Wednesday, April 18, 2018

Brian Romanchuk — Forecastability And Economic Modelling

When most people think about macroeconomics, what they want is the ability to forecast economic outcomes. However, economists' (of all stripes) reputation as forecasters is not particularly high. My view is that this is not too surprising: what we want forecasters to accomplish is probably impossible. (I am hardly the first person to note this, as variants of this idea go back at least to Keynes; I could not hope to offer a history of this idea.) However, I think if we want to approach macro theory formally, we need to formalise the notion that outcomes cannot be forecast, which means we need to define non-forecastability formally.
This article gives one potential definition of forecastability, and then applies the concept to a simple stock-flow consistent (SFC) model. It should be noted that these are my preliminary thoughts, and I believe that the definition will need to be refined.…
This is one of the key questions in philosophy of economics, as well as philosophy of science and philosophy of social science.

The purpose of science is to provide as general an explanation of data ("data" means "the given.") The data set is determined by the nature, scope and scale of the subject matter being explained. This is accomplished through modeling, both conceptual and mathematical.

Prediction comes in with respect to testing outcomes of theoretical models, using hypothesis the theory generates and carefully designing testing apparatus.

The difference between philosophical speculation based on reasoning and science is that scientific reasoning can be tested by subjecting hypotheses to disconfirmation, since a general statement (theory) is contradicted by a single false instance.

No amount of true instances can definitely confirm a general statement that is not a tautology and therefore empty of content about how things stand in the world. This is the case logically, even though we call theoretical assumptions that are well confirmed by hypothesis testing "scientific laws."

Science is always tentative on the next outcome unless it is established that all the factors involved are known to be true based on observation. A logical argument is sound if and only if the logical from is valid and the premises are true. Then the conclusion necessarily follows.

This implies that a great deal of that which is considered scientific is speculative. That is to say, it is not science but philosophy.

There is nothing wrong with philosophy. Not everything is explained by scientific reasoning. The questions involving key fundamentals of life and reality have not been answered using scientific reasoning. They are "the enduring questions" that are the domain of philosophy. When methods are developed to answer such questions using scientific reasoning, then they become the subject matter of science.

I don't wish to give the impression that fundamental issues in philosophical method are resolved. They are not for the simple logical reason of lack of criteria that are universally agreed up. But the above more or less summarizes what is generally accepted practice based on logic., even though there are issues in the foundations of logic, too.

Hopefully, Brian's post will contribute to getting economists thinking more  about the foundations of their field and doing this more carefully.

Bond Economics
Forecastability And Economic Modelling
Brian Romanchuk

See also
My point is merely that forecasting is not the same as modelling, nor the same as telling a good story.
Stumbling and Mumbling
On thin predictions
Chris Dillow | Investors Chronicle

See also
There are many arguments for the use of models in economics, including notions of rigor and transparency, or that models can help you to see relationships you otherwise might not have expected. I don’t wish to gainsay those, but I thought of another argument yesterday. Models are a way of indexing your thoughts. A model can tell you which are the core features of your argument and force you to give them names. You then can use those names to find what others have written about your topic and your mechanisms. In essence, you are expanding the division of labor in science more effectively by using models.
Austrian economists of typically better at examining the foundations of economics, probably since Mises and Hayek were philosophers. Austrian economists have also written at great about the foundations of liberalism as a social and political theory.

Marginal Revolution
Models as indexing, and the value of GoogleTyler Cowen | Holbert C. Harris Chair of Economics at George Mason University and serves as chairman and general director of the Mercatus Center

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