Home > Uncategorized > Leontief’s devastating critique of econom(etr)ics

Leontief’s devastating critique of econom(etr)ics

from Lars Syll

Much of current academic teaching and research has been criticized for its lack of relevance, that is, of immediate practical impact … I submit that the consistently indifferent performance in practical applications is in fact a symptom of a fundamental imbalance in the present state of our discipline. The weak and all too slowly growing empirical foundation clearly cannot support the proliferating superstructure of pure, or should I say, speculative economic theory …

004806Uncritical enthusiasm for mathematical formulation tends often to conceal the ephemeral substantive content of the argument behind the formidable front of algebraic signs … In the presentation of a new model, attention nowadays is usually centered on a step-by-step derivation of its formal properties. But if the author — or at least the referee who recommended the manuscript for publication — is technically competent, such mathematical manipulations, however long and intricate, can even without further checking be accepted as correct. Nevertheless, they are usually spelled out at great length. By the time it comes to interpretation of the substantive conclusions, the assumptions on which the model has been based are easily forgotten. But it is precisely the empirical validity of these assumptions on which the usefulness of the entire exercise depends.

What is really needed, in most cases, is a very difficult and seldom very neat assessment and verification of these assumptions in terms of observed facts. Here mathematics cannot help and because of this, the interest and enthusiasm of the model builder suddenly begins to flag: “If you do not like my set of assumptions, give me another and I will gladly make you another model; have your pick.” …

But shouldn’t this harsh judgment be suspended in the face of the impressive volume of econometric work? The answer is decidedly no. This work can be in general characterized as an attempt to compensate for the glaring weakness of the data base available to us by the widest possible use of more and more sophisticated statistical techniques. Alongside the mounting pile of elaborate theoretical models we see a fast-growing stock of equally intricate statistical tools. These are intended to stretch to the limit the meager supply of facts … Like the economic models they are supposed to implement, the validity of these statistical tools depends itself on the acceptance of certain convenient assumptions pertaining to stochastic properties of the phenomena which the particular models are intended to explain; assumptions that can be seldom verified.

Wassily Leontief

A salient feature of modern mainstream economics is the idea of science advancing through the use of “successive approximations” whereby ‘small-world’ models become more and more relevant and applicable to the ‘large world’ in which we live. Is this really a feasible methodology? Yours truly thinks not.

Most models in science are representations of something else. Models “stand for” or “depict” specific parts of a “target system” (usually the real world). And all empirical sciences use simplifying or unrealistic assumptions in their modelling activities. That is not the issue — as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.

Theories are difficult to directly confront with reality. Economists therefore build models of their theories. Those models are representations that are directly examined and manipulated to indirectly say something about the target systems.

But models do not only face theory. They also have to look to the world. Being able to model a “credible world,” a world that somehow could be considered real or similar to the real world, is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified.

If we cannot show that the mechanisms or causes we isolate and handle in our models are stable, in the sense that what when we export them from are models to our target systems they do not change from one situation to another, then they only hold under ceteris paribus conditions and a fortiori are of limited value for our understanding, explanation and prediction of our real world target system. No matter how many convoluted refinements of concepts made in the model, if the “successive approximations” do not result in models similar to reality in the appropriate respects (such as structure, isomorphism etc), the surrogate system becomes a substitute system that does not bridge to the world but rather misses its target.

So, I have to conclude that constructing “minimal economic models” — or using microfounded macroeconomic models as “stylized facts” or “stylized pictures” somehow “successively approximating” macroeconomic reality — is a rather unimpressive attempt at legitimizing using ‘small-world’ models and fictitious idealizations for reasons more to do with mathematical tractability than with a genuine interest of understanding and explaining features of real economies.

As noticed by Leontief, there is no reason to suspend this harsh judgment when facing econometrics. When it comes to econometric modelling one could, of course, choose to treat observational or experimental data as random samples from real populations. I have no problem with that (although it has to be noted that most ‘natural experiments’ are not based on random sampling from some underlying population — which, of course, means that the effect-estimators, strictly seen, only are unbiased for the specific samples studied). But econometrics does not content itself with that kind of populations. Instead, it creates imaginary populations of ‘parallel universes’ and assume that our data are random samples from that kind of  ‘infinite super populations.’ This is actually nothing else but hand-waving! And it is inadequate for real science. As David Freedman writes:

With this approach, the investigator does not explicitly define a population that could in principle be studied, with unlimited resources of time and money. The investigator merely assumes that such a population exists in some ill-defined sense. And there is a further assumption, that the data set being analyzed can be treated as if it were based on a random sample from the assumed population. These are convenient fictions … Nevertheless, reliance on imaginary populations is widespread. Indeed regression models are commonly used to analyze convenience samples … The rhetoric of imaginary populations is seductive because it seems to free the investigator from the necessity of understanding how data were generated.

  1. Yoshinori Shiozawa
    January 19, 2021 at 6:45 pm

    I welcome this article by two reasons.

    First, this is the first time as far as I know (I do not claim that I have read all of Syll’s post in this blog) that Syll explicitly distinguished theories and models.

    Second, he raised the question of the relevance of “small world” models in understanding “large world” economy. This question is most often forgotten in economics and at least most unstudied one. This is also the reason why Chapter 2 of our book is titled “A large economics system with minimally rational agents.” The biggest contribution of this book is Taniguchi-Morioka’s results. The complex network of input-output relations as big as the world economy can follow slow change of the final demand, irrespective of the scale of the economy (in this case the number of products, i.e. the convergence speed can be bounded from above whether it is composed of 10 or 100 millions of products).

