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Tuesday, September 13, 2011

What do you want it to be?

I am reading some high quality debates (and jokes) lately for my class in labor economics. This one is on economists, and the assumptions we make.
An official at Treasury asks three experts, “What’s 200 billion plus 200 billion?” The first expert, a mathematician, immediately responds, “Four hundred billion, of course.” The second, an economist, kind of grimaces and says, “Well, that depends . . .” But the third expert, an econometrician, doesn’t immediately answer. Instead, he gets up and quietly closes the office door. Once he’s sure no one is listening, he leans over and whispers in the official’s ear, “What do you want it to be?” 
I never thought this joke was very deep, but thinking about Leamer’s (1983) paper made me appreciate it more. Insightful jokes typically exaggerate to make a point, so let’s assume what is really being asked is a hard question like “How will consumer spending be affected by $200 vs. $400 billion in fifiscal stimulus?” The econometrician is well aware that by playing with assumptions—what control variables and instruments to use, what functional forms to pick—it’s possible to obtain pretty much any desired coefficient on government spending in the consumption function. 
What struck me for the first time upon rereading Leamer (1983) is that the economist is really the hero of this joke. He knows what the econometrician knows, but he’s willing to admit it. In Leamer’s words, “All knowledge is human belief; more accurately human opinion.” In contrast, it is the mathematician who is really misguided, by expressing a false degree of certainty. My view, like Leamer’s, or the economist in the joke, is that there is no way to escape the role of assumptions in statistical work, so our conclusions will always be contingent. Hence, we should be circumspect about our degree of knowledge. In the words of Maimonides: “Teach thy tongue to say ‘I do not know,’ and thou shalt progress.”
-- Keane 2010 on the Journal of Economic Perspectives

Saturday, September 10, 2011

The Classics of Development Economics

"This class will proceed like a Great Books class, where we will read, critique, and learn from the classic papers in development economics." But as I glance at the syllabus, I notice that 98% of the 100+ papers assigned were written after 2002.

History and Development. Misallocation of Capital. Corruption. Infrastructure. Leaders. Property Rights. Media. Ethnic and Social Divisions. Conflict, Violence, and War. Inequality. Poverty Traps.

I wonder if Raj will allow me to post his syllabus online.

Yes, this is the state of development economics and there is no better time to be in field. Much of the exciting, creative work is being done now and there is a huge opportunity to contribute.