Assuming Theory Applies To A Real World Example

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Without knowing the specifics of the relevant institutions, you cannot assume a particular economic model will make valid predictions. The commonest example of this fallacy is assuming a free market model.


Assuming Slopes of Curves (1 link)
Standard neoclassical analysis assumes demand curves are necessarily downward-sloping and supply curves upwards-sloping. The real world doesn't necessarily agree.
Begging The Inequality Question [More...]
All too often, market advocates assume that markets work fine and fixing inequality might make them inefficient. But actually existing markets always depart from perfect models, and already have inefficiencies. Fixing the inequalities might make them more efficient.
Economic Realism (Wonkish) [More...]
A discussion of how realistic economic models should be, and for what purpose. Includes a good criticism of Milton Friedman.
Economics 101 (62 links)
Also known as neoclassical economics and economism. Libertarians are fond of applying standard Economics 101 microeconomics principles to bash the state. They forget the many concealed ideological biases of Economics 101, they forget that the real world doesn't often match simple models, they forget market failures, they forget the purposes of markets and they forget that microeconomics is not enough: you need macroeconomics too.
Economics: Science, Craft, or Snake Oil? [More...]
Dani Rodrik laments that while economics has innumerable models, it has very few tools for deciding which model is appropriate. He also points out that simple answers, such as support of free trade, rely on long lists of preconditions which are seldom met.
Living in a Second-Best World [More...]
An introduction to why deregulation and competition may not create their intended benefits, due to the Theory Of The Second Best.
The Institutional Structure of Production
Ronald Coase's Nobel lecture. He discusses the importance of the structure of institutions for understanding real-world economics and the pervasiveness of transaction costs and how they lead to firms, rather than individual contracting.
What Every Economics Student Needs to Know and Doesn't Get in the Usual Principles Text (book)
John Komlos shows how misleading it can be to mechanically apply the perfect competition model in an oligopolistic environment where only an insignificant share of economic activity takes place in perfectly competitive conditions.
When econ models potentially mislead, econ profs should say so [More...]
Models are often based on assumptions that do not hold in the real world. When they are used to support real-world policies, these failings of the models should be highlighted.


Now let the reporter go undercover as a student in the professor’s advanced graduate seminar on international trade theory. Let him pose the same question: Is free trade good? I doubt that the answer will come as quickly and be as succinct this time around. In fact, the professor is likely to be stymied by the question. “What do you mean by ‘good?’” he will ask. “And good for whom?” The professor would then launch into a long and tortured exegesis that will ultimately culminate in a heavily hedged statement: “So if the long list of conditions I have just described are satisfied, and assuming we can tax the beneficiaries to compensate the losers, freer trade has the potential to increase everyone’s well-being.” If he were in an expansive mood, the professor might add that the effect of free trade on an economy’s growth rate is not clear, either, and depends on an altogether different set of requirements.
Dani Rodrik , "Economics: Science, Craft, or Snake Oil?"