Econometric fictionalism

23 Feb, 2023 at 18:23 | Posted in Statistics & Econometrics | 2 Comments

Mostly Harmless EconometricsIf you can’t devise an experiment that answers your question in a world where anything goes, then the odds of generating useful results with a modest budget and nonexperimental survey data seem pretty slim. The description of an ideal experiment also helps you formulate causal questions precisely. The mechanics of an ideal experiment highlight the forces you’d like to manipulate and the factors you’d like to hold constant.

Research questions that cannot be answered by any experiment are fundamentally unidentified questions.

One of the limitations of economics is the restricted possibility to perform experiments, forcing it to mainly rely on observational studies for knowledge of real-world economies.

But still — the idea of performing laboratory experiments holds a firm grip on our wish to discover (causal) relationships between economic ‘variables.’If we only could isolate and manipulate variables in controlled environments, we would probably find ourselves in a situation where we with greater ‘rigour’ and ‘precision’ could describe, predict, or explain economic happenings in terms of ‘structural’ causes, ‘parameter’ values of relevant variables, and economic ‘laws.’

Galileo Galilei’s experiments are often held as exemplary for how to perform experiments to learn something about the real world. Galileo’s heavy balls dropping from the tower of Pisa, confirmed that the distance an object falls is proportional to the square of time and that this law (empirical regularity) of falling bodies could be applicable outside a vacuum tube when e. g. air existence is negligible.

The big problem is to decide or find out exactly for which objects air resistance (and other potentially ‘confounding’ factors) is ‘negligible.’ In the case of heavy balls, air resistance is obviously negligible, but how about feathers or plastic bags?

One possibility is to take the all-encompassing-theory road and find out all about possible disturbing/confounding factors — not only air resistance — influencing the fall and build that into one great model delivering accurate predictions on what happens when the object that falls is not only a heavy ball but feathers and plastic bags. This usually amounts to ultimately stating some kind of ceteris paribus interpretation of the ‘law.’

Another road to take would be to concentrate on the negligibility assumption and to specify the domain of applicability to be only heavy compact bodies. The price you have to pay for this is that (1) ‘negligibility’ may be hard to establish in open real-world systems, (2) the generalization you can make from ‘sample’ to ‘population’ is heavily restricted, and (3) you actually have to use some ‘shoe leather’ and empirically try to find out how large is the ‘reach’ of the ‘law.’

In mainstream economics, one has usually settled for the ‘theoretical’ road (and in case you think the present ‘natural experiments’ hype has changed anything, remember that to mimic real experiments, exceedingly stringent special conditions standardly have to obtain).

In the end, it all boils down to one question — are there any Galilean ‘heavy balls’ to be found in economics, so that we can indisputably establish the existence of economic laws operating in real-world economies?

As far as I can see there are some heavy balls out there, but not even one single real economic law.

Economic factors/variables are more like feathers than heavy balls — non-negligible factors (like air resistance and chaotic turbulence) are hard to rule out as having no influence on the object studied.

Galilean experiments are hard to carry out in economics, and the theoretical ‘analogue’ models economists construct and in which they perform their ‘thought experiments’ build on assumptions that are far away from the kind of idealized conditions under which Galileo performed his experiments. The ‘nomological machines’ that Galileo and other scientists have been able to construct have no real analogues in economics. The stability, autonomy, modularity, and interventional invariance, that we may find between entities in nature, simply are not there in real-world economies. That’s are real-world fact, and contrary to the beliefs of most mainstream economists, they won’t go away simply by applying deductive-axiomatic economic theory with tons of more or less unsubstantiated assumptions.

By this, I do not mean to say that we have to discard all (causal) theories/laws building on modularity, stability, invariance, etc. But we have to acknowledge the fact that outside the systems that possibly fulfil these requirements/assumptions, they are of little substantial value. Running paper and pen experiments on artificial ‘analogue’ model economies is a sure way of ‘establishing’ (causal) economic laws or solving intricate econometric problems of autonomy, identification, invariance and structural stability — in the model world. But they are pure substitutes for the real thing and they don’t have much bearing on what goes on in real-world open social systems. Setting up convenient circumstances for conducting Galilean experiments may tell us a lot about what happens under those kinds of circumstances. But — few, if any, real-world social systems are ‘convenient.’ So most of those systems, theories and models, are irrelevant for letting us know what we really want to know.

To solve, understand, or explain real-world problems you actually have to know something about them — logic, pure mathematics, data simulations or deductive axiomatics don’t take you very far. Most econometrics and economic theories/models are splendid logic machines. But — applying them to the real world is a totally hopeless undertaking! The assumptions one has to make in order to successfully apply these deductive-axiomatic theories/models/machines are devastatingly restrictive and mostly empirically untestable– and hence make their real-world scope ridiculously narrow. To fruitfully analyze real-world phenomena with models and theories you cannot build on patently and known to be ridiculously absurd assumptions. No matter how much you would like the world to entirely consist of heavy balls, the world is not like that. The world also has its fair share of feathers and plastic bags.

