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The data now used for “testing economic theories” provide no tests at all.

Summary:
From Salim Rashid It is plausible that economics slipped into its current difficulty because all earlier theory was framed with agriculture in mind. But we are not in an agricultural world anymore. The number of available products must have expanded a 1000-fold since the 1700s. Unless one looks, it is difficult to grasp the sheer amounts of data that are generated and potentially available – but perhaps impossible to digest because of their magnitude and complexity. Below are two examples, from Trade statistics and from Price indices. Customs forms provide us with Trade data, one for each export shipment. There were about 22 million export shipments originating in the U.S. in 2005. This suggests that we have information on some 22 million individual decisions. However, there are 229

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from Salim Rashid

It is plausible that economics slipped into its current difficulty because all earlier theory was framed with agriculture in mind. But we are not in an agricultural world anymore. The number of available products must have expanded a 1000-fold since the 1700s. Unless one looks, it is difficult to grasp the sheer amounts of data that are generated and potentially available – but perhaps impossible to digest because of their magnitude and complexity. Below are two examples, from Trade statistics and from Price indices.

  • Customs forms provide us with Trade data, one for each export shipment. There were about 22 million export shipments originating in the U.S. in 2005. This suggests that we have information on some 22 million individual decisions. However, there are 229 countries and 8,867 product codes with active trade, so a shipment can have more than 2 million possible classifications.
  • Next, consider the Consumer and Producer Price Indexes, the CPI and PPI. The Producer Price Index program collects monthly price data on about 128,000 individual items from about 32,000 establishments.  The CPI collects data on about 80,000 individual items. The larger number for the PPI is presumably due to the addition of many intermediate goods in the PPI.

Unless one accepts the hara-kiri assumption of perpetual equilibrium, the question of data relevance now revolves around speeds of convergence in each market. However, there are practically no studies of this question – the speed of convergence to equilibrium – for goods or services in microeconomics.

Recognising the complexity of the modern world leads me to return to the principal message of this paper in three sentences.

  1. Equilibrium economic theories can be tested only by equilibrium data
  2. Data being used for tests have no presumption of being equilibrium data.
  3. Hence, the data now used for “testing economic theories” provide no tests at all.

Are there any conditions which justify the current practice? Yes, a state of perpetual equilibrium will serve to justify current practice. However, such an assumption creates many subsequent difficulties, some of which have been described above.

http://www.paecon.net/PAEReview/issue88/Rashid88.pdf

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