Experimental Economics Revisited

Author(s): Thomas H. Naylor

Source: Journal of Political Economy, Vol. 80, No. 2 (Mar. - Apr., 1972), pp. 347-352
Published by: The University of Chicago Press
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 Experimental Economics Revisited

Thomas H. Naylor
Duke University

In this paper I argue that a paper by Castro and Weingarten entitled

"Toward Experimental Economics" is both misleading and incomplete.
First, the literature in economics abounds with articles on experimental
economics. Second, the authors' survey of the literature in experi-
mental economics omits some of the most important contributions in
this field. Third, the authors completely ignore an important new field
of experimental economics-namely, computer simulation experiments
with models of economic systems. My paper contains an extensive
survey of the literature on real-world experiments in economics as
well as computer simulation experiments.

Introduction

In a recent issue of this Journal, there appeared a paper by Castro and

Weingarten (1970) in which the stated objective was "to explain the
manner in which experimental techniques may be systematically applied
to the analysis of basic economic behavior." The paper purported "to
describe a number of experimental techniques that have substantial
relevance to economists that have not been previously noted in the
literature."

In this paper, I shall argue that the paper by Castro and Weingarten is
both misleading and incomplete. First, the literature in economics abounds
with articles on experimental economics. Second, the authors' survey of
the literature in experimental economics omits some of the most important
contributions in this field. Third, the authors completely ignore an im-
portant new field of experimental economics-namely, computer simula-
tion experiments with models of economic systems.

This research was supported by National Science Foundation grant GS-2981. I am

indebted to Mrs. Fanny Grandis for her assistance in the preparation of this
manuscript.

347

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348 JOURNAL OF POLITICAL ECONOMY

Real-World Experiments

Castro and Weingarten (1970) present convincing evidence that it may,

indeed, be possible to perform controlled experiments with a given eco-
nomic system where the economic system may be a firm, an industry, or
the economy of a country. However, their illustrations of the application
of experimental economics are restricted to three different types of eco-
nomic decisions: (1) the decision to work for a given wage rate or to
remain unemployed, (2) the decision to buy at a given price or to save,
and (3) the decision to invest at a given interest rate or to hoard. Al-
though these are interesting applications of the concept of experimental
economics, they are by no means indicative of the extent to which experi-
mental economics has been applied. For example, Castro and Weingarten
make no mention of the work of Rousseas and Hart (1951), Yaari
(1965), and MacCrimmon and Tota (1969) with the experimental de-
termination of indifference curves. A more serious omission is the work
which has been done with market experiments by economists such as
Chamberlin (1948), Shubik (1959), Smith (1962, 1964, 1965a, 1965b,
1967), Friedman (1963, 1967, 1969), Carlson (1967), Dolbear (1968),
and Frahm and Schrader (1970). In 1969 the Review of Economic
Studies published a symposium on experimental economies.'
Another important omission in the Castro-Weingarten paper is the fact
that no mention is made of the social experiments presently being con-
ducted by the Institute for Research on Poverty at the University of
Wisconsin and by Mathematica Incorporated on the guaranteed annual
income. These social experiments are well documented in the papers by
Orcutt and Orcutt (1968), Bawden (1969), Conlisk and Watts (1969),
Orr (1969), and Watts (1969). Indeed, there is every indication that
we are likely to see more of this type of experimentation in the near
future, for the Office of Economic Opportunity is presently proposing a
series of controlled experiments to test the effects of an educational
voucher system. Several developing countries are now engaged in experi-
ments to test the effects of financial incentives to reduce population
growth rates.

Computer Simulation Experiments

Institutional, political, and other practical constraints frequently make

controlled experimentation impossible or impractical in the case of eco-
nomic systems. When this is the case, the policy maker is left with only
one alternative. He may formulate a model of the given economic system

1 Other experimental studies in microeconomics include the work of Mosteller and

Nogee (1951), Davidson, Suppes, and Siegel (1957), Siegel and Fouraker (1960),
Siegel (1961), and Dolbear (1963).

