Kleykamp in Taiwan --
" Live Long and Prosper "
" Live Long and Prosper "
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| The Economic Analysis of Social Issues Spring 2012 |
| Keynes on Economics THE Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions. It is not difficult in the sense in which mathematical and scientific techniques are difficult; but the fact that its modes of expression are much less precise than these, renders decidedly difficult the task of conveying it correctly to the minds of learners. Before Adam Smith this apparatus of thought scarcely existed. Between his time and this it has been steadily enlarged and improved. |
| (Portions of) Keynes' Letter to Harrod 10 July 1938 "In chemistry and physics and other natural sciences the object of experiment is to fill in the actual values of the various quantities and factors appearing in an equation or a formula; and the work when done is once and for all. In economics that is not the case, and to convert a model into a quantitative formula is to destroy its usefulness as an instrument of thought. " "The point needs emphasising because the art of thinking in terms of models is a difficult--largely because it is an unaccustomed--practice. The pseudo-analogy with the physical sciences leads directly counter to the habit of mind which is most important for an economist proper to acquire." "One has to be constantly on guard against treating the material as constant and homogeneous in the same way that the material of the other sciences, in spite of its complexity, is constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple's motives, on whether it is worth while falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth." |
1950 3.50 1 1 -100 1951 3.30 2 1 -200 1952 3.10 3 1 -300 1953 4.60 3 2 -294 1954 4.40 4 2 -393 1955 4.30 5 2 -480 1956 5.65 5 3 -494 1957 5.45 6 3 -594 1958 5.20 7 3 -700 (1) Copy this data above into an Excel .csv file and read into gretl (2) Run a regression of y on x1 and note the sign of the coefficient on x1 as well as the R-square (3) Now run a regression of y on x1 and x2 and note the sign on x1 and the R-square (4) Finally run a regression of y on x1,x2,and x3 and note the sign on x1 and the R-square What do you think? Is x1 negatively or positively related to y? This example shows that omitting a variable can actually change the sign of the estimated coefficient -- not once but many times. Therefore, we cannot simply let the data speak for itself. We must use theory to allow us to choose between models. Theory is essential, even in empirical work. This example shows the difficult in basing research solely on induction. |