Applied Economics

Applied economics is the application of economic theory and econometrics in specific settings. As one of the two sets of fields of economics (the other set being the core),^[1] it is typically characterized by the application of the core, i.e. economic theory and econometrics to address practical issues in a range of fields including demographic economics, labour economics, business economics, industrial organization, agricultural economics, development economics, education economics, engineering economics, financial economics, health economics, monetary economics, public economics, and economic history. From the perspective of economic development, the purpose of applied economics is to enhance the quality of business practices and national policy making.^[2]

The process often involves a reduction in the level of abstraction of this core theory. There are a variety of approaches including not only empirical estimation using econometrics, input-output analysis or simulations but also case studies, historical analogy and so-called common sense or the "vernacular".^[3] This range of approaches is indicative of what Roger Backhouse and Jeff Biddle argue is the ambiguous nature of the concept of applied economics. It is a concept with multiple meanings.^[4] Among broad methodological distinctions, one source places it in neither positive nor normative economics but the art of economics, glossed as "what most economists do".^[5]

Origins of the term

The origin and meanings of applied economics have a long history going back to the writing of Say and Mill. Say wrote about "applying" the “general principles of political economy” to "ascertain the rule of action of any combination of circumstances presented to us". The full title of Mill's (1848) work is Principles of Political Economy with Some of Their Applications to Social Philosophy.^[4]

J.N. Keynes discussion

John Neville Keynes was perhaps the first to use the phrase “applied economics”. He noted that the "English School" (John Stuart Mill, John Elliott Cairnes, and Nassau William Senior)^[6][7] believed that political economy was a positive, abstract, deductive science; and that this school made a clear distinction “between political economy itself and its applications to practice" (1917, 12). This School thought that a general body of theory could be established through abstract reasoning – not relying on a wide knowledge of economic facts. From this point of view applying this theory involved making allowances for some of the factors ignored in building the abstract theories. Keynes wrote about applying the political economies hypothetical laws to interpreting and explaining of “concrete industrial facts". The issue of conceptual distinction between political economy as a science (involving formulating laws which govern the production and distribution of wealth) and political economy as an art (using the laws to tackle practical problems).^[8]

Whilst noting the rival view of the historical economists, who believed that the goals being pursued by policy makers and the means to pursue them were an integral part of the science of economics, J.N Keynes believed in the desirability of the "English School's" distinction between the discovery of principles and their application (1917, 54).^[8]

Indeed, it was he who proposed using the phrase “applied economics” instead of “the art of political economy”. Keynes further discussed the uses of the phrases applied political economy and applied economics noting three different uses:^[8]

1. in the sense suggested in the text [in association with the art of political economy];
2. to designate the application of economic theory to the interpretation and explanation of particular economic phenomena, without any necessary reference however, to the solution of practical questions;
3. to mark off the more concrete and specialized portions of economic doctrine from those more abstract doctrines that are held to pervade all economic reasoning. (1917, 58–59) and applying theories of economy on what we have in reality to get a healthy enterprise and business prosperity.

Other 19th and early 20th century economists’ use of the term

Léon Walras, for example, planned to organize his main work into volumes on "pure," "applied," and "social" economics. Jaffé (1983) describes Walras's plan as involving making a distinction between that which is true, is useful, and is just. In using the term true, Walras referred to propositions that necessarily followed from the nature of things. Pure economics then involves pure logic. Applied economics involves examining ways to achieve practical goals and requires the making judgments about whether or not the logic of pure economics was relevant to the real world. Social economics also presumed pure economics, but dealt with a different range of questions than did applied economics.^[9]

Vilfredo Pareto ([1906] 1971, 104) follows as similar usage suggesting economics might begin by eliminating that which is inessential to examine problems as reduced to their principal and essentials. He distinguishes between "pure economics" from "applied economics" with pure economics containing only the principal lines of argument and applied economics involving supplying the details.^[10]

Joseph Schumpeter (1954, 23) referred to some applied fields in economics the repetition of which might help highlight some of the issues involved in what defining applied economics involves. He discussed the following fields:^[11]

1. those that are typically thought of as part of economics but which also looked at individually to allow greater attention to detail – e.g. money and banking, trade, cycles, and location
2. those that are independent of economics but study of them is needed for economics. These include subjects such as accounting, actuarial science, and insurance
3. those that are areas of public policy: agriculture, labour, transportation, utility industries, control of industry, and public finance
4. comparative economic systems
5. demography
6. area studies

