2 minute read

... And simple allegorical stories to help our intuitive understanding of economic concepts. Here is an excerpt:
I posted a link to Bryan Caplan’s paper on Behavioral Economics and the Welfare State. Many of the comments I got from economists were predictable:  
   1. Where is the formal model and existence proofs?
   2. Where is the data analysis?
   3. How is this a paper?
   4. Do you mean to tell me this is publishable? 
I too was shocked initially by these features or lack thereof. However, that’s part of what made the paper compelling.
Some papers get a wonderful data set, perform magnificent identification and get a result that really changes your mind about something you care about. Most don’t.
Most are cases that are of very narrow interest or do a 90% good job at the ID but leave enough doors open that you are not really sure if  the result is meaningful or not.
On the other hand, one could as Bryan and his co-author did, attack an important question, string together some non-obvious points and in my case leave the reader thinking about whether he or she should reexamine an import view.
The profession should rightly celebrate the first kind of paper. However, what about the relative worth of the second and the third?
I submit that bringing up arguments that use the economic way of thinking matter. This is true even if the argument is not definitive, has no mathematical proof behind it and marshals no data.
Now, clearly I've written in support of using maths in economics on this blog before. However, in case anyone missed it, my point was not to say that we have to have put forward a mathematical equation for each and every economic argument or study. Indeed, I took some pains to make it explicit that this wasn't the case... Shoehorning a maths proof into an economics paper does not (cannot) constitute analytical rigour, let alone intellectual honesty.

I wholeheartedly agree with the excerpt above. We should embrace any economic paper and/or argument that aids our conceptual understanding, or forces us to re-examine our views on a particular subject. However, I continue to submit that theory alone is insufficient... 

Smith goes on to describe the baby-sitting coop allegory, which he says did more to make him a "confident Keynesian" than any other analysis. The important caveat here is that - as pointed out in the comments section - we have competing parables such as Bastiat's "Broken Window" that appear to offer completely different policy prescriptions. Again, this reinforces my belief that we ultimately need to seek empirical validation/refutation of our theories, whether they come in the form of a complex mathematical proof or a simple children's story. As I wrote here:
Knowing when to use your tools is just as important as knowing how to use them. Also, the ultimate test for any model - mathematical or otherwise - should always be how well it describes real-life data.
THOUGHT FOR THE DAY: It's always good to have a explanation at hand that everyone can understand.

PS - The Bryan Caplan paper that Smith is making reference to here is well worth a read. There are also some interesting critiques in the comments section of Smith's initial post about it.