What do ​economic models explain?

22 Mar, 2018 at 19:55 | Posted in Economics | 5 Comments

Truth ConceptIn my view, scientific theories are not to be considered ‘true’ or ‘false.’ In constructing such a theory, we are not trying to get at the truth, or even to approximate to it: rather, we are trying to organize our thoughts and observations in a useful manner.

Robert Aumann

What ‘Nobel prize’-winning economist Robert Aumann and other mainstream economics defenders of scientific storytelling ‘forget’ is that potential explanatory power achieved in thought experimental models is not enough for attaining real explanations. Model explanations are at best conjectures, and whether they do or do not explain things in the real world is something we have to test. To just believe that you understand or explain things better with thought experiments is not enough. Without a warranted export certificate to the real world, model explanations are pretty worthless. Proving things in models is not enough. Especially not since we all know that almost all models massively misrepresent their real-world targets in many ways and have lots of outcomes that never occur in real life. Although the models usually incorporate familiar-sounding entities — like ‘rational actors’ and ‘firms’ — these entities are nothing but idealized entities with tractability characteristics with the sole goal of making mathematical-logical deductions possible.

Finding vague similarities or establishing flimsy analogies between the model world and the real world is not much of an explanation. Especially not when the never-questioned core model assumptions are not even remotely reasonably realistic. Analyzing real-world cooperation with game theoretical models built on, e.g., assumptions of ‘common knowledge’ and ‘belief alignment,’ does not explain anything at all since we know these restrictive assumptions are blatantly false of the cooperation phenomenon and that the result of the analysis depends heavily on these assumptions. And what is perhaps even worse — those outer-worldly assumptions cannot be relaxed without vastly changing the results the models bring about, and so underlining the exceedingly weak real-world applicability of this kind of ‘rational choice’ models. Using models building on that kind of assumptions is not credible. It is useless from both an epistemic and ontological point of view.

Mainstream economists often defend their ‘as if’ modelling practice with the argument that truth is not an essential element in economics. But that is not a tenable attitude if one at the same time argue that these models have anything to say about causality. To be able to give a causal account of something, the account has to be true. You have to really show that effect e was brought about by cause c. An increase in wages could be a cause of higher consumption, but unless it really is increased it does not explain higher consumption.

nancyMy newly planted lemon tree is sick, the leaves yellow and dropping off. I finally explain this by saying that water has accumulated in the base of the planter: the water is the cause of the disease. I drill a hole in the base of the oak barrel where the lemon tree lives, and foul water flows out. That was the cause. Before I had drilled the hole, I could still give the explanation and to give that explanation was to present the supposed cause, the water. There must be such water for the explanation to be correct. An explanation of an effect by a cause has an existential component, not just an optional extra ingredient.

Describing credible ‘as-if’ worlds in thought-experimental models is not equivalent to giving genuine explanations. To think that is actually to ignore the real problem. Even though most mainstream economists think that their models are credible, that in no way constitutes a warrant or reason for considering them explanatory in any substantive way. Why? Simply because — as argued more extensively in my On the use and misuse of theories and models in mainstream economics — genuine explanation requires ‘truth.’ Models building on non-existent things like ‘common knowledge’ and ‘belief alignment’ have no explanatory warrant whatsoever.

So, if you are seeking genuine explanations of what happens in real-world economies, you can take your books on general equilibrium, growth theory, game theory, ‘rational choice’ theory, Mankiw textbooks, New-Classical-Keynesian macroeconomics models, and put them all in the dustbin. If you are going for genuine explanations you simply have to look elsewhere.

Transitivity — a questionable ‘rational choice’ assumption

21 Mar, 2018 at 19:23 | Posted in Economics | 3 Comments

My doctor once recommended I take niacin for the sake of my heart. Yours probably has too, unless you’re a teenager or a marathon runner or a member of some other metabolically privileged caste. Here’s the argument: Consumption of niacin is correlated with higher levels of HDL, or “good cholesterol,” and high HDL is correlated with lower risk of “cardiovascular events.” If you’re not a native speaker of medicalese, that means people with plenty of good cholesterol are less likely on average to clutch their hearts and keel over dead.