Most of the ‘idealizations’ we find in mainstream economic models are not ‘core’ assumptions, but rather structural ‘auxiliary’ assumptions. Without those supplementary assumptions, the core assumptions deliver next to nothing of interest. So to come up with interesting conclusions you have to rely heavily on those other — ‘structural’ — assumptions.

In physics, we have theories and centuries of experience and experiments that show how gravity makes bodies move. In economics, we know there is nothing equivalent. So instead mainstream economists necessarily have to load their theories and models with sets of auxiliary structural assumptions to get any results at all in their models.

So why then do mainstream economists keep on pursuing this modelling project?

Mainstream ‘as if’ models are based on the logic of idealization and a set of tight axiomatic and ‘structural’ assumptions from which consistent and precise inferences are made. The beauty of this procedure is, of course, that if the assumptions are true, the conclusions necessarily follow. But it is a poor guide for real-world systems.

The way axioms and theorems are formulated in mainstream economics often leaves their specification without almost any restrictions whatsoever, safely making every imaginable evidence compatible with the all-embracing ‘theory’ — and theory without informational content never risks being empirically tested and found falsified. Used in mainstream ‘thought experimental’ activities, it may, of course, ​be very ‘handy,’ but totally void of any empirical value.

Some economic methodologists have lately been arguing that economic models may well be considered ‘minimal models’ that portray ‘credible worlds’ without having to care about things like similarity, isomorphism, simplified ‘representationality’ or resemblance to the real world. These models are said to resemble ‘realistic novels’ that portray ‘possible worlds’. And sure: economists constructing and working with those kinds of models learn things about what might happen in those ‘possible worlds’. But is that really the stuff real science is made of? I think not. As long as one doesn’t come up with credible export warrants to real-world target systems and show how those models — often building on idealizations with known to be false assumptions — enhance our understanding or explanations about the real world, well, they are just nothing more than just novels.  Showing that something is possible in a ‘possible world’ doesn’t give us a justified license to infer that it therefore also is possible in the real world. ‘The Great Gatsby’ is a wonderful novel, but if you truly want to learn about what is going on in the world of finance, I would recommend rather reading Minsky or Keynes and directly confronting real-world finance.

Different models have different cognitive goals. Constructing models that aim for explanatory insights may not optimize the models for making (quantitative) predictions or deliver some kind of ‘understanding’ of what’s going on in the intended target system. All modelling in science has tradeoffs. There simply is no ‘best’ model. For one purpose in one context model A is ‘best’, for other purposes and contexts model B may be deemed ‘best’. Depending on the level of generality, abstraction, and depth, we come up with different models. But even so, I would argue that if we are looking for what I have called ‘adequate explanations’ (Syll, Ekonomisk teori och metod, Studentlitteratur, 2005) it is not enough to just come up with ‘minimal’ or ‘credible world’ models.

The assumptions and descriptions we use in our modelling have to be true — or at least ‘harmlessly’ false — and give a sufficiently detailed characterization of the mechanisms and forces at work. Models in mainstream economics do nothing of the kind.

Coming up with models that show how things may possibly be explained is not what we are looking for. It is not enough. We want to have models that build on assumptions that are not in conflict with known facts and that show how things actually are to be explained. Our aspirations have to be more far-reaching than just constructing coherent and ‘credible’ models about ‘possible worlds’. We want to understand and explain ‘difference-making’ in the real world and not just in some made-up fantasy world. No matter how many mechanisms or coherent relations you represent in your model, you still have to show that these mechanisms and relations are at work and exist in society if we are to do real science. Science has to be something more than just more or less realistic ‘story-telling’ or ‘explanatory fictionalism.’ You have to provide decisive empirical evidence that what you can infer in your model also helps us to uncover what actually goes on in the real world. It is not enough to present your students with epistemically informative insights about logically possible but non-existent general equilibrium models. You also, and more importantly, have to have a world-linking argumentation and show how those models explain or teach us something about real-world economies. If you fail to support your models in that way, why should we care about them? And if you do not inform us about what are the real-world intended target systems of your modelling, how are we going to be able to value or test them? Without giving that kind of information it is impossible for us to check if the ‘possible world’ models you come up with actually hold also for the one world in which we live — the real world.


