Post To RWER Blog Regarding Econometrics

LS:   Gerry, you write “the more qualifications are attached to a theory the more data you need to test it.” But that sure doesn’t solve the basic problem. As one of the founding fathers of modern econometrics — Trygve Haavelmo — himself wrote:

“What is the use of testing, say, the significance of regression coefficients, when maybe, the whole assumption of the linear regression equation is wrong?”

Real-world social systems are usually not governed by stable causal mechanisms or capacities. The kinds of ‘laws’ and relations that econometrics has established, are laws and relations about entities in models that presuppose causal mechanisms and variables — and the relationship between them — being linear, additive, homogenous, stable, invariant and atomistic. But — when causal mechanisms operate in the real world they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. Since statisticians and econometricians — as far as I can see — haven’t been able to convincingly warrant their assumptions as being ontologically isomorphic to real-world economic systems, I remain deeply sceptic of the whole enterprise. You write “shouldn’t we try?” My answer to that question is the same as Keynes’ (re Tinbergen): “Newton, Boyle and Locke all played with alchemy. So let him continue.”

Me:  “Real-world social systems are usually not governed by stable causal mechanisms or capacities. The kinds of ‘laws’ and relations that econometrics has established, are laws and relations about entities in models that presuppose causal mechanisms and variables — and the relationship between them — being linear, additive, homogenous, stable, invariant and atomistic. But — when causal mechanisms operate in the real world they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. Since statisticians and econometricians — as far as I can see — haven’t been able to convincingly warrant their assumptions as being ontologically isomorphic to real-world economic systems, “I remain deeply sceptic of the whole enterprise. You write “shouldn’t we try?” My answer to that question is the same as Keynes’ (re Tinbergen): “Newton, Boyle and Locke all played with alchemy. So let him continue.”

The point of retail sale is where production becomes consumption, and hence is a terminal ending, summing and economic factor expression point. It is also hence a potentially paradigm changing price and monetary policy point for both the economy and the monetary system. The point of exchange is such an integratively woof and warp part of the economic process that, like breathing, most are unconscious of its power and significance.

It’s true that econometrics, like virtually all studies that precede paradigm changes, is largely an alchemical pursuit, but then the single concept of the new pattern sweeps all of the suspended complexities, perplexities and erudition aside.

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Me:   Y:  “If some fields of mathematics are found to be insufficient to treat a group of problems, what we should do is to construct a new theory that can be applied for them.”

“In the same vein, if econometrics is incomplete, it is necessary to device a new theory (not a theory on econometrics) which opens a new mode of understanding or explaining economy.”

Excellent insights. Perhaps what we require is the econometrics of Paradigmology which looks for the deeply acculturated irrational and de-stabilizing conceptual essence parading itself as necessary. Like for instance that only private money creation and only in the form of debt is legitimate, when in fact private for profit money creation isn’t a legitimate economic business model at all and is actually a disguised form of domination and felonies waiting to happen.

How ironic that we can recognize that rational expectations is an invalid economic assumption and yet fail to see the above irrational expectation regarding private finance and its monopolistic paradigm. But then increasing ironies is an imminent signature of the need for paradigm change and its reflective dualistic phenomenon i.e. reality inversions, an aspect of historically accomplished ones.

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