But a large-scale trial carried out by the National Heart, Lung, and Blood Institute was halted in 2011, a year and a half before the scheduled finish, because the results were so weak it didn’t seem worth it to continue. Patients who got niacin did indeed have higher HDL levels, but they had just as many heart attacks and strokes as everybody else.

rockPaperScisssor How can this be? Because correlation isn’t transitive. That is: Just because niacin is correlated with HDL, and high HDL is correlated with low risk of heart disease, you can’t conclude that niacin is correlated with low risk of heart disease.

Transitive relations are ones like “weighs more than.” If I weigh more than my son and my son weighs more than my daughter, it’s an absolute certainty that I weigh more than my daughter. “Lives in the same city as” is transitive, too—if I live in the same city as Bill, who lives in the same city as Bob, then I live in the same city as Bob.

But many of the most interesting relations we find in the world of data aren’t transitive. Correlation, for instance, is more like “blood relation.” I’m related to my son, who’s related to my wife, but my wife and I aren’t blood relatives. In fact, it’s not a terrible idea to think of correlated variables as “sharing part of their DNA.” Suppose I run a boutique money management firm with just three investors, Laura, Sara, and Tim. Their stock positions are pretty simple: Laura’s fund is split 50–50 between Facebook and Google, Tim’s is one-half General Motors and one-half Honda, and Sara, poised between old economy and new, goes one-half Honda, one-half Facebook. It’s pretty obvious that Laura’s returns will be positively correlated with Sara’s; they have half their portfolio in common. And the correlation between Sara’s returns and Tim’s will be equally strong. But there’s no reason (except insofar as the whole stock market tends to move in concert) to think Tim’s performance has to be correlated with Laura’s. Those two funds are like the parents, each contributing one-half of their “genetic material” to form Sara’s hybrid fund.

Jordan Ellenberg

Stoppa järnvägsnedläggningarna!

20 Mar, 2018 at 11:58 | Posted in Politics & Society | 2 Comments

Yours truly debatterar i dagens Göteborgs-Posten den sanslösa järnvägsnedläggnig som staten i det tysta är i full gång med:

tågInfrastrukturen tycks löpa amok med klimat, demokrati och skattemiljarder. Trafikverket fortsätter att vansköta den svenska järnvägen och bluffar nu även igenom nedläggning av elbanor i Västra Götaland. Landets järnvägar är också mest 1800-talskrokiga enkelspår, en otänkbar standard för moderna vägar. Samtidigt storsatsar regeringen och trafikverket på Arlanda och flyget. Detta trots Parisavtalet och vårt klimatpolitiska ramverk för att minska CO2-utsläppen, vilket kräver åtgärder nu.

Vi har följt trafikpolitiken och järnvägen i många decennier och kan konstatera att läget i dag är sämre än någonsin med ständiga tågförseningar och tågstopp på grund av problem med växlar, signaler, spårarbeten, snöfall med mera. Resenärer och näringslivets godstransporter drabbas och media skriver ständigt om problemen. Men det är inte lika välkänt att staten med Trafikverket i spetsen arbetar intensivt för att lägga ned en massa järnvägar runt om i landet. En ny stor nedläggningsomgång har just börjat.

Game theory — a severe case of ‘as if’ Model Platonism

19 Mar, 2018 at 15:12 | Posted in Economics | Comments Off on Game theory — a severe case of ‘as if’ Model Platonism

peanutsplatonismThe critic may respond that the game theorist’s victory in the debate is at best Pyrrhic, since it is bought at the cost of reducing the propositions of game theory to the status of ‘mere’ tautologies. But such an accusation disturbs the game theorist not in the least. There is nothing a game theorist would like better than for his propositions to be entitled to the status of tautologies, just like proper mathematical theorems.

