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Good Predictions and Bad Policies


  • Luis Roberto Martínez Armas



Relatively little has been said on economic policy by participants in the debate on the realisticness of assumptions in economic models. What has been said is that a `Friedmanian´ methodology which accepts unrealistic assumptions and is only concerned with correct predictions is appropriate from the perspective of a practical economist who is in charge of designing policy. This paper tries to show that this is not true. Even if a model provides very accurate predictions of an event, its ability to provide valid explanations is determined by the realisticness of its underlying assumptions. Different assumptions yield different explanations and unrealistic assumptions tend to provide no explanation at all. There is a strong relation between the way a phenomenon is explained and understood and the actions that are consequently recommended. Therefore, a model based on unrealistic assumptions is not a reliable source of advice on policy.

Suggested Citation

  • Luis Roberto Martínez Armas, 2009. "Good Predictions and Bad Policies," DOCUMENTOS CEDE 006148, UNIVERSIDAD DE LOS ANDES-CEDE.
  • Handle: RePEc:col:000089:006148

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    References listed on IDEAS

    1. Wooldridge, Jeffrey M., 1997. "On two stage least squares estimation of the average treatment effect in a random coefficient model," Economics Letters, Elsevier, vol. 56(2), pages 129-133, October.
    2. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters,in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
    3. Gaviria, Alejandro & Pages, Carmen, 2002. "Patterns of crime victimization in Latin American cities," Journal of Development Economics, Elsevier, vol. 67(1), pages 181-203, February.
    4. Rafael Di Tella & Sebastian Galiani & Ernesto Schargrodsky, 2010. "Crime Distribution and Victim Behavior during a Crime Wave," NBER Chapters,in: The Economics of Crime: Lessons for and from Latin America, pages 175-204 National Bureau of Economic Research, Inc.
    5. Steven D. Levitt, 1999. "The changing relationship between income and crime victimization," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 87-98.
    6. Isaac Ehrlich, 1996. "Crime, Punishment, and the Market for Offenses," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 43-67, Winter.
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    More about this item


    Milton Friedman; unrealistic assumptions; economic policy; economic models; instrumentalism.;

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology

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