Evidence-based economics: the fundamentals
Evidence-based economics is partly methodological and partly substantive. It also has implications for the normative question of how we should evaluate the success of an economy “beyond GDP”.
- Methodology (Section A with short articles, and section B with journal papers/chapters)
Evidence-based economics sets out to generate an account of the economy – how it works, causally, and how these causal mechanisms arose, historically/causally – that corresponds with the evidence. “Evidence” here includes not only statistics/econometrics, but also many other types, including comparative, historical and institutional analysis, narrative, laboratory and field experiments including randomized controlled trials, surveys (qualitative and/or quantitative), etc. This link from evidence to theory is largely neglected in current economics, despite the positive changes that have occurred since the empirical turn. The aim is to replace items of traditional theory that conflict with reality.
The process of generating such an account involves an iterative process: deriving concepts from evidence, and testing one’s ideas using further evidence, leading to refinement, augmentation, major changes, rejection, etc; either can come first. The aim is to align one’s mental categories ever more closely with the categories of the real world. This has not traditionally been the predominant method of theory development in economics, but there are some important instances of good practice; I have mentioned some of these in various parts of this website, but the list is incomplete – please notify me of any examples you are aware of.
My approach to evidence-based economics has been influenced by the achievements of biologists in creating knowledge about the living world. Biology has become spectacularly successful in the past two centuries, and is comparable to economics in that its subject matter is complicated, multicausal and open-ended. This analogy with biology is methodological not substantive – the application of specific biological concepts to the economy is rarely justified.
- Substantive theory: Firm Centred Economics (Section C)
Many colleagues, in economics and in philosophy, have expressed the opinion that evidence-based economics is not achievable, giving several reasons for their view. One type of response to this is to engage in debate on the issues they raise, on their terms. Another is also methodological but less reactive: to develop concepts and methods that are feasible and effective, as in the Methodology section here. Possibly more effective is to demonstrate in practice that new substantive theory can be developed that is explanatorily successful – “theory” in the sense of a causal account, as in the natural sciences, rather than a set of equations or a diagram with an accompanying story as is common usage in traditional economics.
This section of the website contains a collection of material that is working towards a new account of the modus operandi of the modern economy – “capitalism” in the real-economy sense – the system that originated in the industrial revolution and subsequently spread across the world. This is “firm centred economics”, because its focus goes beyond analysis of market dynamics – it is also centrally concerned with the additional dynamics introduced by the existence of hierarchical firms that control, and can readily alter, the production process and the product. Behind this is the observation that different types of economy have different characteristics – there is no “universal economic theory”.
The case that the modern economy has features additional to a pure market economy can be summarised as: (i) the evidence is abundantly clear that the modern economy is more dynamic than all the historical examples of a Smithian economy, a characteristic sometimes described as (but not explained by) the term “creative destruction”; (ii) mechanistically, the market mechanism leads to convergence towards an equilibrium – standard theory is about allocation on the basis of already-existing production systems. Any change, including innovation or growth, needs to come from something external, typically described as a “shock”.
It turns out that the new theory is “obvious”, in the sense that the same categories are commonly used in discussions of current economic affairs and practical policy. In this sense there are no surprises, which could be taken to indicate the realism of the theory. What is surprising is that this apparently obvious theory has not already been systematized. A similar convergence of widely-shared experiential knowledge with evidence-based theory is seen in the article “The creation of money – good practice in evidence-based economics” (reproduced in the Methodology section of this website): see footnote 7, the quote from Charles Goodhart.
- Evaluation: A Responsible Economy (Section D)
The question of how best to evaluate the success of an economy – beyond GDP, which is agreed to be unsuitable for this purpose – does not strictly fall within the range of “evidence based”. But my approach to it does include the use of evidence. Whereas GDP measures annual production, income or expenditure – the sum total of means – judging how good an economy is requires thinking in terms of ends. My approach is to ask, “what is the economy for?” – what should it deliver? My answer is, it should be judged on how well it meets the basic needs of the population. Rival policies, or indeed ideologies, can then be evaluated on the basis of their effectiveness in achieving this overall aim, and evidence is central to this objective.
This website contains two versions of this proposal: a short description, and the abstracts of the 5 chapters of my book, Evaluating economic success: health, happiness, and basic human needs. The book is open access, available free of charge at https://link.springer.com/book/10.1007/978-3-031-57671-3
Short bio
A little background may be useful. My first degree was in physiology, which has given me an abiding interest in how things work (mechanisms), along with an appreciation of the role of feedback systems – the founding principle of modern physiology is a relatively constant internal environment, brought about by balancing (negative) feedback. After various clinical jobs, I worked for many years in academic epidemiology/biostatistics. During this time, I developed and validated certain novel questionnaire items. I also led in developing the evidence base for health impact assessment, and advocated for the development of “systems epidemiology”, the explicit modelling of causal chains.
More recently, after postgraduate study in economics, I have focused mainly on analysing the economy, and on developing improvements in the methodology of economics that have become “evidence-based economics”. This has involved drawing on a biologist’s instinctive connection with real-world causation, and with methods of investigating it. It has also meant deep engagement with both economics and biology, which has led to some valuable methodological and philosophical insights – so that as well as specifically economics-oriented work, much of which is included on this website, I have contributed to the literature on causation and causal inference, both in philosophy and statistics; I also have a master’s degree in sociology. My grasp of these diverse domains enables me to have an integrative understanding of many substantive and methodological issues – but in addition, it makes me very aware of the tendency to tunnel vision that many academic experts have, in all these disciplines.
Michael Joffe
evidence based economics 