Trillion Dollar Economists

Chapter 6Experiments in Economics and Business

Economics, at least as it was taught to me, was a non-experimental social science. Like others in this category—sociology, anthropology, or political science—economists could not, it was thought, conduct experiments and test hypotheses like their counterparts in the hard sciences. The chemist, the physicist, or medical researchers can control for all factors other than the one hypothesis he or she wants tested. The economist could do no such thing, but instead had to figure out how an economy already working actually worked. Or, as one common joke has put it, the economist’s job is to explain how something that works in practice works in theory.

Business pretty much worked this way, too, and for many firms it still does. Individuals or entrepreneurs invent stuff and then try to sell it. The farsighted and strong-willed ones are successful. Henry Ford knew what kind of car the masses of Americans would buy, and what his Ford Motor company would make: a simple black Model T. If consumers didn’t like it, they could go elsewhere. Likewise, Steve Jobs was famous for knowing what electronic devices consumers wanted and what they wanted the designs to look like. And he was mostly right. There are countless other examples of other companies and entrepreneurs who behave with such self-confidence and have been rewarded with success.

This chapter is about a very different way of thinking—the use of experiments in both economics and business, ...