What can economists know?

16 March, 2017 at 13:02 | Posted in Economics | 2 Comments

The early concerns voiced by such critics as Keynes and Hayek, while they may indeed have been exaggerated, were not misplaced. 51ffpHXDowL._SX326_BO1,204,203,200_I believe that much of the difficulty economists have encountered over the past fifty years can be traced to the fact that the economic environment we seek to model are sometimes too messy to be fitted into the mold of a well-behaved, complete model of the standard kind. It is not generally the case that some sharp dividing line separates a set of important systematic influences that we can measure, proxy, or control for, from the many small unsystematic influences that we can bundle into a ‘noise’ term. So when we set out to test economic theories in the framework of the standard paradigm, we face quite serious and deep-seated difficulties. The problem of model selection may be such that the embedded test ends up being inconclusive, or unpersuasive.

Although advances have been made using a modern empiricist approach in modern economics, there are still some unsolved ‘problematics’ with its epistemological and ontological presuppositions. There is, e. g., an implicit assumption that the data generating process (DGP) fundamentally has an invariant property and that models that are structurally unstable just have not been able to get hold of that invariance. But one cannot just presuppose or take for granted that kind of invariance. It has to be argued and justified. Grounds have to be given for viewing reality as satisfying conditions of model-closure. It is as if the lack of closure that shows up in the form of structurally unstable models somehow could be solved by searching for more autonomous and invariable ‘atomic uniformity.’ But if reality is ‘congruent’ to this analytical prerequisite has to be argued for, and not simply taken for granted.

Even granted that closures come in degrees, we should not compromise on ontology. Some methods simply introduce improper closures, closures that make the disjuncture between models and real world target systems inappropriately large. Garbage in, garbage out.

Underlying the search for these immutable ‘fundamentals’ lays the implicit view of the world as consisting of material entities with their own separate and invariable effects. These entities are thought of as being able to be treated as separate and addible causes, thereby making it possible to infer complex interaction from knowledge of individual constituents with limited independent variety. But if this is a justified analytical procedure cannot be answered without confronting it with the nature of the objects the models are supposed to describe, explain or predict.

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2 Comments

  1. What economists can know are two things:
    (a) noise terms are hidden factors and structural relationships.

    “… some sharp dividing line separates a set of important systematic influences that we can measure, proxy, or control for, from the many small unsystematic influences that we can bundle into a ‘noise’ term”.
    .
    For example, regression equation P = a UR + b + e for price level P from unemployment rate UR with “noise” term e.
    .
    So-called noise term e in fact is from hidden factors LFR (labor force compensation ratio) and LPR (labor productivity ratio). The structural relationship among complete factors to P can be shown in this accounting identity P = (1- UR) * LFR* LPR. This accounting identity is valid temporal assertions about actual economy for all time periods including future. In temporal logic notations, we use ∀ 𝑡 P(𝑡) = (1- UR(𝑡)) * LFR(𝑡) * LPR(𝑡). Aggregate price level can be decomposed into this 3-factor equation. It is always true for all-time periods.

    (b) difficulties are from temporal validity for approximation equations with ‘noise’ terms”

    “… when we set out to test economic theories in the framework of the standard paradigm, we face quite serious and deep-seated difficulties”
    .
    So-called difficulties are due to only one specific set of time periods that errors are calculated for identifying these parametric approximation equations. Thus, these approximation equations can only be valid temporal assertions over that specific set of time intervals. In fact, approximation equations are often not valid beyond that one specific set of time periods. Economists should know time-specific approximation equations cannot be used for valid temporal assertions about actual economy in future time periods or even one different set of past time periods

  2. The model I use is not unstable. Whenever a small change is introduced as a perturbation to one or more of the variables, it naturally circulates as a money-flow and gets redistributed between many more money flows, to eventually become so small as to be insignificant.

    Provided that the model being used is representative of the complete social system, I cannot see how instability would occur, unless it was caused by a deliberate accumulation of these perturbations, and that would be an unnatural activity. Should this be true (and I can think of one situation where it can occur), its up to the government to take responsibility and change the laws to stop it occurring.


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