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Mistaken methodology of econometrics

from Asad Zaman

This is the continuation of a sequence of posts on methodology of economics and econometrics (For previous posts, see: Mistaken Methodologies of Science 1Models and Realities 2Thinking about Thinking 3Errors of Empiricism 4Three Types of Models 5Unrealistic Mental Models 6The WHY of Crazy Models 7The Knowledge of Childless Philosophers 8Beyond Kant 9,). In this (10th) post, we consider the methodology of econometrics, which is based on Baconian or observational models. That is, econometric models tend to look only at what is available on the surface, as measured by observations, without attempting to discover the underlying reality which generates these observations. This is an over-simplified description, and we will provide some additional details about econometric methodology later.

The methodology of econometrics is rarely discussed in econometrics textbooks. Instead, students are taught how to DO econometrics in an apprentice-like fashion. All textbooks mentions the “assumptions of the regression model” in an introductory chapter. In later chapters, they proceed to do regression analysis on data, without any discussion of whether or not these assumptions hold, and what difference it could make to the data analysis. The student is taught – by example, not by words – that these assumptions do not matter, and we can always assume them to be true. In fact, as I learned later, these assumptions are all-important and these actually drive all the analysis. By ignoring them, we create the misleading impression that we are learning from the data, when in fact, the results of the analysis come out of the hidden assumptions we make about it. Once one realized this clearly, it becomes EASY to carry out a regression analysis which makes any data produce any result at all, by varying the underlying assumptions about the functional form, and the nature of the unobservable errors. This issue is discussed and explained in greater detail in my paper and video lecture on “Choosing the Right Regressors“.  The fundamental underlying positivist principles of econometric methodology, which are never discussed and explained, can be summarized as the following three ideas: read more

  1. John deChadenedes
    February 11, 2020 at 2:37 am

    Thank you, professor! As many people are beginning to understand, the so-called “methodology” of economics has always been based on hidden assumptions that are (a) not made explicit, (b) never questioned, and (c) generally false. As you know if you have ever studied formal logic, if even one of your premises is false you can rigorously prove anything. (“Black equals white”, “Up is down”, “War is peace”, “Inequality is just fine”, for example.) In economics as it is currently taught, virtually all of the premises are false, which makes it absurdly easy to prove whatever you want to say. You may want, for your own satisfaction, to identify the foundational assumptions of the economics you were taught in undergraduate and graduate courses and see if you really think they are true.

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