Ken Binmore

When applying deductivist thinking to economics, game theorists like Ken Binmore set up ‘as if’ models based on a set of tight axiomatic assumptions from which consistent and precise inferences are made. The beauty of this procedure is, of course, that if the axiomatic premises are true, the conclusions necessarily follow. The snag is that if the models are to be real-world relevant, we also have to argue that their precision and rigour still holds when they are applied to real-world situations. They often do not. When addressing real-world systems, the idealizations and abstractions necessary for the deductivist machinery to work simply do not hold.

If the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? The logic of idealization is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, in which concepts and entities are without clear boundaries and continually interact and overlap.

Clearly, it is possible to interpret the ‘presuppositions’ of a theoretical system … not as hypotheses, but simply as limitations to the area of application of the system in question. Since a relationship to reality is usually ensured by the language used in economic statements, in this case the impression is generated that a content-laden statement about reality is being made, although the system is fully immunized and thus without content. In my view that is often a source of self-deception in pure economic thought …

200px-Hans_Albert_2005-2A further possibility for immunizing theories consists in simply leaving open the area of application of the constructed model so that it is impossible to refute it with counter examples. This of course is usually done without a complete knowledge of the fatal consequences of such methodological strategies for the usefulness of the theoretical conception in question, but with the view that this is a characteristic of especially highly developed economic procedures: the thinking in models, which, however, among those theoreticians who cultivate neoclassical thought, in essence amounts to a new form of Platonism.

Hans Albert

Seen from a deductive-nomological perspective, typical economic models (M) usually consist of a theory (T) — a set of more or less general (typically universal) law-like hypotheses (H) — and a set of (typically spatio-temporal) auxiliary assumptions (A). The auxiliary assumptions give ‘boundary’ descriptions such that it is possible to deduce logically (meeting the standard of validity) a conclusion (explanandum) from the premises T & A. Using this kind of model game theorists are (portrayed as) trying to explain (predict) facts by subsuming them under T, given A.

An obvious problem with the formal-logical requirements of what counts as H is the often severely restricted reach of the ‘law.’ In the worst case, it may not be applicable to any real, empirical, relevant, situation at all. And if A is not true, then M does not really explain (although it may predict) at all. Deductive arguments should be sound – valid and with true premises – so that we are assured of having true conclusions. Constructing game theoretical models assuming ‘common knowledge’ and ‘rational expectations,’ says nothing of situations where knowledge is ‘non-common’ and  expectations are ‘non-rational.’

Building theories and models that are ‘true’ in their own very limited ‘idealized’ domain is of limited value if we cannot supply bridges to the real world. ‘Laws’ that only apply in specific ‘idealized’ circumstances —  in ‘nomological machines’ — are not the stuff that real science is built of.

When confronted with the massive empirical refutations of almost all models they have set up, many game theorists react by saying that these refutations only hit A (the Lakatosian ‘protective belt’), and that by ‘successive approximations’ it is possible to make the models more readily testable and predictably accurate. Even if T & A1 do not have much of empirical content, if by successive approximation we reach, say, T & A25, we are to believe that we can finally reach robust and true predictions and explanations.

Hans Albert’s ‘Model Platonism’ critique shows that there is a strong tendency for modellers to use the method of successive approximations as a kind of ‘immunization,’ taking for granted that there can never be any faults with the theory. Explanatory and predictive failures hinge solely on the auxiliary assumptions. That the kind of theories and models used by game theorists should all be held non-defeasibly corroborated, seems, however — to say the least — rather unwarranted.

Retreating — as Ken Binmore and other game theorists —  into looking upon their models and theories as some kind of ‘conceptual exploration,’ and give up any hopes whatsoever of relating theories and models to the real world is pure defeatism. Instead of trying to bridge the gap between models and the world, they simply decide to look the other way.

To me, this kind of scientific defeatism is equivalent to surrendering our search for understanding and explaining the world we live in. It cannot be enough to prove or deduce things in a model world. If theories and models do not directly or indirectly tell us anything about the world we live in – then why should we waste any of our precious time on them?

