Economy and Welfare State

The validity of science, including social science, is based on empirical test, otherwise any theory, regardless how beautiful mathematically or logically, is only hypothesis. When a pharmaceutical company develops a new medication, the U.S. Food and Drug Administration (FDA) approves or rejects the application of its marketing application based on reviewing data rather than claimed biological or pharmacological mechanism of the new drug. One key difference in the two disciplines is that economic data is mostly not from randomized experiments as that in clinical trials, making econometric/statistical inference imperfect. However, this imperfection does not remove the necessity of econometric/statistical test, nor the significance of it as the probability that a set of econometric/statistical models taking into account endogeneity give consistent biases in the same direction and similar magnitudes is very low. The conclusion based on passing rigorous empirical tests makes economics a science, not an ideology or mathematical game. It is the author's view that the debate of economic policy should focus not only on theory, but also on data. This book is such an endeavor.