More modern views

Critique

Backhouse and Biddle argue that the mainstream view, that there is an accepted "theoretical core" and that this can be applied in a range of areas, relies on this core having specific characteristics – namely, that it has a wide scope and can be developed independently of individual applications. But they note that as with the definition of applied economics itself, there are within the economics profession differing views as to what belongs in the core – where one draws the line between research that is contributing to the core and research that is applying the core, and the relative importance or significance of research on topics in the core versus applied economics research.^[4]

Some examples of the problems of applied economics from various fields and issues:

• Examples of problems of applied economics: Macroeconomics

One example of this is macroeconomics. In the 1960s and 1970s, macroeconomics was a part of the core of the subject. Why? Because macroeconomics was not only sufficiently important to be part of any economist's training, but also embodied a set of concepts and principles not found in microeconomic theory. However the replacement of Keynesian approach to macroeconomics with new classical macroeconomics and its successors, macroeconomics might now be regarded by the mainstream as merely an application of microeconomic theory.^[4]

• Examples of problems of applied economics: Development Economics

Another example is the situation within Development Economics. Throughout the 1950s and 1960s most development economist regarded the application of standard "core" microeconomic theory to their area as being entirely inappropriate. An alternative set of models provided their core. This might be best described as the structuralist approach. More recently development economics texts have provided applications of mainstream core theory.^[4]

• Examples of problems of applied economics: Economic Growth Theory

Comim uses the history of the economics of growth in order to illustrate the historical nature of the concept of applied economics. He first discusses the perspective of the theorists’ views of the applied dimension of their work and examines each from the perspective of the work carried out at the Department of Applied Economics (DAE) at Cambridge University. He emphasizes the divergences concerning economists’ understanding of the proper use of economic theory, divergences that might ultimately reveal the influence of distinct practices as far as applied economics is concerned and the role of institutional environments.^[19]

• Examples of problems of applied economics: the Minimum-wage controversy

Leonard notes one area of disagreement amongst applied economists which became famous in the US. That was the minimum-wage controversy. He notes that the fierceness of this controversy was odd because the likely effects were small and that several seemingly more important policy issues such as (entitlement reform, health insurance, CPI calculation) generated nothing like the storm. His explanation is that while this controversy was not especially important to the economy, it was very important to economics and economics as a policy science. His explanation for this is that minimum wage research came to be seen as a test of the usefulness of applying neoclassical price theory to the wages and employment. In other words, it was not just a technical quarrel over such things as the sign and size of wage-elasticity but rather an installment in a long running methodological dispute over whether neoclassical price theory is in reality of any use.^[20]

• A critique of the dominance of econometrics

Swann (2006) queries the dominance of such econometric techniques within Applied Economics and suggests what he describes as the "vernacular of the everyday practice of economics" should be taken seriously. Swann points out that econometrics's privileged position has not been supported by its disappointing results and rather suggests other applied techniques, the vernacular, are also worthy of consideration. These approaches to applied economics, include simulation, engineering economics, case studies and common sense.^[3]

See also

• Applied anthropology
• Applied physics
• Applied Statistics
• Applied theology

Notes

References

• Begg, I and S. G. B. Henry (1998). Applied Economics and Public Policy, Cambridge University Press. Description.
• Campbell, M. (1989). "Sources of Controversy in Applied Economics." In Controversy in Applied Economics, edited by M. Campbell, M. Hardy, and N. Healey. New York: Wheatsheaf.
• Department of Applied Economics (1948). "First Report: Activities in the Years 1946–1948." Cambridge: University of Cambridge, .
• Dow, S. (1987). "The Scottish Political Economy Tradition. Scottish Journal of Political Economy, 34(4), pp. 335–48.
• Harcourt, G. C., and M. Kitson (1993). "Fifty Years of Measurement: A Cambridge View". Review of Income and Wealth, ser. 39, no. 4, December, 435–47.
• History of Political Economy (2000). Toward a History of Applied Economics. Annual Supplement, Volume 32. Durham, NC and London: Duke University Press Table of Contents.
• Robinson, J. ([1974] 1979). "History versus Equilibrium." In vol. 5 of Collected Economic Papers. Oxford: Basil Blackwell.
• Schabas, M. (2001). "Economics, History of," sect. 3 Applied Economics, International Encyclopedia of the Social & Behavioral Sciences, pp. 4152–4158. Abstract.
• Swann, G. M. P. (2006). Putting Econometrics in Its Place: A New Direction in Applied Economics, Edward Elgar Description.