterpret my argument; there is nothing wrong with data mining; you can find out much about the economy in the data. My point is that when you data mine, you undercut your ability to formally statistically test the results in a formal manner. If the assumptions of the model are ad hoc, then the results are ad hoc. That doesn’t mean that the models can’t be informally empirically tested and compared with reality, but the major thrust of modern economics is on formal empirical testing of the models. They avoid the semblance of pontificating, by structuring their models in scientific clothing. Thus, in my view, modern applied economics has serious problems. The problems are exacerbated by incentives within the profession for publishing; these incentives lead to assumptions for the ad hoc pragmatic models often being chosen based on their likelihood of getting published, which requires “nice” results and empirical statistical applicability, rather than being chosen based on their reasonableness. These problems are serious, but they are not the problems of neoclassical economics. In fact, they are problems that developed because modern economics has moved away from the neoclassical assumptions and become more eclectic.