Thatcher in retrospect

18 Mar, 2018 at 20:58 | Posted in Politics & Society | 6 Comments

Yours truly was interviewed last week for a radio program re the legacy and impact of Margaret Thatcher on society. The picture below conveys, in not so many words, my feelings and views on the subject …


The rising inequality that has been going on in our societies since the Reagan-Thatcher era is outrageous. Income and wealth have​ increasingly been concentrated in the hands of a very small and privileged elite. And a society where we allow the inequality of incomes and wealth to increase without bound ​ sooner or later implodes. The cement that keeps us together erodes and in the end we are only left with people dipped in libertarian egoism and greed.

Now, more than ever, is it high time to reawaken the dream of a more egalitarian society and once and for all put an end to the neoliberal counterrevolution!

The poverty of deductivism

17 Mar, 2018 at 17:52 | Posted in Theory of Science & Methodology | 4 Comments

guaThe idea that inductive support is a three-place relation among hypothesis H, evidence e, and background factors Ki rather than a two-place relation between H and e has some drastic philosophical implications, which partly explains why philosophers of science have been so reluctant to endorse it. The inductivist program … aimed at doing for inductive inferences what logicians had done for deductive ones … Once the Ki enter the picture, the issue of inductive support becomes contextualized: one cannot answer it by merely looking at the features of e and H. An empirical investigation is necessary in order to establish whether the context is ‘right’ for e to be truly confirming evidence for H or not … Scientists’ knowledge of the context and circumstances of research is required in order to assess the validity of scientific inferences​.

‘De gustibus non est disputandum … exceptum if non-selfishum’

17 Mar, 2018 at 11:32 | Posted in Economics | Comments Off on ‘De gustibus non est disputandum … exceptum if non-selfishum’

degustThe status quo of Economics ten or fifteen years ago was that paying $8 to see a revenge fantasy of a fictitious protagonist taking fictitious revenge on a fictitious bad guy who has fictitiously wronged him falls tightly under economists de-gustibus-non-est-disputandum sensibility, whereas a subject spending $8 to take real revenge on a real-life bad guy who has wronged the subject himself needed explaining. Looked at by an outsider not wedded to the assumption of 100% self-interest (or not a fan of popular action movies), the different reaction to retaliatory behavior versus cinematic behavior would be entirely perplexing. To me it is not so much perplexing as it is indicative of the power of habitual thinking by participants in an academic discipline.

Matthew Rabin

‘Auch unter Trump wird sich für uns wenig zum Besseren verändern’

17 Mar, 2018 at 10:07 | Posted in Economics | Comments Off on ‘Auch unter Trump wird sich für uns wenig zum Besseren verändern’

toozeTooze: Viele Menschen, die Trump gewählt haben, sind der Überzeugung: Die Regierungen der vergangenen Jahrzehnte haben sich nicht um mich gekümmert. Damit haben sie sogar Recht. Jetzt ist da aber plötzlich jemand, der nimmt uns ernst.

ZEIT ONLINE: Aber stimmt das wirklich? Nimmt Trump diese Menschen ernst?

Tooze: Natürlich ist Trump in Wahrheit kein Interessensvertreter für die Stahlarbeiter im Rustbelt. Das zu glauben, wäre sehr naiv. Er mag eine Sympathie für diese Menschen hegen, die sich wie er selbst über Rassismus und Xenophobie definieren, mehr aber auch nicht. Seine Wähler wiederum glauben: Er ist Weiß und männlich, er ist nicht elitär, er mag McDonald’s und amerikanische Autos. Deshalb ist Trump zumindest teilweise einer von uns. Auf dieser Ebene ist die Sympathie sehr stark und real.

ZEIT ONLINE: Wann dringt bei diesen Menschen die Erkenntnis durch: Auch unter Trump wird sich für uns wenig zum Besseren verändern?

