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Limitations of econometrics in economic analysis

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This essay, examining the limitations of econometrics in the study of the economies of poor countries, looks worth reading. Of course many of its criticisms apply to econometrics as a whole.

The dramatic expansion of econometric and quantitative-modelling techniques has been one of the most significant trends throughout the social sciences since the 1990s. Originally elaborated within the rational-choice framework of American neo-classical economics, mathematical models of risk-analysis or game theory have now spread into the ‘political’ domains of military conflict, state forms and ethno-linguistic identities. The resulting discipline—part economics, part statistics, part quantitative political science—now plays a central role not only in scholarship, but in formulating policy options for global institutions. The dense thicket of algebraic equations with which econometric studies are hedged normally ensures them a narrowly specialized readership. In the past, Collier’s work on civil war has produced such results as Uw = {p(D).T; M; C}, where the utility of choosing rebellion (Uw) is a function of the probability of victory (p), the gains to rebels upon victory (T), the potential for government defence spending (D), the expected duration of the conflict (M) and the co-ordination costs of mobilizing for rebellion (C).

Among critics of neo-classical economics, econometric approaches to issues such as civil war and social breakdown tend to provoke a set of almost visceral objections. First, the expression of complex, historically produced structures and motivations through the binaries of individual rational-choice calculation—will I lose or gain by rebelling against the government?—is condemned for its extreme economic reductionism. Second, econometrics is often accused of simply corroborating what the data it deploys has already shown.

Perhaps the most fundamental objection to current econometric practice is that it rests on prior assumptions and post-hoc hypotheses which remain systematically unexamined. State-of-the-art development theory now centres, firstly, on mobilizing an army of researchers to reduce complex social phenomena to quantifiable, comparable series of data—the process of reduction itself usually involving value judgements which are scarcely questioned; and secondly, on the models themselves. Far less critical attention is given to the theoretical assumptions underpinning the ‘hypothetical leap’ between the statistical result and the researcher’s ultimate explanation of it. Social, historical and political determinants have been reduced to a set of numbers at the beginning of the process. At its end-point they return, in disembedded form; or embedded only in the commonsense—which is to say, ideological—assumptions of the researcher. If it is to do useful work, econometrics must recognize its place, as a lower-order set of tools which may generate correlations or discrepancies whose elucidation requires more richly theorized—more conceptually and empirically developed—forms of enquiry.
 
It seems his criticism is with how the econometric analysis is used more than with its process. I mean anyone can take any piece of information and manipulated to their use. But used correctly and presented properly, its a useful tool.
 
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