Maurice Allais on empirics and theory

30 Nov, 2019 at 14:08 | Posted in Economics | 6 Comments

225px-allais_pn_maurice-24x30-2001bSubmission to observed or experimental data is the golden rule which dominates any scientific discipline. Any theory whatever, if it is not verified by empirical evidence, has no scientific value and should be rejected.

 

Maurice Allais

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science, it ought to be considered of little or no value to simply make claims about the model and lose sight of reality.

Mainstream — neoclassical — economics has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. Hopefully humbled by the manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on axiomatic-deductivist modelling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

To have valid evidence is not enough. What economics needs is sound evidence. Why? Simply because the premises of a valid argument do not have to be true, but a sound argument, on the other hand, is not only valid but builds on premises that are true. Aiming only for validity, without soundness, is setting the economics aspirations level too low for developing a realist and relevant science.

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  1. Prof. Syll says “What economics needs is sound evidence”.
    However, he believes that neither Econometrics nor Randomised Controlled Trials (RCTs) can provide such evidence.
    So what is “sound evidence”?
    .
    According to Prof.Syll:
    – “The real world is dominated by “fundamental Keynesian uncertainty”. “We simply do not know”.
    – “Although regression analysis and econometrics have become the most used quantitative methods in social sciences and economics today, it’s still a fact that the inferences made from them are invalid.”
    – “Real-world social systems are not governed by stable causal mechanisms or capacities”. A pattern or relationship observed during one period of time or at one location is unlikely to be found at other times or locations.
    – “Every social phenomenon is determined by a host of both necessary and contingent relations, and it is impossible in practice to have complete knowledge of these constantly changing relations”.
    – “I cannot see that the main task of science is to detect event-regularities between observed facts.”
    .
    A few recent examples of Prof. Syll’s anti-empiricism include:
    26 March, 2018: Keynes’ critique of econometrics — still valid after all these years
    17 Oct, 2019 Econometrics — junk science with no relevance whatsoever to real-world economics
    19 Nov, 2019: Econometrics — fictions of extremely limited value
    25 Nov, 2019: RCTs — assumptions, biases and limitations
    29 March, 2019 RCTs — a method in search of ontological foundations
    5 Aug, 2019: Roy Bhaskar
    .
    So what does Prof. Syll mean by “sound evidence”?
    Divine revelation?
    His own supernatural perceptions of “deep reality?
    Vacuous or very vague aspirations?
    .
    I suggest that all we can achieve are imperfect and uncertain judgements based on empirical estimates surrounded by confidence intervals. The latter will often be much wider than we would like.
    Prof Syll’s notion of “sound evidence” appears to have no practical application.

    • There are many other sciences which manage to accumulate factual evidence without an exclusive reliance on the manipulation of statistical aggregates of dubious conceptual foundation and provenance.
      .
      Economists could go and look upon the actual operation of institutions, with only incidental use of statistics for summaries, which would require no resort to esoteric estimation techniques or unsupportable claims to magic qualities suitable for causal inference: cause would be a matter of observed human motivation, intention and behavior.
      .
      Instead of assuming the efficiency of financial markets or confirming that efficiency as a quality from statistical conjuring, perhaps economists could study the mechanisms of an actual financial market and quatitatively measure its efficiency as an engineer might measure the heat efficiency of a particular internal combustion engine.
      .
      Perhaps then economists with eyes to see and ears to hear might observe administered pricing, unemployment, bureaucratic firms, fraud and the near-absence of markets from the “market economy” they have been pontificating about in unassailable ignorance for more than a century.
      .
      It is certainly not even superficially plausible that distilling the actions of millions of people in billions of transactions into an aggregate representing an extended period over a vast and varied geographic region leaves much if any information left. But, that is how macroeconomists approach their field. They proceed to engage in time-series analysis of a history that can only happen one way only to discover auto-correlation explains everything and nothing, and they would need a thousand years to pass without regime change before they could discriminate among basic theoretic hypotheses. And, most of them still would not know how banks create money or that money is not neutral.
      .
      IMHO, Professor Syll is far too mild a critic.

      • Bruce,
        I entirely agree that broad grass-roots institutional and sociological understanding of how the economy functions is vital. But this alone won’t equip us to make macrocecomic policy decisions.
        .
        For example, suppose we observe and study workers losing their jobs at say 50 firms. How do we determine if this is a serious nation-wide problem in an economy with 100,000 firms? What percentage of workers have already lost their jobs nationwide or are likely to do so in the coming year?
        And what government spending or tax changes are required to minimise the danger of a recession?
        You need macro data and a quantitative forecasting model to try to answer such questions.
        .
        Keynes appreciated the need for quantitative macro estimates. He didn’t wait for “sound evidence” which Prof Syll says is needed. Instead Keynes struggled with poor data to do very simple crude econometrics to estimate the multiplier. See his General Theory, Chapter 10 (part IV) and his revised estimate in Appendix 2 (last paragraph).

        • For some context re Keynes and econometrics, let this “far too mild a critic” recommend reading this article on Keynes’ critique of the econometric project:

          https://larspsyll.wordpress.com/2019/10/17/econometrics-junk-science-with-no-relevance-whatsoever-to-real-world-economics/

        • To focus on just your one example — people losing their jobs — how do we discriminate the case of the economic system adjusting dynamically to changing technologies or tastes from the case of financial dysfunction causing a shortage of effective demand? This could be a serious question for debate and investigation in economics, but in practice I submit that it is not. Instead, economists shout, each in their ideological silos. The rare economist, like Minsky, who did “field work” at banks, to understand what they do, is treated as a fringe figure — someone who must be disregarded because he “had no model” (a phrase I have heard more than once in reference to Minsky, who of course did have a model, just not the approved type of model).
          .
          Econometrics, the methods of which promote idiosyncratic manipulation of data of dubious quality in contexts of counterfactual speculation, just reinforce this culture of shouting in ideological silos.
          .
          If mainstream macroeconomists were serious, yes, they would be actively working on better data definition and collection. The concepts of employment or price or firm (establishment) remain poorly developed and ideas for how observations should be aggregated have not been critically examined since Irving Fischer in WWI, beyond cynical political conspiracies to manipulate measures of inflation to steal pensions. There is no reason in our age of computers and universal surveillance for the clunky periodization or reporting lags and repeated revisions.
          .
          But, economists who look with equanimity on the travesty of “aggregate supply” meeting “aggregate demand” at a “price level” are not likely candidates for figuring out what is wrong with the CPI as an inflation measure when mortgage lending standards change and house prices change or homelessness soars.

  2. Bruce,
    Mainstream macroeconomists have been actively working on better data definition and collection for over 90 years. For an account of early progress see Appendix 2 of Keynes General Theory.
    [Tip: For a nice free version of the GT: https://b-ok.cc/book/3573721/b7831c ]
    .
    Most applied economics involves a multitude of theoretical and statistical issues, many of which are well described by Keynes and Prof. Syll.
    Keynes discussion was in his review of Tinbergen’s pioneering econometric work. Unfortunately:
    “Keynes’ specific points of criticism proved invalid since, in his model building and applied work, Tinbergen had dealt with the particular problems raised and carried out the various tests or procedures which Keynes criticised him for omitting.”
    Morgan – The History of Econometric Ideas 1990, pages 108-121.
    https://b-ok.cc/book/915327/d834da
    .
    As far as I know, the only quantative estimates made by Keynes are his multipler estimates for the USA 1929-32 which are reported in the General Theory, in Chapter 10 (part V) and Appendix 2 (last para).
    Initially Keynes wrote “the multiplier seems to have been less than 3 and probably fairly stable in the neighbourhood of 2·5”.
    However, in the light of better data, he made a “very crude, preliminary” assessment that “the changes in money incomes were from three to five times the changes in net investment … within a reasonable margin of error.”
    .
    Keynes estimates are of course vulnerable to all the criticisms which he raised in 1939, but that is inevitable in practical work.


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