Tooze: Das ist sehr schwer zu sagen. Diese Menschen waren schon 2008 bereit, einen unkonventionellen Kandidaten zu wählen: Barack Obama. Man macht sich gar nicht klar, was für ein großer Erfolg das damals war. Die Weiße Arbeiterschaft im mittleren Westen hat mit dazu beigetragen, einen Schwarzen zum Präsidenten der Vereinigten Staaten von Amerika zu wählen.

2016 sind sie dann noch einen Schritt weiter gegangen und haben für Donald Trump gestimmt. Hillary Clinton verkörperte all das, was sie schon seit Langem ablehnen: die Elite in Washington. Diese Menschen sind politisch nicht fundamental festlegt. Sie wollen jemanden im Weißen Haus sehen, der nicht aus dem klassischen politischen Establishment kommt, der zumindest den Anschein erweckt, er wolle sich um sie kümmern. Barack Obama und Donald Trump haben genau das verkörpert.

Die Zeit

Scientific realism and inference​ to the best explanation

17 Mar, 2018 at 09:14 | Posted in Theory of Science & Methodology | 11 Comments

In a time when scientific relativism is expanding, it is important to keep up the claim for not reducing science to a pure discursive level. We have to maintain the Enlightenment tradition of thinking of reality as principally independent of our views of it and of the main task of science as studying the structure of this reality. Perhaps the most important contribution a researcher can make is to reveal what this reality that is the object of science actually looks like.

darScience is made possible by the fact that there are structures that are durable and largely independent of our knowledge or beliefs about them. There exists a reality beyond our theories and concepts of it. It is this independent reality that our theories in some way deal with. Contrary to positivism, I would as a critical realist argue that the main task of science is not to detect event-regularities between observed facts. Rather, that task must be conceived as identifying the underlying structure and forces that produce the observed events.

Instead of building models based on logic-axiomatic, topic-neutral, context-insensitive and non-ampliative​ deductive reasoning — as in mainstream economic theory — it would be much more fruitful and relevant to apply inference to the best explanation.

People object that the best available explanation might be false. Quite so – and so what? It goes without saying that any explanation might be false, in the sense that it is not necessarily true. It is absurd to suppose that the only things we can reasonably believe are necessary truths …

People object that being the best available explanation of a fact does not prove something to be true or even probable. Quite so – and again, so what? The explanationist principle – “It is reasonable to believe that the best available explanation of any fact is true” – means that it is reasonable to believe or think true things that have not been shown to be true or probable, more likely true than not.

Alan Musgrave

Top 20 heterodox economics books

16 Mar, 2018 at 20:52 | Posted in Economics | 3 Comments


  • Karl Marx, Das Kapital (1867)
  • Thorstein Veblen, The Theory of the Leisure Class (1899)
  • Joseph Schumpeter, The Theory of Economic Development (1911)
  • Nikolai Kondratiev, The Major Economic Cycles (1925)
  • Gunnar Myrdal, The Political Element in the Development of Economic Theory (1930)
  • John Maynard Keynes, The General Theory (1936)
  • Karl Polanyi, The Great Transformation (1944)
  • Paul Sweezy, Theory of Capitalist Development (1956)
  • Joan Robinson, Accumulation of Capital (1956)
  • John Kenneth Galbraith, The Affluent Society (1958)
  • Piero Sraffa, Production of Commodities by Means of Commodities (1960)
  • Johan Åkerman, Theory of Industrialism (1961)
  • Axel Leijonhufvud, Keynes and the Classics (1969)
  • Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process (1971)
  • Michal Kalecki, Selected Essays on the Dynamics of the Capitalist Economy (1971)
  • Paul Davidson, Money and the Real World (1972)
  • Hyman Minsky, John Maynard Keynes (1975)
  • Philip Mirowski, More Heat than Light (1989)
  • Tony Lawson, Economics and Reality (1997)
  • Steve Keen, Debunking Economics (2001)