    However, I am a bit frustrated as for the interpretation or significance of Leontief’s paper. This is the famous presidential address delivered at the American Economic Society’s 1970 annual conference, that is a half century ago. Following this paper or independently of it, a series of papers that are deeply critical of the state of economics at that time appeared. Here is a list of such papers and books (in the alphabetical order) as far as I know:

    Clower, R. 1975 Reflections on the Keyensian Perplex. Zeitshcrift für Nazionalöconomie 35: 1-24.

    Hicks, R.J. 1974 The Crisis in Keynesian Economics. Oxford: Clarendon Press.

    Johnson, H.G. 1974 The Current and Prospective State of Economics. Australian economic Papers. 13(22):1-27.

    Kaldor, N. 1972 The Irrelevance of Equilibrium Economics. Economic Journal 82: 1237-1252.

    Kornai, J. 1971 Anti-Equilibrium: On economic systems theory and the tasks of research. Amsterdam: North-Holland.

    Leijonhufvud, A. 1973 Life among Econ. Western Economic Journal 11: 327-337.

    Leontief, W.W. 1971 Theoretical Assumptions and Nonobservable Facts. American Economic Review 61: 1-7.

    Phelps Brown, E.H. 1972 The Underdevelopment of Economics. Economic Journal 82-9-20.

    Robinson, J. 1974 The Second Crisis of Economic Theory. American Economic Review 64: 1-10.

    Robinson, J. 1974 History versus Equilibrium. Thames Polytechnique.

    Shubic, M. A curmudgeon’s Guide to Macroeconomics. Journal of Economic Literature 8: 405-434.

    Ward, B. What’s Wrong with Economics. New York: Basic Books.

    Worswick G.D.N. 1972 Is Progress in Economics Possible? Economic Journal 82: 73-86.

    All papers and books were famous and influential in the first half of 1970’s. This was the age when the atmosphere was full of feeling that we should change the status quo of economics. But, this atmosphere turned out and the second half of 1970’s saw the start of rational expectation revolution which led to the actual mainstream macroeconomics.

    There were all kind of criticisms and reflections in the first half 1970s, but they were all ineffective and forgotten and actual mainstream economics came to be established. Repeating similar criticisms is not sufficient. Some thing is missing in Lars Syll’s arguments. I am afraid that he is repeating the same criticisms of around 1970, just 50 years ago.

    • Yoshinori Shiozawa
      January 19, 2021 at 6:50 pm

      Erratum: American Economics Society > American Economics Association

    • Yoshinori Shiozawa
      January 19, 2021 at 7:02 pm

      Correction: I missed the expression “the convergence speed can be bounded from above”. It must be corrected as “from below”. The exact meaning of this expression is that the largest absolute value of eigenvalues of a matrix of large dimension is bounded from above by a number less than 1.

  2. Ikonoclast
    January 21, 2021 at 9:02 pm

    The people making money out of this economic system don’t care that it’s invalid. They don’t care that it’s philosophically, scientifically and morally invalid and unsustainable socially and ecologically. They make money out of it now. It works for them, now. They don’t care about anything else and certainly not for other humans or the environment. They will continue to do this until a mass movement stops them or the earth systems (climate etc.) “break” and break everything else.

    Arguments are force-less without a social movement. Critiques of the existing, without plans for an alternative, limp on one leg and go around in circles.

    • Yoshinori Shiozawa
      January 25, 2021 at 3:41 am

      Ikonoclast

      what you say is a half truth. You are only thinking of a War of Manœuvre, but it can gain power only when the people win a War of Position in cultural hegemony. We should know why we lost the war with neoliberals. Theoretical arguments are a part of a war in theory, a part of war of position in an effort to turn the power balance of cultural hegemony.

      See “Cultural hegemony” in Wikipeida.

  3. ghholtham
    January 22, 2021 at 6:20 pm

    Leontieff was right and David Freedman was wrong. The two positions are different and should not be confused. A model has to be plausible and to specify its domain of application to become a useful theory – yes. Once the domain is specified the theory can be assessed on that domain. Not because the domain is a sample of anything but because the theory was stated to apply to it. There is only one history and if a theory encompasses it and pretends to explain it, we don’t need parallel histories to check whether it did.
    An element of uncertainty (and, it seems, confusion) arises because theories in social studies don’t pretend to be the sole influences at work on a complex reality. Other influences will disturb the observations even if the theory of underlying causation is correct. We need to decide whether the deviations from what we would expect to see if the theory held identically are big enough to reject the theory. Sometimes it’s clear – if an effect is strong but has the opposite sign to the prediction of the theory there isn’t much to discuss. If there appears to be an effect with the “right” sign but it is small in relation to the “random” variations, matters are more delphic. Then it depends on where you put the burden of proof and what your criterion is for saying yes or no. The good thing is: that is all explicit. Even where the exercise is not conclusive the scope for disagreement is narrowed.
    In any science or systematic study it is possible to buttress a theory which is proving unsuccessful by adding qualifications – add more variables, change functional form, assert that even if not true on the historical sample it might be true at other times or places. Enough epicycles and Ptolemy works. But each qualification is a minor refutation of the theory in its original form and slowly reduces its potential importance. In economics people still take “models” seriously even when they have been qualified to death in empirical tests. One big problem with economics is inattention to rigorous empirical testing. People believe what they want to believe – but we shouldn’t encourage that tendency.

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