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Mainstream Economist Points Out Why Econometrics is Absurd.

I give you Tony Lawson. Here are his credentials. He is a member the of University of Cambridge’s Faculty of Economics, with many published papers in prestigious journals, as that page shows.

Tony Lawson is no Austrian Economist. He is well ensconced in the very heart of the mainstream. He gets published in the Cambridge Journal of Economics [and is on the editorial board] and many other mainstream economics journals, and by the Cambridge University Press. He is politically correct to the max, writing about things like ‘Feminism, Realism and Universalism’ in a journal called Feminist Economics. He supervises PhD students. He was trained as a mathematician, so don’t think he just doesn’t understand all that deep math econometricians use. Quite the opposite.

And his critique is exactly what AE has been saying all along, that econometrics always assumes some mystical magic number, independent of human choice, that somehow makes people with free will act as if they are mindless zombies.

Devil’s Advocate: How this is different from AE, which also predicts human behavior. Isn’t that saying they are zombies, since they are predictable?

Smiling Dave: Nopers. Because AE talks about what most people will do if they are rational. The Austrian predictions are based on an analysis of how people will think, if they think normally. But where does econometrics get its magic numbers from? Based on an analysis of how people think? Fugeddaboutit. You can’t grind out numbers from such an analysis, and nobody ever has.

So where do econometricians get their numbers from? Prof. Taylor lets us in on the secret [All he says is in italics, with my snarky comments in normal font]:

The first thing to note is that all these mathematical methods that economists use presuppose event regularities or correlations. This makes modern economics a form of deductivism. A closed system in this context just means any situation in which an event regularity occurs. Deductivism is a form of explanation that requires event regularities.

Here he is admitting that you can’t do econometrics without constants [=regularities] of some kind. Next he talks about where these supposed constants come from. He says there are two sources. The first is digging into history and finding some number that has always been there until now, and pretend it will always be there in the future, even though we have no rational reason for thinking so:

Now event regularities can just be assumed to hold, even if they cannot be theorised [=there is no rational reason for thinking so], and some econometricians do just that and dedicate their time to trying to uncover them.

Yep, just assume there is magic number out there, for no reason at all, then dig into the data and hope you come up with one. Then of course, assume for no reason that the number will never change.

Some econometricians do just that. And they get published, and their papers are read as if they were something more than idle scribblings of madmen. OK. I think we can dismiss that crowd as being absurd. But maybe the other kind of econometrician is better. Let’s have a look:

But most economists want to theorise in economic terms as well. But clearly they must do so in terms that guarantee event regularity results [=magic numbers]. The way to do this is to formulate theories in terms of isolated atoms. By an atom I just mean a factor that has the same independent effect whatever the context [=acts like a zombie]. Typically human individuals are portrayed as the atoms in question, though there is nothing essential about this. Notice too that most debates about the nature of rationality are beside the point. Mainstream modellers just need to fix the actions of the individual of their analyses to render them atomistic, i.e., to fix their responses to given conditions [=i.e to turn them into zombies].

So the atom, meaning the human, acts the same way whatever the context. That’s what all econometric models are about. What’s your opinion of this way of modeling, Prof?

It is this implausible fixing of actions that tends to be expressed though, or is the task of, any rationality axiom.

In other words, the ridiculousness of the whole model is baked into it from Step One, even before any equations are thrown around. The axioms themselves, the very starting points of the whole shebang, are always implausible, says the Prof. All econometrics, the Prof assures us, is one big bag of Garbage In Garbage Out.

Yep, that’s the critique in one word. It is implausible to say everyone will always do the same thing in every single situation. Implausible, explains the prof. Implausible. Contrast this with AE, which says a person will behave in way X, Y or Z, depending on what is most important to him at the moment, something which may change all the time. [Lawson agrees with this. As someone summarized his philosophy, “…individuals are complex and internally
structured and so may respond di fferently in similar situations at diff erent occasions.” Well said, my son.]

As if this wasn’t bad enough, econometrics piles impossibility on top of implausibility:

…the specification in this way of what any such atom does in given conditions allows the prediction activities of economists ONLY if nothing is allowed to counteract the actions of the atoms of analysis. Hence these atoms must additionally be assumed to act in isolation.

Beginning to get pretty ridiculous, no? Everyone always acts in isolation. Meaning Smith will always do the same thing, no matter what his wife, or Jones, or the market, is up to. He acts as if he were in isolation, in a Twilight Zone where everyone else is just a ghost or a phantom whom he need not take into consideration. Seriously?

But maybe the Prof is being unfair. Maybe some econometrics is stupid like that, but surely in this vast distinguished field there is someone, a single solitary individual, with a brain? Don’t kid yourself, say the prof:

It is easy to show that this ontology of closed systems of isolated atoms characterises all of the substantive theorising of mainstream economists.

Translation: It’s all like that.

But surely all those gigantic minds cannot all be collectively wrong? Surely the assumptions, though odd sounding to the layman, are accurate models of reality?

No, says the prof:

It is also easy enough to show that the real world, the social reality in which we actually live, is of a nature that is anything but a set of closed systems of isolated atoms.

How did absurd mess ever happen? The prof comes up with an answer that Austrians have been saying all along:

The defining feature of modern mainstream economics, as I see it, is its insistence on methods of mathematical modelling. It is this dogmatism that both defines the mainstream and is the problem. To which Austrians everywhere say, “Thank you, Captain Obvious.”

And why this stubborn insistence?

So ultimately the failure is one of ontological neglect, no doubt grounded in a cultural-ideological presupposition that mathematics is somehow necessary to all scientific activity, understanding and rigour.

Sound familiar? It should. It’s the classical Austrian position.

See you in Cambridge, guys.

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5 Comments

  1. Smiling Dave says:

    LOL gave me a lot of work to do, Lio. So you’re saying they have refutations of the arguments he raises?
    Maybe you could help me out here. He makes the following points:
    1. Some Econometricians assume with no justification at all that certain equations hold.
    2. The ones that do give justifications give implausible ones, see next points.
    3. First of all, they assume humans act in isolation, which the real world shows to be false.
    4. Second of all, they assume a person will behave the same way always, whatever the context, something implausible.

    So which of those points do the papers refute, and how?

    Like

  2. lio67 says:

    Dave,

    1/ “Some Econometricians” is not exactly the same as “All Econometricians” nor as “Econometrics”.
    2/ Where have you read that Econometrics assume your points 2,3 and 4?

    I think there is a usual general confusion between users and tools. Do not blame the tools, blame the users! I do not think that all econometricians are as stupid as some try to depict them.

    As Ida Wolden Bache wrote in his concluding remarks :

    “By revealing interesting and non-obvious partial regularities, econometric models could contribute to causal explanations in the critical realist sense. Hence, econometrics is useful for critical realists, at least as a supplement to other research techniques. What is more, by highlighting the conditions under which stable empirical regularities obtain in the social world, critical realism could contribute to a better understanding of the potential and the limitations of econometrics.”

    Theory and practice are interdependent: each one learns from the other and, in that learning process, both are inspired to stretch, to bend a little, to grow.

    Like

  3. […] readers will remember this humble article where we introduced Tony Lawson, a big cheese over at Cambridge University. We said he was in the […]

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  4. Smiling Dave says:

    I think Ida is a woman’s name. I wrote a partial critique of her(?) paper, it’s my latest article here.

    As for the rest of your comments, I don’t think we are on the same page, but the gap is too great.

    I appreciate your showing up, reading and commenting on my humble blog. Thanks.

    Like

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