What the New Nobel Winners Get Wrong about Economics
This year’s Nobel Prize in economics was awarded to David Card of the University of California, Berkeley, Joshua Angrist of Massachusetts Institute of Technology, and Guido Imbens of Stanford University. The laureates, according to the Nobel Committee have made an important contribution as to how to ascertain cause and effect from observational data.
For instance, how does the imposition of a minimum wage affect employment? In answering these types of questions, economists rely on observational data, but with observational data a fundamental identification problem arises: the underlying cause of any correlation remains unclear.
If we observe that minimum wages and unemployment correlate, is this because a minimum wage causes unemployment? Or because unemployment and lower wage growth at the bottom of the wage distribution leads to the introduction of a minimum wage? Or because of a myriad of other factors that affect both unemployment and the decision to introduce a minimum wage? A key concern with the structural equation approach, however, is that in order to establish a causal relationship, the proposed structure has to be correctly specified.1
By most commentators, the increase in the minimum wage is going to harm the labor market by raising the unemployment. In a study conducted in the 1990s, economists David Card and Alan Krueger examined a minimum wage rise in New Jersey by comparing fast-food restaurants there and in an adjacent part of Pennsylvania.2 They found no impact on employment.
By modifying the randomized controlled trials (RCT) our Nobel laureates in particular, Ingrist and Imbens, have supposedly solved the problem of how to ascertain causality from the data. For the purpose of this article, we will not discuss the details employed by the laureates to ascertain cause and effect from the data.
Can Historical Data Tell Us How the Economy Works?
Note that the so-called data that analysts are utilizing is a display of historical information.
According to Ludwig von Mises in Human Action (pp. 41–49),
History cannot teach us any general rule, principle, or law. There is no means to abstract from a historical experience a posteriori any theories or theorems concerning human conduct and policies.
Also, in The Ultimate Foundation of Economic Science (p. 74) Mises argued that
[w]hat we can “observe” is always only complex phenomena. What economic history, observation, or experience can tell us is facts like these: O
Article from Mises Wire