Can Econometric Models Provide a Laboratory Setting for Economic Analysis?
Econometric model building attempts to produce a laboratory with controlled variables. By means of mathematical and statistical methods, an economist establishes functional relationships between various economic variables.
For example, personal consumer outlays are related to personal disposable income and interest rates, while fixed capital investments are explained by the past stock of capital, interest rates, and economic activity. A group of such estimated relations constitutes an econometric model.
A comparison of the goodness of fit of the dynamic simulation versus the actual data is an important criterion in assessing the reliability of a model. (In a static simulation, the model is solved using actual lagged variables. In a dynamic simulation, the solution is obtained by employing calculated from the model-lagged variables.)
The final test of the model is its response to a policy variable change, such as an increase in taxes or an increase in government outlays. By means of a qualitative assessment, a model builder decides whether the response is reasonable or not. Once the model is successfully constructed, it is ready to be used.
Is the Mathematical Method Valid in Economics?
Econometric modeling, however, employs an unsound methodology by trying to capture human behavior by means of mathematical and statistical methods. By applying mathematics, mainstream economists are attempting to emulate the natural sciences, where the employment of mathematics enables scientists to formulate the essential nature of objects.
Mathematical equations capture the response of objects to a particular stimulus. Consequently, the same response will be obtained repeatedly within these given conditions. The same approach, however, is not valid in economics since economics deals with human action, not objects.
The main characteristic or nature of human beings is that they are rational animals, using their minds to sustain life. The human mind is not set to follow automatic procedure, but rather every individual employs his mind according to his own circumstances. Thus, it is impossible to capture human nature via mathematical fo
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