  1. Prof Syll suffers from chronic myopia. As in numerous previous posts, he says:
    “As far as I can see there is not even one single real economic law.”
    Symptoms of Prof Syll’s myopia are:
    – Hallucinations that economists try to derive laws from “deductive-axiomatic economic theory with tons of more or less unsubstantiated assumptions”.
    – Failure to recognize that all scientific laws are to varying degrees probablistic, conditional and temporary. Laws may be concerned with tendencies rather than certainties or ultimate end states. See:
    Marshall: Principles of Economics, 8e 1920, Bk I, chapter III: ‘Economic Generalizations or Laws’
    Klein: ‘Some Laws of Economics’ 1983,
    – Failure to realise that the validity of economic laws stems from the supporting the empirical evidence which is unaffected by philosophical rants such as the above eloquent post.
    In fact there are many thousands of valid economic laws. These include some laws formulated by economists and an even greater number embodied in common sense, popular culture and literature.
    – Engel’s law
    As family income increases, the percentage of income spent on food decreases.’s_law
    – Keynes’ “Fundamental Pychological Law”
    ”Men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income”.
    Keynes’ General Theory, chapter 8, section III
    Iron Law of Wages
    In the long run wages tend the cost of just enough of food, clothing and shelter to maintain existence in the absence of family planning, wars, epidemics and/or increases in the demand for labor due to technical progress or government economic policies.
    The Law of Substitution (a special and limited application of the law of survival of the fittest)
    “One method of industrial organization tends to supplant another when it offers a direct and immediate service at a lower price.”
    Marshall – Principles of Economics, Bk VI chapter VII: ‘Profits of Capital and Business Power’.
    The law of Increasing Returns to Scale
    “In those industries which are not engaged in raising raw produce, an increase of labour and capital generally gives a return increased more than in proportion.”
    Marshall – Principles of Economics, Bk IV chapter XII
    – Law of Diminishing Returns during a short period of time
    “During a short period of time an increase in the amount demanded raises the normal supply price. This law is almost universal even as regards industries which in long periods follow the tendency to increasing return.”
    Marshall – Principles of Economics, Bk V chapter V
    — Law of diminishing returns (aka Law of Diminishing Marginal Productivity)
    Increasing one factor of production by one unit, while holding all other production factors constant, will at some point yield diminishing extra output per incremental unit of input.
    — Law of One Price
    In the absence of trade frictions (such as transport costs and tariffs), and under conditions of free competition and price flexibility (where no individual sellers or buyers have power to manipulate prices and prices can freely adjust), identical goods sold in different locations must sell for the same price when prices are expressed in a common currency.
    — Law of Rent
    The rent of land tends towards the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (ie, the best rent-free) land for the same purpose, given the same inputs of labor and capital.
    — Laws of Supply and Demand
    “When the demand price is equal to the supply price, the amount produced has no tendency either to be increased or to be diminished; it is in equilibrium. … if any accident should move the scale of production from its equilibrium position, there will be instantly brought into play forces tending to push it back to that position.”
    Marshall – Principles of Economics, Bk V chapter III
    – Pareto’s law of income distribution
    The logarithm of the number of persons with income in excess of a given level is approximately a negative linear function of the logarithm of that income level.
    — Walras’s Law
    Budget constraints imply that the values of excess demand (or, conversely, excess market supplies) must sum to zero regardless of whether the prices are general equilibrium prices.’s_law
    — Law of Purchasing Power Parity
    An internationally traded good will tend towards the same price everywhere in the world when cost is compared in a common currency apart from differences due to transport cost, tariffs and other institutional factors.
    — Director’s law
    The bulk of public programs are designed primarily to benefit the middle classes, but are financed by taxes paid primarily by the upper and lower classes’s_law
    — Wagner’s law
    Public expenditure increases as national income rises
    — Verdoorn’s law
    In the long run faster growth in output increases productivity due to increasing returns.'s_law
    — Varian Rule
    “A simple way to forecast the future is to look at what rich people have today; middle-income people will have something equivalent in 10 years, and poor people will have it in an additional decade”
    — Thirlwall’s law
    The long run growth of a country can be approximated by the ratio of the growth of exports to the income elasticity of demand for imports.
    — Law of diminishing marginal utility
    The first unit of consumption of a particular good or service yields more utility than the second and subsequent units, with a continuing reduction for greater amounts.
    — Metcalfe’s law
    The value of a telecommunications network is proportional to the square of the number of connected users of the system’s_law
    — Okun’s law/Rule of Thumb
    1% negative growth in real GDP is associated with 0.5% increase in cyclical unemployment, depending on the country and time period under consideration.
    — The Laffer curve
