Good Economic Theory Focuses on Explanation, Not Prediction

by Frank Shostak

In order to establish the state of the economy, economists employ various theories. Yet what are the criteria for how they decide whether the theory employed is helpful in ascertaining the facts of reality?

According to the popular way of thinking, our knowledge of the world of economics is elusive — it is not possible to ascertain how the world of economics really works. Hence, it is held the criterion for the selection of a theory should be its predictive power.

So long as the theory “works,” it is regarded as a valid framework as far as the assessment of an economy is concerned. Once the theory breaks down, the search for a new theory begins.

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