In praise of experimental economics

This blog recently republished an article by Frank Shostak asking “Is there a place for experimental economics?” I could write a lengthy defense of not only why experimental economics has a useful role within economics, but also the ways in which it is methodologically compatible with Austrian economics.

Fortunately, I don’t need to. In “Why Austrians should quit worrying and learn to love the lab” Ben Powell and Ryan Oprea do precisely this [working version here]. And one of the authors they directly respond to is Shostak himself (and indeed an article he wrote back in 2002, which appears to be the basis for his recent article here).

Their argument is a Misesian one – the distinction between theory and history:

an Austrian economist need not interpret any experimental result as “testing” praxeological theory. Experimental economics investigates concrete cases of human action much like economic history does. Austrian economics does not reject historical, ethnographic, or econometric findings per se. It rejects their capacity to test praxeological theory. So should be the case with experimental economics. Even if one holds that propositions in economic theory are beyond testing, experimental results can at least illustrate them

It is also worth reading, and understanding Smith’s Nobel lecture [.pdf], where he makes a distinction between ecological and constructivist rationality. If Austrians can’t learn from the likes of Vernon Smith – and those Austrian economists who’ve worked alongside him to expand our understanding of human action – we might as well shut ourselves off from all contemporary economics. Experimental economics is a fertile, fervent research programme that all schools of thought can learn a great deal from. It is a complement to Austrian economics, not a substitute.

8 Comments

  • Toby Baxendale says:

    I see nothing in Frank’s article that is in contradiction to Mises book, Theory and History.

    As I understand it, we can get knowledge by a deductive thought process and by empirical observation. Theory is the thought process and empirics is the History part that is the Theory and History title to the famous book of Mises.

    Frank as you know is not only a great theoretical thinker, his definition of money you and I hold to be the best, he is also a master of empirics based on this money definition. We have had great input from him and his researcher Peter Stelios in compiling an accurate Austrian Money supply measure which is pure history, pure empirical work , but based on a sound analytical thought process grounded in logic.

    To me , all he is saying is it is futile to apply empirics only to economics and think you can come up with economic truths.

    When Pete Boettke and Pete Leason were my guests at the LSE teaching under the Distinguished Hayek Teaching Fellowship Program in 2005 (from memory I believe), they wrote this article on the matter http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1696159 which is I believe the most cogent exposition of the Mises methodological position. I think Frank works very much in this mode.
    I will add the articles you refer to, to my ever expanding reading list

  • Toby Baxendale says:

    I just had a chance for a 1st read.

    I like this quote from the Powell / Opera article “However, an Austrian economist need not interpret any experimental result as “testing”
    praxeological theory. Experimental economics investigates concrete cases of human action
    much like economic history does. Austrian economics does not reject historical, ethnographic,
    or econometric findings per se. It rejects their capacity to test praxeological theory. So should
    be the case with experimental economics. Even if one holds that propositions in economic
    theory are beyond testing, experimental results can at least illustrate them.”

    I agree with this. Like the empirics that Frank does , as long as the work is done to illustrate a part ofthe whole theory of action, it is just an aid to help understand the Theory better. We lesser mortals, unlike the greatest if all praxeologist, Mises, often need this help.

    I note the authors also observe that testing out Game Theory falls outside what is praxeology, a point I think Frank is also saying! In fact, these two articles might actuallt be saying the same thing.

    This is part of their conclusion “There is no inherent methodological divide between experimental and Austrian
    economics and there are many potential gains from exchange. Experimental work is nothing
    else but controlled empirical analysis and for a praxeologist can easily take a place beside
    traditional empirics as a part of economic history. Even if one holds that certain conjectures
    about economic behavior lie beyond empirical verification, experimental work can provide
    powerful, complementary empirical demonstrations of these conjectures. Moreover
    laboratory experiments can serve as an arena to study magnitudes, strategic problems and
    specific patterns of learning under various institutions, allowing Austrians and other economists
    to ask questions about economic life that lie outside of the scope of a prioristic theory.”

    If done as the handmaiden of good theory, I cant see why this approach cant be helpful.

  • Anthony J. Evans aje says:

    Those articles clearly aren’t saying the same thing. Shostak says:

    But while a laboratory is a valid way of doing things in the natural sciences, it is not so in economics. If anything, the introduction of a laboratory in economics only stifles our understanding.

    Powell and Oprea are arguing that experimental economics can improve our understanding. Maybe Shostak does understand the MIsesian distinction betwen theory and history, but he’s not applied it here. If he did he’d acknowledge that experimental economics can be useful, if done properly.

  • Toby Baxendale says:

    The point I make is that the Powell and Opera paper reject the same things thank FS does and show alot more that he is not aware of or does not make comment on. I suspect that he might edorse some of what they say if he was aware of some of this research as it is Misean and well put.

  • waramess says:

    Powell and Oprea delight in shrouding their thesis in language that the ordinary person will find difficult to understand.

    Not to be encouraged. Far better to approach economics as Shostak does, and indeed Mises did, so that it becomes a popular discipline rather than an academic one.

    • Anthony J. Evans aje says:

      @waremess
      I think your comment is sweeping and ignorant.

      They weren’t writing for “the ordinary person”, it’s an academic publication. Note that this is “Advances in Austrian Economics”, not the AER. It’s hardly impenetrable jargon, but it’s not intended to be an op ed.

      But it’s completely erroneous to infer that because they write academic articles they make economics less of a popular discipline.

      Take a look at some of Ben’s op eds here:
      http://mail.beaconhill.org/~bpowell/Popular%20Writing%20and%20Media.htm

      He is a regular guest on Fox Business, commenting on economic affairs. He’s been on ABC’s 20/20. Ben does a fantastic job delivering good economics to the wider public.

      The point is that there should be a commonality between the popular and academic output. Milton Friedman is perhaps the best example of this. Note that of your preferred approach Mises is hardly accessible to the layman (do you really think Human Action is “easy to understand” for laymen?), whilst Shostak’s article would benefit from a great academic awareness of the issues he is writing about.

      Don’t get me wrong, I love Frank’s articles and enjoy nothing more than a glass of wine and a few chapters of HA – but academic and popular writing should be seen as complements not substitutes.

  • waramess says:

    aje, economics is a popular business affecting, as it does, all walks of life. It should not be an overly academic subject which hides itself from popular understanding.

    It is true that much of the economic community live in a world ruled by tribes and the more obscure their arguments the less likely it will be they will need to defend them against similarly well read opponents.

    This obfuscation is not helpful and the reason why economics has become a scorned discipline.

    It is the reason why economists inability to forsee what in retrospect was the obvious, notwithstanding their highly technical and supposed learned lingo, portrays economics to the man in the street as the worthless pursuit of idiots.

    Better to keep it simple, even if it means the man in the street might understand it.

    • It should not be an overly academic subject which hides itself from popular understanding.
      If you believe I think differently then you have misread what I wrote. You’re picking the wrong target.

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