Universitet och högskolor släpper igenom sämre studenter

16 Mar, 2018 at 12:48 | Posted in Education & School | 7 Comments

kalKrisen i den svenska skolan har nått högskolan. I dagens Kaliber berättar universitetslärare om studenter med låga förkunskaper, om krav som sänks och om ett ersättningssystem som ger mer pengar ju fler studenter som godkänns …

Lars Pålsson Syll är professor i samhällskunskap och undervisar bland annat blivande lärare i statistik. Sedan han började undervisa för 30 år sedan har antalet högskolestudenter mer än fördubblats. Lars Pålsson Syll poängterar att det fortfarande finns lysande studenter, men att genomsnittet tycks ha sjunkit.

– De kommer med mindre i bagaget än vad jag och andra universitetslärare förväntar oss, de har gått i skolan, kraven för att man ska komma in på lärarutbildningen och bli samhällslärare är att man har matte B, samtidigt märker man att de inte verkar förstå ens elementa som de borde ha lärt sig i matematiken redan på högstadiet.

Hur hanterar ni det här? Är det då fler som blir underkända eller sjunker kraven, eller vad händer?

– Ja, om man skulle vara politiskt korrekt skulle man helst svara att vi tacklar det genom att underkänna fler studenter, men verkligheten är nog inte riktigt så panglossiansk, det är inte så vi ofta gör, utan jag tror, även om vi inte medvetet gör det så blir det nog så att får vi ett sämre material att jobba med så anpassar man ju kraven lite grann efter det materialet. Det är inte så rimligt att tro att en lärare vill underkänna 9 av 10 studenter och hålla kvar vid en kravnivå som vi hade för kanske 20-30 år sedan. Men det är klart att det är ingen som säger att vi sänka kraven för att få igenom de här studenterna, men de facto tror jag att vi gör det, och ett av de oroande skälen till att vi gör det är ju också den typen av ersättningssystem som vi har inom högskola, där genomströmningen av studenter syns i vår budget.


Science’s brightest star just went out

15 Mar, 2018 at 20:31 | Posted in Varia | 2 Comments

Stephen Hawking

Abduction — the induction that constitutes the essence​ of scientific reasoning

15 Mar, 2018 at 17:15 | Posted in Theory of Science & Methodology | 3 Comments

In science we standardly use a logically non-valid inference — the fallacy of affirming the consequent — of the following form:

(1) p => q
(2) q

or, in instantiated form

(1) ∀x (Gx => Px)

(2) Pa

Although logically invalid, it is nonetheless a kind of inference — abduction — that may be factually strongly warranted and truth-producing.

holmes-quotes-about-holmesFollowing the general pattern ‘Evidence  =>  Explanation  =>  Inference’ we infer something based on what would be the best explanation given the law-like rule (premise 1) and an observation (premise 2). The truth of the conclusion (explanation) is nothing that is logically given, but something we have to justify, argue for, and test in different ways to possibly establish with any certainty or degree. And as always when we deal with explanations, what is considered best is relative to what we know of the world. In the real world, all evidence is relational (e only counts as evidence in relation to a specific hypothesis H) and has an irreducible holistic aspect. We never conclude that evidence follows from a hypothesis simpliciter, but always given some more or less explicitly stated contextual background assumptions. All non-deductive inferences and explanations are necessarily context-dependent.

If we extend the abductive scheme to incorporate the demand that the explanation has to be the best among a set of plausible competing potential and satisfactory explanations, we have what is nowadays usually referred to as inference to the best explanation.

In inference to the best explanation we start with a body of (purported) data/facts/evidence and search for explanations that can account for these data/facts/evidence. Having the best explanation means that you, given the context-dependent background assumptions, have a satisfactory explanation that can explain the evidence better than any other competing explanation — and so it is reasonable to consider the hypothesis to be true. Even if we (inevitably) do not have deductive certainty, our reasoning gives us a license to consider our belief in the hypothesis as reasonable.

