Economics is hard

How are economic statistics collected? Do economic models correspond to observable reality?

In a world where markets and politicians respond strongly to things like gross domestic product (GDP) figures and economic forecasts, these are important questions. Unfortunately, discussion often jumps directly to the interpretation of new data or the output of models. Students are rarely challenged to question what the data and the models represent.

I recently came across two great articles that dig into these issues.

In An Ad Hominem Argument Against GDP, Alexey Guzey briefly talks about some general problems with statistics (are they believable?, don’t they look weird?, how are they collected?, what are the incentives of the data collectors?). Then he asks: “who would you trust with producing US GDP estimates and the methodology for estimating GDP?”

In The Wit and Wisdom of Trygve Haavelmo, J.W. Mason shows the profound econometric thinking of Norwegian economist Trygve Haavelmo. Based on a paper Haavelmo wrote in 1944 (!), J.W. Mason notes that “orthodox economists in the mid-20th century thought more deeply and critically about the nature of their project than their successors do today”.

You should read J.W. Mason’s entire post, but the three main points are:

“First, economic models are tools, developed to solve specific problems. Second, economic theories have content only insofar as they’re associated with specific procedures for measurement. Third, we have positive economic knowledge only insofar as we can make unconditional predictions about the distribution of observable variables.”

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