    There exists some tax rate between 0% and 100% that will result in maximum tax revenue for government.
    — Zipf’s law (regarding city sizes)
    The population of the largest city in a country is about twice the size of the next largest, three times the size of the third largest, and so forth.
    Gabaix: ‘Power Laws in Economics’: Journal of Economic Perspectives, Winter 2016
    — Goodhart’s law
    When a measure becomes a target, it ceases to be a good measure’s_law
    — Gresham’s law
    Bad money drives out good.
    — Hotelling’s Law
    In many markets it is rational for producers to make their products as similar as possible.’s_law
    — Parkinson’s law
    Work expands so as to fill the time available for its completion.
    — Rosenfeld’s law
    The amount of energy required to produce one dollar of GDP has decreases by about one percent per year (as observed since 1845).
    – Rome wasn’t built in a day
    (Success in business takes time and effort)
    – There is no such thing as a free lunch
    – You can’t get owt for nowt
    – No pain, no gain
    (All goods have an opportunity cost because scarce resources are needed to produce them)
    – Mighty oaks from little acorns grow
    (All businesses start small)
    — Life is not fair
    (Inequality can be caused by differences in natural abilities, parental wealth, the luck of birth, and other factors beyond one’s control)
    – Nothing ventured, nothing gained.
    – Fortune follows the brave.
    – Audentis Fortuna iuvat (Virgil)
    (Earning profits requires taking risks)
    – Make hay while the sun shines
    (Success is more likely if you take advantage of favorable opportunities) 
    The early bird gets the worm.
    (Early well prepared entrants into new markets face less competition and make more profits than late entrants)
    – Don’t throw good money after bad
    – Let bygones be bygones
    (Don’t commit the sunk costs fallacy – unrecoverable costs should not influence current decision-making)
    – Penny wise, pound foolish
    – A stitch in time saves nine
    (Making economies today, eg cutting spending on maintenance, may lead to substantial future costs)
    – Take care of the pence, and the pounds will take care of themselves
      (Numerous small gains may be more advantageous than a few big items)
    – If it is too good to be true it probably isn’t.
    (Extremely high returns are very unlikely)
    — Don’t put all your eggs in one basket
    The best investment policy is to diversify holdings in order to minimize risk.
    – A fool and his money are soon parted
    – No money, no honey
    – Money begets money.
    – Money, like manure, does no good till it is spread.
    – Money borrowed is soon sorrowed
    – Money often costs too much. (Emerson)
    – Neither a lender nor a borrower be, for loan oft loses both itself and friend, and borrowing dulls the edges of husbandry. (Polonius’ advice to his son in Shakespeare’s play ‘Hamlet’)
    – Money calls, but does not stay: It is round and rolls away.    
    – “There be three things which make a nation great and prosperous: a fertile soil, busy workshops, easy conveyance for men and goods from place to place”
    Francis Bacon (1561–1626)
    – The community does not exist on the fictitious value of money but on the results of productive labour, which is what gives money its value.
    Adolf Hitler, speech to the German Reichstag, January 30, 1937
    – Money is a good servant, but a dangerous master (Francis Bacon)
     – Money never made a man happy yet, nor will it. There is nothing in its nature to produce happiness. The more a man has, the more he wants. (Ben. Franklin.)
    – The love of money is the root of all evil (I Timothy 6:10)
    – Money is the fruit of evil as often as the root of it (Henry Fielding)
    – Credit is the lifeblood of business, the lifeblood of prices and jobs.
    President Herbert Hoover (1874–1964), address at Des Moines, Iowa, October 4, 1932
    – The best way to destroy the capitalist system is to debauch the currency.
    Attributed to Vladimir Ilich Lenin by John Maynard Keynes, The Economic Consequences of the Peace, p. 235 (1920) [However, as Keynes noted, this quotation has not been found in Lenin’s writings and remains unverified].
    – The appropriation of public money always is perfectly lovely until some one is asked to pay the bill … Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody.
    Calvin Coolidge (1872–1933)
    – The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, assistance to foreign lands should be curtailed lest Rome become bankrupt, the mobs should be forced to work and not depend on government for subsistence.
    Spuriously attributed to Marcus Tullius Cicero (106-43 BCE)

  2. In economics abstraction is unavoidable as experiments are not available in most of the cases. The problem with most of the mainstream modelling is that they make wrong abstractions. For example, they model a modern economy like a subsistence economy producing for direct satisfaction of personal (consumption) needs. Instead, modern economies are “monetary production economies” or capitalistic systems producing for (monetary) profit. Even in abstract terms, the two approaches paint a totally different behavior of the system. In the latter view, the immediate satisfaction of needs are subordinated to the profit motive, while the first approach abstract from the profit motive or trivializes it.

    The latter approach, in contrast to the first, has a potential of understanding important features of the economy, but still will remain abstract, subject to “accidental” events. So, the main difference is not to give up abstractions, if we want to improve our system, but to make the right abstractions and keep in mind that still, we are dealing with a model, not immediately with the reality.

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