Home > New vs. Old Paradigm > Econometrics — still lacking a valid ontological foundation

Econometrics — still lacking a valid ontological foundation

from Lars Syll

Important and far-reaching problems still beset regression analysis and econometrics – many of which basically are a result of an unsustainable ontological view.

complex-research-terminology-simMost econometricians have a nominalist-positivist view of science and models, according to which science can only deal with observable regularity patterns of a more or less lawlike kind. Only data matters and trying to (ontologically) go beyond observed data in search of underlying real factors and relations that generate the data is not admissable. All has to take place in the model of the econometric mind, since the real factors and relations according to the econometric (epistemologically based) methodology are beyond reach, since they, allegedly, are both unobservable and unmeasurable. This also means that instead of treating the model-based findings as interesting clues for digging deepeer into real structures and mechanisms, they are treated as the end points of the investigation.

As mathematical statistician David Freedman writes in Statistical Models and Causal Inference (2010):

In my view, regression models are not a particularly good way of doing empirical work in the social sciences today, because the technique depends on knowledge that we do not have. Investigators who use the technique are not paying adequate attention to the connection – if any – between the models and the phenomena they are studying. Their conclusions may be valid for the computer code they have created, but the claims are hard to transfer from that microcosm to the larger world …

freedman2Given the limits to present knowledge, I doubt that models can be rescued by technical fixes. Arguments about the theoretical merit of regression or the asymptotic behavior of specification tests for picking one version of a model over another seem like the arguments about how to build desalination plants with cold fusion and the energy source. The concept may be admirable, the technical details may be fascinating, but thirsty people should look elsewhere …

Causal inference from observational data presents may difficulties, especially when underlying mechanisms are poorly understood. There is a natural desire to substitute intellectual capital for labor, and an equally natural preference for system and rigor over methods that seem more haphazard. These are possible explanations for the current popularity of statistical models.

Indeed, far-reaching claims have been made for the superiority of a quantitative template that depends on modeling – by those who manage to ignore the far-reaching assumptions behind the models. However, the assumptions often turn out to be unsupported by the data. If so, the rigor of advanced quantitative methods is a matter of appearance rather than substance.

If econometrics is to progress it has to abandon its outdated nominalist-positivist view of science and the belief that science can only deal with observable regularity patterns of a more or less law-like kind. Scientific theories ought to do more than just describe event-regularities and patterns – they also have to analyze and describe the mechanisms, structures, and processes that give birth to these patterns and eventual regularities.

  1. Garrett Connelly
    September 25, 2014 at 3:30 pm

    Yes, this paradigm shift is required for economics to even be considered a bona fide part of sociology.

    Economists have reached completely off the wall conclusions about deficit spending by completely ignoring that it destroys democracy and that democracy itself is part of the economy and visa versa. This self inflicted blindness of economists is being institutionalized at the historic moment when democracy is moving into the information-age, beyond mere numerics to qualitative focus of distributed intelligence, a realm where economics as taught is both naive and passé.

    • BC
      September 25, 2014 at 8:14 pm

      Yes, Garrett, and moreover the fundamentally flawed premise by economists that the ecological system of the planet is a subsystem of “the economy”, i.e., the illusory thing they have invented that increasingly perceives real biophysical factors as “externalities” to be ignored. Of course, the precise converse is the reality.

      That humans and non-human lifeforms are inseparable from the ecological system on which we depend for existence, economics perceives this thing called “the economy” that is separate from what is required to encourage and sustain ecological conditions required by humans and non-humans.

      Econometrics is increasingly unintelligible mathematical abstractions of something that does not even actually exist. That it can be said to exist in the minds of economists, bankers, CEOs, rentiers, and their captured imperial technocrats and politicos suggests that “the economy” exists to function for those who imagine it and its objectives AT THE EXPENSE of everyone and everything else.

  2. September 25, 2014 at 10:22 pm

    last time i looked at econometrica or J ec theory was it looked not so much like unintellegible abstractions, but more llke they took papers from SIAM (soc inst appl math) from the 70’s and republished them. but in a more messy form,. (also they claimed it had something to do with economics)

  3. davetaylor1
    September 26, 2014 at 12:28 pm

    Lars’ analysis is the clearest statement yet of the consequences of David Hume’s philosophy, conceived about the same distance in time from the founding of the Bank of England’s fraudulent reserve banking, as we are now from Thatcher’s turn from an industrial to a share owning democracy. She and her pal Reagan had no excuse for that, apart from ignorance and being taken in by simplistic economists like Friedman and Hayek.

    Earlier (in 1975) Roy Bhaskar’s ‘A Realist Theory of Science’ began aiming to “provide a comprehensive alternative to the positivism which since the time of Hume have fashioned our image of science. Central to the positivist vision of science is the Humean theory of causal laws. It is a principle concern of this study to develop some new arguments and show how they relate to more familiar ones against that still widely accepted theory”. Having discovered Bhaskar “in the late 1980’s”, Tony Lawson related this to economics in ‘Economics and Reality’ (1997), where after surveying the usual methods of deducing social science conclusions from assumptions and statistics, by p.19 has found that “Historically, encouragement for the conception of science and explanation in question stems from a version of positivism that is rooted in Hume’s analysis of causality, or at least Hume’s arguments as they are usually interpreted”. (The untenability and profitably God-free political motivation of Hume’s arguments had been obvious to me personally as long ago as 1958).

    From about 1995, Margrit Kennedy in the US and Huber & Robertson in the UK were proposing alternatives to the monetary system, and its war-funding, fraudulent usury was being thoroughly documented for “The Money Masters” video. (I’d worked out the fraud for myself – if not its American history – following the raising of Henry VIII’s flagship in 1982 and a chance reference to England’s ‘Glorious Revolution’ of 1688). In our different ways Paul Grignon, Stephen Zarlenga and I have tried to raise interest in this even more fundamental practical issue here. Fraud doesn’t happen by statistics. Its mechanisms are real but its information false. (For a few dollars one can now acquire James Gleick’s explanatory history of ‘The Information’: truly informative despite missing – on p.281 – Claude Shannon’s crucial reference to information capacity rather than information. His colleague Norbert Wiener answers Hume concisely on p.241: “Information is information, not matter or energy. No materialism which does not admit this can survive to the present day”).

    I’m going on about this because if heterodox economists are going to change anything they need to come to agreement on fundamentals, and that is what these two issues are.

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