Believe those who seek the truth; doubt those who find it. —André GideRead more at location 240
In 2000, Ursinus College, a small undergraduate institution in Pennsylvania, raised its tuition by more than 17 percent. Subsequently, the number of applicants and acceptances for its freshman class rose.9 That outcome appears to violate the law of demand, which says that demand goes down as the price goes up.10 Has the law of demand been found to be false? Neither I nor any other economist would be willing to concede that the law of demand fails to hold.Read more at location 241
we might ask whether competing colleges raised their pricesRead more at location 245
Perhaps a new government program increased the subsidies for college students.Read more at location 247
The college was taking advantage of what economists call price discrimination, charging a high price to those students willing to pay while luring the more price-sensitive students with generous aid.Read more at location 249
The point is that the law of demand holds only when “all other things are equal.” However, in the real world, other things are almost never equal.Read more at location 251
In physics or engineering, when you leave out a factor (such as friction), you do so because you can show that in the context of your analysis that factor will not be important. In economics, we typically cannot do that, because we do not control the environment in which we undertake a study.Read more at location 252
Instead, we are subject to what is known as confirmation bias.Read more at location 257
If its applications had fallen when Ursinus College raised tuition, we would not have looked for other explanations. However, when demand increased, we are inclined to examine other factors.Read more at location 259
Imagine that you had a scale to measure the carefulness with which someone reasons about a subject. Let that scale run from 1 to 5, with 1 representing the most careless sort of reasoning, filled with superstition and personal biases, and 5 representing scientific reasoning, based on mathematical logic and experimental observation. Where does economics fit in? I believe that good economics is at least a 6! That is, good reasoning in economics requires more careful thinking than good physical science—for two reasons. First, more causal factors are at work in economics than in physical science. Second, although physical relationships are relatively stable, the economy evolves rapidly, including evolution in response to government’s attempts at regulation.Read more at location 263
A key component of the scientific method is making statements that are verifiable.Read more at location 269
Thus, scientific propositions must have the potential to be falsified.Read more at location 271
For the most part, statements that qualify as scientific propositions are falsifiable. They are either mathematical proofs, which can be falsified by showing a flaw in their internal logic, or else hypotheses about what we observe in the world, which can be falsified through careful observations and experiments.Read more at location 272
However, not all scientific beliefs are falsifiable. A few key beliefs, called paradigms by Thomas Kuhn,11 and which I will call “frameworks of interpretation,” are so fundamental to how scientists view their subject that they are almost beyond question.Read more at location 281
Darwin’s theory of evolution is a fundamental framework of interpretation in biology.Read more at location 283
Biologists no longer ask whether Darwinian evolution can explain phenomena. Instead, they talk about how the theory can be adapted to provide explanations.Read more at location 283
for example, some phenomena, such as a peacock’s large tail, would appear to reduce survivability. To address that anomaly, biologists have suggested that the large tail signals strengthRead more at location 285
The difference between a falsifiable proposition and an interpretive framework is that it takes only one anomaly to reject a falsifiable proposition.Read more at location 287
A single conclusive experiment serves to falsify an empirical hypothesis.Read more at location 289
However, a single anomaly does not lead someone to abandon an interpretive framework.Read more at location 289
An anomaly makes scientists uneasy, but they look for ways to address the anomaly without abandoningRead more at location 291
However, if enough anomalies accumulate that scientists become uncomfortable with a framework,Read more at location 293
find that an alternative framework addresses the anomalies and is compatible with existing knowledge, then they will switchRead more at location 293
In natural science, there are relatively many falsifiable propositions and relatively few attractive interpretive frameworks. In the social sciences, there are relatively many attractive interpretive frameworks and relatively few falsifiable propositions.Read more at location 297
The reason that there are relatively few falsifiable propositions in the context of social phenomena is that many causal factors exist, and decisive experiments are rarely possible.Read more at location 299
As a result, economics is closer to history than to physics.Read more at location 301
the decline of Rome, or the decline of empires in general,Read more at location 302
That framework cannot be falsified, but readers can compare it with other frameworks and make judgments about its plausibility.Read more at location 302
For example, consider the phenomenon of the comparative salaries of men and women.Read more at location 303
Economists interpret salaries using the framework of human capital.Read more at location 304
Sociologists use a framework that emphasizes group identity, status, and power, with men the more dominant groupRead more at location 305
If a study were to suggest that women earn less than men, even when controlling for years of education and other indicators of human capital, then that would be an anomaly for the economists.Read more at location 306
If a study were to suggest that most of the lowest-paying occupations are occupied predominantly by men, then that would be an anomaly for the sociologists.Read more at location 308
Economists will not abandon their human capital framework, nor will sociologists abandon their group-status framework.Read more at location 310
The models’ predictions hold only when other things are equal, and other things are never equal.Read more at location 312
Another challenge for economics is that the economy evolves.Read more at location 326
Nobel Laureate George Akerlof famously provided an interpretive framework for the used-car market in which high-quality used cars would be kept off the market, because buyers would have to assume, in the absence of other information, that all used cars were “lemons.”13 However, that framework assumes that no market adaptation exists to address the problem. The information problem in the used-car market can be addressed in a variety of ways. For example, mechanics can inspect used cars before consumers purchase them. Sellers can offer warranties on the cars. Decades after Akerlof ’s article was published, a national used-car dealer called CarMax emerged with a business model based on a reputation for selling high-quality used cars. Other services emerged to make the repair and service records of used cars transparent to buyers.Read more at location 339
Markets also adapt in response to our attempts to regulate them. For example, economists have pointed out that the way in which physicians are compensated in the United States, with billing based on procedures, distorts the incentives of doctors so that they tend to perform too many procedures that have high costs and low benefits. However, if that system were changed so that doctors were compensated only according to the number of patients that they see, then we would likely have the opposite problem:Read more at location 345
Because of causal density and evolution, economists cannot be certain of the reliability of our assumptions.Read more at location 351
In physics or chemistry, the number of unverifiable assumptions and alternative models is whittled down through the process of experimental verification.Read more at location 355
Economists who employ models think of themselves as “doing science,” meaning that they are generating falsifiable propositions. However, in practice, they rarely reject their preferred models.Read more at location 358
all interpretive frameworks suffer from anomalies, that is, from phenomena that do not easily fit into the framework.Read more at location 361
What is unfair is to treat the other person’s model as falsifiable, unable to survive even a single anomaly, while you privilege your preferred model by explaining away any number of anomalies.Read more at location 364
In short, I believe that it is useful to think of economists as constructing interpretive frameworks. Those frameworks are fragile, in that there are almost always anomalies—observationsRead more at location 366
Popularity of a framework is not necessarily a sign of its strength.Read more at location 367
President Harry Truman, weary of economists who say, “On the one hand . . . On the other,” reportedly pleaded for a one-handed economist. That would be asking for trouble.Read more at location 375
