What is Applied Economics?

Applied economics is the application of economic theory and econometrics in certain settings. The ample range of theories where they can be applied is demographic economics, business economics, industrial organization, education economics and monetary economics.

How did the term applied economics originated?

“The origin and meanings of Applied Economics have a long history going back to the writing of Say and Mill. Say wrote about “applying” the “general principles of political economy” to “ascertain the rule of action of any combination of circumstances presented to us.” The full title of Mill’s (1848) work is Principles of Political Economy with Some of Their Applications to Social Philosophy.

J. Keynes discussion

John Neville Keynes was perhaps the first to use the phrase “applied economics”. He noted that the “English School” (John Stuart Mill, John Elliott Cairnes, and Nassau William Senior) believed that political economy was a positive, abstract, deductive science; and that this school made a clear distinction “between political economy itself and its applications to practice” (1917, 12). This School thought that a general body of theory could be established through abstract reasoning – not relying on a wide knowledge of economic facts. From this point of view applying this theory involved making allowances for some of the factors ignored in building the abstract theories. Keynes wrote about applying the political economies hypothetical laws to interpreting and explaining of “concrete industrial facts.” The issue of conceptual distinction between political economy as a science (involving formulating laws which govern the production and distribution of wealth) and political economy as an art (using the laws to tackle practical problems).

Whilst noting the rival view of the historical economists, who believed that the goals being pursued by policy makers and the means to pursue them were an integral part of the science of economics, J.N Keynes believed in the desirability of the “English School’s” distinction between the discovery of principles and their application (1917, 54).

Indeed, it was he who proposed using the phrase “applied economics” instead of “the art of political economy”. Keynes further discussed the uses of the phrases applied political economy and applied economics noting three different uses:

  1. in the sense suggested in the text [in association with the art of political economy];
  2. to designate the application of economic theory to the interpretation and explanation of particular economic phenomena, without any necessary reference however, to the solution of practical questions;
  3. to mark off the more concrete and specialized portions of economic doctrine from those more abstract doctrines that are held to pervade all economic reasoning. (1917, 58–59) and applying theories of the economy on what we have in reality to get a healthy enterprise and business prosperity.” Source: https://en.wikipedia.org/wiki/Applied_economics