Accepting a hypothesis means that you believe it does explain the available evidence better than any other competing hypothesis. Knowing that we — after having earnestly considered and analysed the other available potential explanations — have been able to eliminate the competing potential explanations, warrants and enhances the confidence we have that our preferred explanation is the best explanation, i. e., the explanation that provides us (given it is true) with the greatest understanding.

This, of course, does not in any way mean that we cannot be wrong. Of cours, we can. Inferences to the best explanation are fallible inferences — since the premises do not logically entail the conclusion — so from a logical point of view, inference to the best explanation is a weak mode of inference. But if the arguments put forward are strong enough, they can be warranted and give us justified true belief, and hence, knowledge, even though they are fallible inferences. As scientists we sometimes — much like Sherlock Holmes and other detectives that use inference to the best explanation reasoning — experience disillusion. We thought that we had reached a strong conclusion by ruling out the alternatives in the set of contrasting explanations. But — what we thought was true turned out to be false.

That does not necessarily mean that we had no good reasons for believing what we believed. If we cannot live with that contingency and uncertainty, well, then we are in the wrong business. If it is deductive certainty you are after, rather than the ampliative and defeasible reasoning in inference to the best explanation — well, then get into math or logic, not science.

Keynes and econometrics

15 Mar, 2018 at 12:23 | Posted in Statistics & Econometrics | Comments Off on Keynes and econometrics

29f98bbf-47d2-45c8-840e-2be65f36be25After the 1920s, the theoretical and methodological approach to economics deeply changed … A new generation of American and European economists developed Walras’ and Pareto’s mathematical economics. As a result of this trend, the Econometric Society was founded in 1930 …

In the late 1930s, John Maynard Keynes and other economists objected to this recent “mathematizing” approach … At the core of Keynes’ concern laid the question of methodology.

Maria Alejandra Madi

Keynes’ comprehensive critique of econometrics and the assumptions it is built around — completeness, measurability, indepencence, homogeneity, and linearity — is still valid today.

Most work in econometrics is made on the assumption that the researcher has a theoretical model that is ‘true.’ But — to think that we are being able to construct a model where all relevant variables are included and correctly specify the functional relationships that exist between them, is  not only a belief without support, it is a belief impossible to support.

The theories we work with when building our econometric regression models are insufficient. No matter what we study, there are always some variables missing, and we don’t know the correct way to functionally specify the relationships between the variables.

deb6e811f2b49ceda8cc2a2981e309f39e3629d8ae801a7088bf80467303077bEvery econometric model constructed is misspecified. There are always an endless list of possible variables to include, and endless possible ways to specify the relationships between them. So every applied econometrician comes up with his own specification and ‘parameter’ estimates. The econometric Holy Grail of consistent and stable parameter-values is nothing but a dream.

A rigorous application of econometric methods in economics really presupposes that the phenomena of our real world economies are ruled by stable causal relations between variables.  Parameter-values estimated in specific spatio-temporal contexts are presupposed to be exportable to totally different contexts. To warrant this assumption one, however, has to convincingly establish that the targeted acting causes are stable and invariant so that they maintain their parametric status after the bridging. The endemic lack of predictive success of the econometric project indicates that this hope of finding fixed parameters is a hope for which there really is no other ground than hope itself.

The theoretical conditions that have to be fulfilled for econometrics to really work are nowhere even closely met in reality. Making outlandish statistical assumptions does not provide a solid ground for doing relevant social science and economics. Although econometrics have become the most used quantitative methods in economics today, it’s still a fact that the inferences made from them are as a rule invalid.

Econometrics is basically a deductive method. Given the assumptions it delivers deductive inferences. The problem, of course, is that we will never completely know when the assumptions are right. Conclusions can only be as certain as their premises — and that also applies to econometrics.

Adornokritik von Links

14 Mar, 2018 at 18:19 | Posted in Politics & Society | Comments Off on Adornokritik von Links

Die Waffe der Kritik kann allerdings die Kritik der Waffen nicht ersetzen

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