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), 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. 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), 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. 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'. 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. 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'. 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. 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) 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). 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). 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: 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. Vilfredo Pareto ( 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. 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: