Econometrics — a Keynesian perspective

17 May, 2020 at 08:55 | Posted in Economics | 3 Comments

istheseptuagintaIt will be remembered that the seventy translators of the Septuagint were shut up in seventy separate rooms with the Hebrew text and brought out with them, when they emerged, seventy identical translations. Would the same miracle be vouchsafed if seventy multiple correlators were shut up with the same statistical material? And anyhow, I suppose, if each had a different economist perched on his a priori, that would make a difference to the outcome.

J M Keynes

Mainstream economists today usually subscribe to the idea that although mathematical-statistical models are not ‘always the right guide for policy,’ they are still somehow necessary for making policy recommendations. The models are supposed to supply us with a necessary ‘discipline of thinking.’

This emphasis on the value of modelling should come as no surprise. Mainstreamers usually vehemently defend the formalization and mathematization that comes with the insistence of using a model-building strategy in economics.

But if these math-is-the-message-modellers aren’t able to show that the mechanisms or causes that they isolate and handle in their mathematical-statistically formalised models are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ these models do only hold under ceteris paribus conditions and are consequently of limited value to our understandings, explanations or predictions of real economic systems. Building models only to show  ‘self-discipline’ is setting the aspiration level far too low.

According to Keynes, science should help us penetrate to ‘the true process of causation lying behind current events’ and disclose ‘the causal forces behind the apparent facts.’ We should look out for causal relations. But models — mathematical, econometric, or what have you — can never be more than a starting point in that endeavour. There is always the possibility that there are other (non-quantifiable) variables – of vital importance and although perhaps unobservable and non-additive not necessarily epistemologically inaccessible – that were not considered for the formalized mathematical model.

The kinds of laws and relations that ‘modern’ economics has established, are laws and relations about mathematically formalized entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real-world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made mathematical-statistical ‘nomological machines’ they are rare, or even non-existent. Whether econometric or not, that also, unfortunately, makes most of contemporary mainstream endeavours of economic modelling rather useless.

Econometric modelling should never be a substitute for thinking. From that perspective, it is really depressing to see how much of Keynes’ critique of the pioneering econometrics in the 1930s-1940s is still relevant today.

The general line you take is interesting and useful. It is, of course, not exactly comparable with mine. I was raising the logical difficulties. You say in effect that, if one was to take these seriously, one would give up the ghost in the first lap, but that the method, used judiciously as an aid to more theoretical enquiries and as a means of suggesting possibilities and probabilities rather than anything else, taken with enough grains of salt and applied with superlative common sense, won’t do much harm. I should quite agree with that. That is how the method ought to be used.

Keynes, letter to E.J. Broster, December 19, 1939

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  1. That’s exactly what some of our almost forgotten “giants” understood the value of modelling and econometrics. Let me share some the quotes I used from them in my thesis in 1983 – “An Attempt at Integrating Macroeconometric and Input-Output Models: The Case of Bangladesh” which was examined by Lawrence Klein.

    “Models constitute a framework or a skeleton and the flesh and blood will have to be added by a lot of common sense and knowledge of details” Jan Tinbergen, Nobel Lecture

    “Models are essential aids to clear thinking”, Gunnar Myrdal, Asian Drama, Vol. III, p. 1962.

    Of course Tinbergen pioneered econometric modelling. Klein worked with him very closely, and built the first macroeconometric model for the US. Here are some excerpts from his interview in 1987, published in Econometric Theory, 3, 1987, 409-460.

    On the idea of building a model, “So the concept then was to develop the methodology and develop the models with very explicit applications in mind towards policy analysis.” That is, the ultimate purpose of modelling is policy analysis and explicit application.

    On what happened in later years, “In later years, I think some people became slaves of the neoclassical behavioral formulation without taking account of the aggregation problem. In their fear of being “ad hoc” they chose theoretical lines which were not” always well conceived. Many of the things that people thought were theoretical
    were not very good if you take into account the aggregation problems that were involved. In my own approach, I have insisted that there must be a theoretical basis for equation specification, and there must also be a close correspondence with reality…. I think many of the present generation of researchers are not … careful with reality, but are over-impressed with pure theory spinning … I think that at the present time macroeconomics,…, has taken what seems to me to be a fruitless turn that is not going to produce very powerful results.”

    On treatment of expectations, “The present generation of economists are not leading us in any fruitful direction for studying expectations. Expectations are endogenized and introduced in a very mechanical way. This method has very little behavioral content and very little informational content. In my opinion, the best way is to go to the source of expectations and find out what people actually expect or anticipate and to endogenize that within the framework of models.”

    Cheers

    • Thanks, Anis. Interesting Klein-quote!

  2. As a lay person reading a lot of economics, it seems that it is mostly confirmation bias and reifying theories in their operation. Too many economists have a bias — perhaps unconscious — that models are then constructed to support. Mathematics is then used to bolster the models. I once concluded an exchange with a local economics professor when he conceded that it is more of an art than a science, that we should put no more faith in a model from economists than we do in the examination of the entrails of chickens.

    At the time I was railing against monetarism and the silly idea of fighting undefined inflation by means of central banks raising interest rates and their notion of NAIRU. That has now become gospel by the mainstream priests of the profession in their service to the oligarchs despite their protests to the contrary. I had a history where I was negotiating collective agreements and fighting for contracts that would keep up to inflation but NAIRU was saying that heightened wages were causing it. While central banks deny adhering to the doctrine if NAIRU, they still talk about offerings of sacrificial lambs — workers — to fighting inflation should it ever reappear.

    The most useful thing I heard from Tinbergen was that he stated a solution to a problem must contain the same number of variables as what caused the problem. And, since economists for decades were not looking at the problems but preferring to create elegant solutions, problems never truly got solved.

    My last comment is friendly to the writings of Polanyi and McMurtry who point out that society has become embedded in an economic paradigm and the conflict we see is that many of us want the economic paradigms to be embedded in society — maybe for possible testing. But society must be secular on economics the way it should be secular on other religious faiths.


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