On Experimental Economics

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

F. A. Hayek: The Fatal Conceit 

The general notion of economic theory and the way in which it has been developed for most of the time since its origin (which is considered to be the publication of Adam Smith's An Inquiry Into the Nature and Causes of the Wealth of Nations, 1776, Czech 2001 -the foreword to the Czech publication here) until practically today, is that it is an exclusively deductive science which derives its knowledge from theoretical speculations and observations of the real world, especially from combining these two methods. Economic theory is accepted only when it is sufficiently rigorous, internally consistent and when it acquires general consent, which follows especially from the fact that the prediction of such theory corresponds with observed data. However, data is collected from the real world and as such, in most cases; they do not allow sufficient testing of the presented theory. The reason lies in the fact that there is a missing basic condition for the theory to be tested - effects and changes of real data do not occur under ceteris paribus conditions, meaning “under otherwise same conditions”. In real life, conditions are never the same. Therefore, real data rarely test the effects predicted by the theory properly, since there are many more changes occurring in the real world than accounted for by the theory, despite the fact that many econometric techniques have been developed to separate the influence of individual variables. Another problem is the fact, that many of the essential economic quantities cannot be subjected to measurement or observation. It is partially because these quantities are idiosyncratic, partially because they are unobservable. Natural sciences, in their prevailing majority, have at least partially overcome most of the problems mentioned above through conducting experiments. Even today, a majority of economic textbooks states that economy is a social science and as such lacks the option of experimenting, a way which most natural sciences have chosen to follow. Therefore has to fully rely on observation together with deductive thinking and the construction of theoretical models which are then later tested on real data, since there are no better options for economy and other related fields to choose. However, this commonly accepted idea has become invalid at least 60 years ago. There is an area in the economic theory called experimental economy and its conclusions are significantly based on experiments conducted in economic laboratories or, more precisely, on data gained from such experiments. Economic research has currently beenrelying on this area of economic theory to greater and greater extent. Experimental economics is nowadays one of the most dynamically developing branches of economic theory, when measured by the number of publications in important scientific journals, new doctorate theses, seminars, workshops and conferences. In laboratory conditions, economists study human behavior in situations which imitate real market situations in a clear and simplified form. Among the biggest advantages of this experimental approach is the fact that, in contrast to real world, it is possible to fix the market environment and vary the behavior of market institutions according to a previously defined procedure.