The Nobel Prize in Economics was pure chance

Andrzej Baranski

Professor of economics

Professors David Card (University of California at Berkeley), Joshua D. Angrist (Massachusetts Institute of Technology) and Guido W. Imbens (Stanford University) were awarded the Nobel Prize in economics for their contributions to the study of causality. Much of the scientific research in economics has as its central axis the explanation of phenomena of human behavior, both at the individual and aggregate level. In the study of economics, theoretical models offer a tool that allows conceptualizing the relationship between variables of interest and, on the other hand, empirical studies seek to validate or refute the postulates of the theory.

But the task of studying the relationships between variables is not as simple as it seems, since establishing correlations is very easy, but proving the causal link is complicated. Professor Card has contributed for three decades with empirical studies on the effect of minimum wage decrees on the level of employment. His 1993 article along with Professor Alan Kreuger, who passed away before he could be awarded, demonstrated how an increase in the minimum wage did not lead to an increase in unemployment in the state of New Jersey. For many economists this could not be true as it did not agree with the predictions of some prevailing theoretical models. Therefore, the article generated a wave of scientific replicas. The results of these investigations, which ultimately confirmed the initial finding, were the fundamental argument with which members of the British Parliament succeeded in passing a minimum wage in the United Kingdom in 1999.

Another topic in which Professor Card has contributed has been the measurement of the effect that education has on people’s incomes in the future. Although it is easy to intuit that the correlation is positive, the determination of causality is not obvious. It is possible that people who are already more skilled are those who are educated more and therefore education is not the causal determinant of higher income, but innate ability. Another possibility is that those who are educated the most are those with higher economic status and thus greater access to networks of contacts, job offers and influence. Again, education would not be the causal determinant of higher earnings. In order to determine with perfect precision the magnitude of the educational effect, a social experiment would be necessary in which some people chosen at random are exposed to an educational process and others are the control group. This hypothetical experiment would be unethical and almost impossible to execute in practice.

How to identify causal relationships if it cannot be experienced as it is done in medicine? Prof. Card has been a pioneer in taking advantage of what is called ” natural experiments ” or ” quasi-experiments ”. These are situations in which the assignment to a treatment group and a control group occur exogenously, and thus generate the necessary conditions to identify the effect of one variable on another. The contributions of Dr. Angrist and Dr. Imbens, each recipient of a quarter of the Nobel Prize, have been mainly for the development of statistical techniques that allow identifying causality in the middle of quasi-experiments using econometric techniques. Econometrics is the branch of economics that formalizes and develops statistical methods for data analysis, and is one of the fundamental tools of the social sciences.

This year’s Nobel Prize in economics leaves me with three general lessons. The first is that scientific growth occurs in the healthy interaction between empirical evidence and theoretical modeling. The economy ceases to be a science the moment it stops measuring reality to recalibrate the models. Second, scientific knowledge is not an absolute truth, but evolves as the evidence indicates. That is why economics must be taught as a method of identifying causal relationships, and not as a series of results written in stone. Finally, we see how science at the service of society can generate enriching discussions at the public policy level. Hopefully, these types of events, such as the Nobel Prizes, inspire our young people to want to contribute to the development of our country through the creation of scientific knowledge.

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The Nobel Prize in Economics was pure chance

Hank Gilbert