The role of assumptions in economics

When you look at an introductory textbook for microeconomics, it seems as though economists live in a world that barely resembles the real one. Their models are built on a series of assumptionsincluding that individual actors have perfect information about their choices or that subjective human values can be measured quantitatively. Some models even assume away competition, substitute goods and marketing.

The role of assumptions in economics

The NBER Public Economics Program studies the effects of taxation and government expenditure programs at the federal, state, and local levels. One ongoing activity of this program is the development of the NBER TAXSIM model, a computer simulation model that uses annual data onindividual taxpayers to project the effects of alternative tax rules.

Rather than attempting to summarize the entire corpus of work that has been done by this program in the past few years, this report provides a bird's eye view of some of the major changes in the field from two perspectives.

Second, we qualitatively summarize some of the emerging themes of recent research, both in terms of topics and methods. It was renamed the Taxation Program into reflect the broader research interests of its affiliated researchers.

To recognize the importance of expenditure as well as tax research, the program was renamed "Public Economics" inwhen James Poterba succeeded David Bradford as Program Director. In the last two decades, the research conducted by the Public Economics Program has changed dramatically in volume, methodology, and topics.

To broadly characterize some of the main trends, we downloaded all of the Working Papers in the Taxation Program in and in the Public Economics Program in andand classified them in various ways, which we summarize in Table 1.

Table 1 pdf The number of Public Economics PE papers per year has grown over time from 55 in to in This appears to primarily reflect the growth in the number of Program members; over the same period, the total number of NBER affiliates has also increased; and the Public Economics share of NBER Working Papers has not shown any pronounced trend.

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The typical methodology used in papers in the PE Program also has changed over time. Inabout 30 percent of papers listed in PE were purely empirical; by that number had grown to about 50 percent. Much of this growth is likely due to the greater availability of micro data that permit rigorous empirical analyses of questions that cannot be answered purely based on theory.

We expect this growth to be even more rapid in the coming years, as researchers gain access to large administrative panel databases that permit even finer analysis.

The NBER Public Economics Program

The topics analyzed by public economists have changed as much as the methods used. Although public finance traditionally has been associated with government spending and taxation, our analysis of papers listed in the PE Program shows a marked trend over time toward a broader definition of what constitutes public finance.

The share of papers listed in the PE Program that are not directly related to government spending or taxation rose from 30 percent in to over 60 percent in Common topics for these other papers include macroeconomics, regulation environmental, housing, financial and so onand papers on educational productivity and outcomes.

Another metric of this broadening of focus is the increasing share of PE papers that are cross-listed in another field, from about 30 percent in to about 90 percent in There also has been a marked shift in research from the analysis of taxation to the analysis of government expenditures.

Working Papers & Publications

Inless than 10 percent of PE papers on taxes or spending dealt exclusively with spending; in that number was about 55 percent. Part of this increase is related to the fact that the nature of government expenditure today is more amenable to economic analysis: But another likely reason for the shift is that the varied nature of expenditure programs at the state and local level creates many important and interesting questions that researchers can investigate using modern quasi-experimental techniques.

There also have been important changes within the sub-field of taxation.

The role of assumptions in economics

Most notably, research has focused increasingly on issues of individual taxation. The share of tax-related papers that deal exclusively with individual taxation has risen from almost 50 percent in to about 90 percent in We believe that part of this trend is related to the availability of excellent microdata and identification strategies that are useful in analyzing individual tax and spending programs.

Corporate taxation is thus an area that appears ripe for additional work using modern theoretical and empirical methods. A Qualitative Perspective While the descriptive statistics above provide a broad sense of the major shifts in the field, there are many thematic and methodological changes that require a more nuanced reading of the literature.

We briefly review what we view as some of the most important themes that have emerged over the past decade of work and highlight areas that are likely to be very active in the coming years.

Naturally, the summaries below neglect a far larger fraction of research than they cover; no brief review could do justice to the breadth and depth of work done by the PE group over the past five years. For most of the major points we make we try to list a few illustrative examples from recent working papers, but do not attempt a comprehensive reference list.

We apologize to researchers whose work and topics of focus we have been unable to cover here because of space constraints. Connecting Theory to Evidence Prompted by the growth in empirical work documented above, researchers more recently have begun to seek methods of connecting empirical findings back to the theoretical models that formed the core of public finance research in the s and s.

The explosion in empirical research in the s and s was largely driven by studies that documented the causal impacts of tax policies or expenditure programs on economic behavior. For instance, a large empirical literature estimated the impacts of income taxation on labor supply and reported taxable income, These studies generally have found significant impacts of taxes on reported taxable income, particularly for high income individuals and over longer horizons when individuals have had sufficient time to adjust labor supply.

Estimates of the taxable income elasticity vary, but are generally between 0. An equally large number of studies have measured the impacts of social insurance and welfare programs on many behaviors, Again, there is consistent evidence that these government expenditure programs affect behaviors around labor supply, savings, and healthcare expenditures.

Many of these studies used quasi-experimental methods that permit convincing identification of the causal impacts of policies under relatively weak assumptions.Moral Markets challenges the 'homo economicus' rational choice framework of mainstream economics with 15 chapters contributed by a team researching the nature of values in economic thinking.

Zak has compiled what may become a starting point for further work on this topic, given the volume's scope and creative insights. "Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.".

Reflection without Rules offers a comprehensive, pointed exploration of the methodological tradition in economics and the breakdown of the received view within the philosophy of science. The set of assumptions that a firm will make about the upcoming economic situation. A firm will often make assumptions about what the economic environment will be like during a certain time, in order to predict how this will affect or influence an upcoming project or other plan.

The role of assumptions in economics

Economics at Assumption provides you with an understanding of economic principles and the tools used in dealing with national and international issues.

The study of economics requires rigorous inquiry and analysis, quantitative and critical thinking skills, and effective written and oral communication abilities. The Role of Assumptions. / Phil Arena / 31 Comments.

Earlier today, The degree to which theoretical models in political science and economics describe relationships that are realistic is certainly not anywhere near the same level as your GPS, but these models can be said to .

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