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EXPERIMENTAL ECONOMICS 349

that relates the endogenous variables of the system to the exogenous

variables and policy instruments. If, for example, the model takes the
form of a relatively small number of first-order or second-order simulta-
neous, linear difference or difference equations, then analytical techniques
may be used to evaluate the effects of alternative economic policies. If, on
the other hand the model consists of a large number of higher-order
simultaneous, nonlinear difference or differential equations (with sto-
chastic terms included), then analytical techniques may exist in theory
only. When this is the case, we must resort to numerical analysis or simu-
lation to evaluate the effects of alternative economic policies.

The starting point of any computer simulation experiment is a model

of the system to be simulated. That is, we assume that a model has
already been formulated and its parameters have been specified. The
principal difference between a simulation experiment and a real-world
experiment is that with simulation the experiment is conducted with a
model of the real system instead of with the actual system itself. It would
not appear that this distinction between real-world and computer simula-
tion experiments is sufficient to justify the exclusion of computer simula-
tion experiments in a paper which claims to deal with experimental
economies.
In recent years, computer simulation has become increasingly popular
among economists as a tool for analyzing the behavior of complex eco-
nomic systems. The range of applications of computer simulation now
extends from specific activities of business firms, for example, inventory
control and production scheduling, to simulations of entire corporations2
and even the economy of the United States3 (as well as other countries).
The book by Naylor entitled Computer Simulation Experiments with
Models of Economic Systems (1971) describes a number of simulation
experiments with models of the firm, industry, and economy as a whole.4
Experimental gaming, a special case of computer simulation involving
human decision makers, represents another omission in the Castro-Wein-
garten article.5
Since the simulation is indeed an experiment, special consideration
should be given to the problems of experimental design and the analysis
of output data-a point that has too often been ignored by economists.
The papers by Naylor, Burdick, and Sasser (1967, Burdick and Naylor
(1969), and Naylor, Wertz, and Wonnacott (1968, 1969) as well as the
two books by Naylor (1969, 1971) have focused on problems of experi-

2 See Shubik (1960), Naylor and Vernon (1969), and Naylor (1971).
3 See Fromm and Taubman (1968).
4 This book contains an extensive list of references on computer simulation experi-
ments with models of economic systems.
5 See the papers by Hoggatt (1959, 1969), Rapoport and Orwant (1962), and
Shubik (1962).

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350 JOURNAL OF POLITICAL ECONOMY

mental design and data analysis with computer simulation experiments

with models of economic systems.
Finally, Day (1971) has proposed an interesting application of a
relatively new technique called "evolutionary operations procedures"
(EVOP) to both real-world experiments and computer simulation experi-
ments with economic systems. EVOP is an experimental design technique
developed by Box (1969) for the control of chemical production processes.
Typically, processes of this type are characterized by the fact that they
are so complicated that the production functions of the firm are unknown
and classical optimization techniques are analytically intractable. "Box's
procedure involves the managers in a sequential game played with their
own plants as the environments in which they experiment with controls to
allow local estimation of the plant payoff function, and on the basis of
which suboptimization incremental changes and controls can be exercised"
(Day 1971). Day has proposed a three-stage procedure for applying
EVOP to a national economy-National Evolution Operations Procedure
(NAEVOP): (1) an initial set of simulation experiments is used to up-
date and evaluate the current planning model; (2) a second round of
experiments is conducted to form a broadly representative opinion survey
about preferences of possible policy/economic-evolution combinations;
and (3) control modifications are attempted in a direction representing
the current conception by the policy makers of the public interest. Day
envisages for NAEVOP "a real-time, four-way communication network
between government planners, political representatives, other economic
block representatives (labor unions, industrial executives) and private
citizens."
In summary, experimental economics is a field of endeavor in which
economists have contributed substantially more than Castro and Wein-
garten (1970) have lead us to believe.

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EXPERIMENTAL ECONOMICS 351I

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