Monday, March 19, 2018

Economics Needs New Theories Not Bounded by Pure Empiricism

Empiricism is like looking at a problem with a microscope to prove a phenomenons existence. As we dig deeper and deeper we start to forget about the overall framework by which these discoveries are found. We may have lots of empiricism but not enough new theories to explain these ideas. A great article on Theory and Empiricism in the Bloomberg helps define this problem better.

I've been taking this Macro-Economics class at Harvard to try and understand the inner workings of economics from the experts. What I have noticed is that there are lots of formulas, data, numbers, and relations between variables. Yet, when I read the news it is noted that we are often wrong about economic outcomes.

Why is this a problem? means we aren't explaining something as well as we should. If we had a strong grasp on the inner economic workings we would be more right than wrong. Listening to a program on the news, please don't ask which one, an economist came on and said economists are sort of right 20-maybe 40% of the time. The projections are often off.

Ok....that just sort of highlights a problem.

If we are not often right, this means there is plenty of reasons to generate new theories. As the economy changes and more information becomes available we should continuously update and adjust our existing theories; or change them all together. But "flipping the switch" on theories is very difficult and risky academically so people prefer to focus on what they can show empirically.

I think this problem has become more prevalent because over the past hundred years we were led by a few great thinkers. Most of us are followers, while only a few people are leaders. The rest of the economists just sort of started prescribing to a particular school of thought and "prove" little pieces of the theories without looking at the overall picture. The advent of empiricism limited our ability to just think about the possibilities and explore ideas freely.

Paradigm shifts happen when something doesn't work well and something new comes along to replace it. New theories are often criticized heavily but as they begin to be accepted and reviewed they gain "believers". There will be those who refuse to accept the new theory and those that won't. The overall review, challenge, and eventual acceptance of a new theory can be brutal on the theorist who feels they must justify every question.

Our indoctrinated beliefs is what limits our ability to come up with better theories.

Philosophers and theorists should explore the potential of new ideas but should not be criticized for "thinking out of the box". Maybe not every idea is a good one, or can be supported empirically, but higher academia should be about exploring new ideas. The microscope can come later and empirical evidence can help show whether or not these ideas will have long-term merit. We begin our early careers learning but should spend the rest of it unlearning ideas to free our thoughts and be creative.

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