Introduction to the Scientific Problem of Econometric Methodology

Journal of Business and Economics, ISSN 2155-7950, USA September 2014, Volume 5, No. 9, pp. 1681-1690 DOI: 10.15341/jbe(2155-7950)/09.05.2014/021 Academic Star Publishing Company, 2014 http://www.academicstar.us Introduction to the Scientific Problem of Econometric Methodology Karmen Marguč (ECHO, d.o.o., Slovenia) Abstract: Social disciplines are difficult to attribute the scientificity because they are not based on controlled experiments. Many authors dealt primarily with the technical methods and models for data processing in the past, while the problem of the econometric methodology remained less explored. Today we are facing poor and limited technical discussions in this area. The primary objective of this research is to define econometrics as scientific, based on its methodology. Descriptive and comparable findings suggest that econometrics’ origin, based on logical positivism, is a crucial problem for the identification of the econometric methodology as scientific. According to analysis of the econometric methodology and considering philosophical prospective, it cannot be attributed to scientific field. Keywords: econometrics; methodology; scientific theory; positivism JEL code: B410 1. Introduction Roots of econometrics according to Mary Morgan go back to the year 1699, when Charles Davenant and Gregory King published an article about demand curve (Morgan 1990). Francisco Louca located the origin of econometrics in the year 1933 or at the end of Morgan’s history, and describes it as “the most daring and successful innovation” in the economy of 20th Century (Louca, 2007). According to Louca, Regnar Frisch is the founder of econometrics (1895-1973), whose term “econometrics” did not merely represent naming economic statistics, but formation of a new research field. Econometrics thus represents “economic theory in relation to statistics and math” which should “make uniform… theoretical-quantitative and empirical-quantitative approaches in economy” with “constructive and strict mind, similar to that, which dominates in naturalistic science” (Frisch, 1933, pp. 1-2, see Hoover, 2005). Similar descriptions can be found in introductory parts of various articles and books of econometrics. In Malinavaud’s work Statistical Methods in Econometrics, econometrics is defined as a discipline including “usage of math or statistic methods in researches of economic phenomena” (Malinvaud, 1966). Carl F. Christ’s work Econometrics Models and Methods describes econometrics as “…acquisition of economic affirmations, which are used to describe manners of existing variables or to predict behaviour of variables” (Christ, 1966). Chow defines econometrics “as art and science of statistic method usage and measuring economic relations” (Chow, 1983). Econometrics is therefore a discipline which combines different fields such as: economic models, mathematical statistics and economic data (Hansen, 2010). Econometrics as a term refers to statistical aspects Karmen Marguc, MA, Project Manager, ECHO; research areas/interests: econometrics, macroeconomics, ecological economics. E-mail: [email protected]. 1681 Introduction to the Scientific Problem of Econometric Methodology conditional on economic theory. Nowadays, mathematical and statistical methods in econometrics also include computer science (Pesaran, 1987). With an emphasis on quantitative aspect of economic problems, econometrics calls for “making uniform” the empirical researches with economic theory. On one hand, theory which does not hold empirical measurements only represents primary logic with limited relevance of actual economic problems analysis. On the other hand measurements which do not hold theory, also do not include important bases, on the basis of which statistical observations can be interpreted (Hansen, 2010). We can conclude that neither “theory” nor “measurements” by themselves are sufficient for understanding economic phenomena. Theoretical structure need to be accurate, actual and more complex. In formulation of its abstract entity, theory needs to be based on different techniques of observation. New statistical and other empirical researches represent a healthy element which constantly loads theory and in this manner prevents from grounding it on the basis of obsolete presumptions. As mentioned above, econometric theory deals with development of quantitative economic models, features of econometric methods and use of econometric methods related to economic models and economic data (Hansen, 2010). The essence of econometrics represents systematic meta-study of basic principles, procedures and philosophical presumptions, which ground empirical modelling with the purpose of efficacy assessment of primary goals or as Malinvaud states:“learning based on empirical data of economic phenomena.” (Malinvaud, 1966). In other words; econometrics represents the essence of philosophical economics, which primary deals with epistemological and metaphysical problems, referring to empirical grounds of economy. It is particularly concerned with methodological problems in the field of efficiency and procedure methods, used in empirical researches, as well as ontological problems concerning econometric aspects. Applied econometrics deals with complexity of lacuna between theory and collected empirical data and faces various philosophical-methodological problems referring to transformation of imperfect data to authentic proofs, which serve as aid to hypotheses (Spanos, 2007). According to Granger applied econometrics uses theoretical econometrics and data of the real world for evaluating economic theories, development of econometric models and analyzing economic history and following foreseeing (Granger, 2008). Problem, occurring in standard statistical model, when researching economic questions, lies in standard statistical model itself, because it is general observed datum and not controlled experiment or quasi-experiment. This is the experiment which is not carried out in strict experimental environment, where distractive influences are excluded. Model of observed data is in the field of econometrics similar to researches of other scientific fields like: astronomy, sociology and political science (Wold, 1969). Present research indicates problems occurring in the field of methodology of econometrics. For general understanding the latter, it is necessary to argument whether the econometrics, in the field of economy, is science or has the needed features to be a part of science. 2. Economy as a Science Based on the question whether economy is science or not developed two poles of representatives. On one hand philosophers deny scientificity of economy, because the essence of economy does not represent scientific experimenting (testing of physical parameters), but scientific method which constantly gives preference over testing hypotheses and theories based on functioning of the latter in the world (Kitanović & