Changes In Economics

From Freakonomics.com {Excerpt with my highlights}

There’s a revolution underway in economics. It’s not due to the financial crisis, but rather something more mundane: Data, and computing power. At least that’s the claim that Betsey Stevenson and I make in our latest Bloomberg View column:

“Consider the stream of data you will create today. Your metro card will record what time you caught the train. Your Web browser will note how you go about your job, and how much you procrastinate. A mid-afternoon purchase at Starbucks will reveal your penchant for lattes and the occasional cookie. Your flow of e-mail traffic will trace out your professional and personal networks.

At the same time, computing power has made it extremely easy and cheap to analyze all the data you produce. An economist with a laptop can, in a matter of seconds, do the kind of number crunching it used to take a roomful of Ph.D.’s weeks to achieve. Just a few decades ago, economists used punch cards to program data analysis for their empirical studies.”

Two weeks ago, Harvard’s Raj Chetty gave a spectacular talk at the National Bureau of Economic Research, about what he called “The Transformative Potential of Administrative Data.” He documented that today’s cutting-edge research is based on crunching newly-available data from the vast databases which underlay our schools, welfare state and tax systems.  I’m just as optimistic that new data coming online from the private sector will prove to be just as useful.

This empirical revolution is reshaping economics in at least four important ways:

1. The role of economic theory is changing: .....Now, its purpose is to make sense of the vast, sprawling and unstructured terabytes on our hard drives.
2. Empirical economics is a natural bedfellow for behavioral economics:  “The data revolution is, however, changing our theories — specifically the way we choose to model how people behave. For decades, economists assumed that people made calculated, rational decisions.   With new data on everything from how we choose our retirement savings plans to how NBA referees call fouls, we have learned to look beyond “homo economicus.” We have a much better grasp of the systematic flaws in reasoning that often get people into trouble. ... 
3. Individual-level data meant that we can say more about individual differences:
4. And a theme that will be familiar to readers of this blog: Economics has become a much broader social science....

The bottom line:

“Technological change has brought opportunities to do economics in a way that our predecessors could only have dreamed about. Those opportunities have, in turn, yielded a field that is more connected to reality. Our hope is that these insights will improve our understanding of the economy and give us a better shot at avoiding the next crisis.”

You can read the full column here.  And let me know in the comments if you think my optimism is misplaced.

Link:  The Economic Revolution Will Be Televised.