The Fruits of Civilization (13-4) Econometrics

Econometrics

Use mathematics as shorthand language, rather than as an engine of inquiry. ~ Alfred Marshall in 1890

Econometrics concerns mathematically modeling economic activities. Econometrics marries economic theory with math and statistics, providing the means for quantitative analyses. This number-crunching allows theories to be tested, forecasts to be made, and policies to be evaluated.

In its abuse of statistics, econometrics falls into the same pit of fiction as other sciences: mistaking correlation with causality. Statistics can never prove one event causes another, but it is precisely this nonexistent power which econometricians implicitly rely upon in their models.

The only function of economic forecasting is to make astrology look respectable. ~ John Kenneth Galbraith

Econometrics rose to the fore in the last half of the 20th century, replacing hand-waving theorizing with statistics-based theorizing that wasn’t really better; the herding of numbers just seemed more precise. Beyond statistics abuse, the assumed rationality of humans by economists is as much myth as practice.

People may be fairly predictable, but rational is as often as not an undeserved compliment. Behaviors are commonly motivated by desire or fear, with cunning to achieve desires and wiles to avoid objects of fear. In contrast, rationality, in the form of habitual good sense and sound judgment, is exceptional.

Econometricians tell me that rare events such as panics cannot be dealt with by the normal techniques of regression but have to be introduced exogenously as “dummy variables.” ~ American economic historian Charles Kindleberger

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Economics must become fundamentally empirical, in contrast to the faux empiricism of econometrics. By this I mean basing itself on economic and financial data first and foremost, and by respecting economic history. ~ Australian economist Steve Keen