Scientific Illusion

Here is a nice paper that I have stumbled on, “The Scientific Illusion in Empirical Macroeconomics” by Lawrence Summers.

Basic argument of the paper is :

Formal econometric work where elaborate technique is used to either apply theory to data or to isolate the direction of causal relationships where they are not obvious a priori virtually always fails. If this argument is accepted it suggest that in evaluating empirical work we should begin by asking different questions than the ones usually posed.Instead of considering the methods employed, we should ask whether the fact reported is an interesting one that affects our view of how the economy operates. Does it affect our belief about a substantive question?

Good empirical evidence tells its story regardless of the precise way in which it is analyzed. In large part, it is its simplicity that makes it persuasive. Physicists do not compete to find more and more elaborate ways to observe falling apples.Instead they have made so much progress because theory has sought inspiration from a wide range of empirical phenomena.

Macroeconomics could progress in the same way. But progress is unlikely as long as macroeconomists require the armor of a stochastic pseudo-world before doing battle with evidence from the real one.

Books such as freakonomics , frequels, undercover economist etc are a hit in the non-fiction world, precisely because there is a dearth of literature in “doing and articulating empirical research work”. Deep structural parameters, structural models give a sense of scientific jazz to economics…but at the end of the day, one must realize that economics / finance is SOCIAL science.