Why Matthew E. Kahn is optimistic about microeconomics

1.   Applied micro researchers have access to more data than ever and have access to more computing power and more easy to use and sophisticated econometric methods than ever before.   Improved canned software in Stata allows applied researchers to relax many of the statistical assumptions that researchers made in previous years.   Such “robust” estimates allow us to march towards learning the truth.

2.   Due to “natural experiments”, discontinuities, and explicit randomizations, we now have more variation in “cause variables” (the X’s) than ever before.

3.  The advent of Google and the rise of Economics in Europe and outside of Western nations means that the current set of applied micro researchers are aware in “real time” about what findings are emerging in the top 5 journals and NBER and IZA and CEPR working papers.    Now that there are so many applied micro economists working around the world, this competition fosters innovation and progress.

4.  Replication is rising as an important piece of our advance as a “science”.

5.  Leading firms such as Amazon highly value quantitative training.  Undergraduates are aware of this and they are investing in the math/computer programming and economics and stats training to have the option to pursue this.  Some of these young people will opt into doing a PHD in economics and applied micro grows stronger due to this influx of talent.

6.  Thanks to scholars such as Raj Chetty, the power of using administrative data (such as IRS tax data) are now more clearly seen all over the world. I expect that more government officials who “know that they do not know” the answers for unlocking economic development will increasingly partner with the J-PAL and other economists to help them to experiment and learn.  This is Hayek as applied microeconomist at its best.

The rest of his post lists four concerns.


Still no word of support from Cowen for Robin Hanson, who has been his friend and colleague for decades and is now facing unfair and slanderous personal attacks. Is this how you treat your friends and colleagues?

But Douhat is doing his best - and Prof. Cowen is clearly letting him do the heavy lifting.

See concern #3 in the linked article

Yet common sense is less common

The economist has dramatically declined in quality over the past two years. This series on the problems of economics is particularly bad. Lacking in analysis. All it does is mention that many studies are underpowered and some concerns about external validity. Excellent observation.

And yet Microeconomics has great empirical content. Look at the work of George Stigler, empirics ain't new.

Perhaps most of the failed replications were cuteonomics: "The effect of microfinance on old women's salsa classes in northern monogolia" or something similar.

More data will not solve the fundamental problem of economics: that jump conditions exist. Modern economies are 'fad driven' (smart phone, kid's toys, 'best doctors', etc) and this creates jump conditions and nonlinear behavior. More data will not fill the gap. But it's a good boon for economic majors versed in using statistical software tools.

Of course, it depends on how the data is used. Amazon, Facebook, and Google use it to sell stuff. Cambridge Analytica used it to snoop on people. Stanford Analytica uses it to snoop on people. Micro is being put to good use, it's just not the good use many of us had in mind, hucksters maybe, but not the rest of us. That's not to say it isn't profitable because it is. If it produces profits it must be good, right? If that's all people expect, then one day we will have a con man as president.

Economists still aren't rigorous enough about the data themselves. In every talk there will be lots of talk about technique and robustness, but mostly hand-waving about the correspondence between the variables used and the real world meaning of various terms. Sometimes the correspondence will be far-fetched. Other times it will be clever, but the "rigor" here mostly boils down to convincing the right elite referees to stand by your assumptions. If famous referees like your story you're in. If nobodies critique your external validity or come up with devastating but unpopular alternate hypotheses, it doesn't matter. At least not till the elite change their minds about an issue. People can't even agree on exactly which dimensions are the "price" and which are the relevant quality or service dimensions. The tendency to treat the "Good" in question as homogeneous under certain conditions always seems to suit the priors of the top five departments, not any ex-ante rigorous definition.

+1. This is an issue I notice often. Something like "College students who had 45 seconds to talk together about a Texas Hold'em hand in a lab scenario made larger wagers and had improved expected value than those who played poker alone" in the results or supplemental info becomes "human social contact amplifies risk-taking attitudes and improves economic efficiency; implications for the design of entrepreneurial ecosystems and social world government are discussed" in the abstract.

Micro can be much more solid than macro, but that's not sayin' much. It's all just econ.

I'm a micro kind of guy.

Sell in May and go away.

I've been telling you people to short TSLA. Nobody listens.

* "In 2010, the SEC constructed an alternative uptick rule to restrict short selling from further driving down a stock price that has dropped more than 10% in one day."

Follow us: Investopedia on Facebook

But if you're an investor, rather than day trader, holding Tesla would have tripled your money in less than five years, even after this week's bad conference call.

I foolishly read TC's summaries of new economic research but the sum total of all these 'findings' does not amount to any real knowledge. Mostly busy work to get positions.

I first heard of "scientism" in an epistemology class around 1970. It's alive and well in economics today.

"Economics has no physics constants."

Much as economist try to deny reality, it still exists.

But one of the first principles of physics is "zero sum". Before circa 1980, it was explicitly zero sum. Input equals output, or more formal: input minus output must equal zero.

Economics since circa 1980 has tried to deliver the perpetual motion machine, so cutting input increases output.

Capital can not gain value in excess of the input adding to capital minus depreciation. Depreciation is the economic recording of entropy, of physics.

Just as in physics, tanstaafl, in economics, there can be no free lunch, no matter what free lunch economists try to promote as sound economic theory.

Cutting costs cuts incomes, cuts GDP. Zero sum.

"Much as economist try to deny reality, it still exists."

While you are harsh, I had thought I'd go to my grave in total disagreement with you.

Every time a here microeconomics I think about how it was a revaluation to business people I worked with you should spend in inputs up until the return on the last unit is 0.

I think I agree with what Kahn says, although he is not clear in a couple of places.

"The war on the perfect competition model." With that heading, I was expecting him to defend the use of the assumptions of perfect competition. But he did the opposite.

"If we have learned from the past experience that extreme heat hurts our economy, and if we expect climate change to cause greater heat in the future, we will invest to attenuate the future effect of heat on economic growth."

This sentence is perfectly good and is one where economists are usually ahead of other people in realizing that the most dire, and even the average, predictions of the damages due to climate change are most likely over-estimates.

But the rest of the paragraph meandered before getting to this cogent sentence.

And I wouldn't call it the Lucas Critique; I think this is an example of a much older and more fundamental economic principle. Nowadays people often use the aphorism "people respond to incentives" but I think that's too general. I tell students it's the Principle of Substitution: if the opportunity cost of something becomes higher then people will substitute away from it. (And to give this principle its full strength, I tell the students that there are more substitutes out there than they realize -- especially in the long run. If we continue to experience global warming, instead of just baking in the hot sun farmers will substitute towards crops that prefer hot weather and that can deal with less rain or unpredictable rain.)

Granted, if Kahn wants to focus on the (lack of) validity of econometric estimates of economic damage, then the Lucas Critique does directly apply. But I think Lucas's discussion of econometrics and macro policy, though interesting and important, is secondary to the truly fundamental economic principles that is rests upon, such as substitution (and people responding to incentives).

"the power of using ... are": oh dearie me.

Comments for this post are closed