Tuesday, January 5, 2010

What is Applied Economics?

Ron Mittelhammer, new president of the AAEA - now the Agricultural and Applied Economics Association, formerly the American Agricultural Economics Association - attempts to define just what applied economics is and finds it a much more challenging job than it at first appeared.

Is it, as per Wikipedia, the intersection of economic theory, econometrics, and real world problems? Or can we leave out the econometrics? Keynes and several contemporaries asked, "Well, what do you apply if not theory?" So to them applied economics takes economic theory and uses it in a particular setting, making applied economics just part of economic theory. If the application of economics is supposed to contribute something to the theory also, though, there has to be some of its application that goes outside of accepted theory.

After reviewing this bit of conflicting literature, Mittelhammer examines 1500+ journal articles to see if he can descriptively identify what applied economics is from a revealed preference standpoint. Out of 20 top general interest journals, he finds that 25% of the articles are pure theory, 15% are largely theory with a minor application, and the remaining 60% are applied.

Without saying it in as many words, Mittelhammer is saying that applied economics is anything which is not pure theory. 24% of the works he identifies as being applied make use of an explicit theory (such as writing down a utility function and some first-order conditions before running the regressions). By contrast, 80% of the papers used econometrics. In his final Venn diagram, he shows applied economics as being the intersection of "methods of analysis" and "history, institutions, and judgment" which also shares some intersection with "economic theory." I'm trying to figure out what the intersection of theory and methods is that is not applied. Econometric theory, perhaps?

The society's recent name change was also interestingly supported: 90% of the articles in agricultural journals are applied, with only 1% pure theory.

The difference between this definition and my schooling interests me. At the Cornell Economics Department (left), the courses with "applied" in the title description simply implied only that the theory was at a less-abstract level. I even attended a course labeled "empirical" that was a collection of pretty rarefied theory. The exception to the rule were the labor economists whose seminars consist of strings of regressions. I'm very thankful I spent time with them during my first years here to pick up a lot of useful skills. Little wonder I had to go outside the department to do some empirical/applied work!

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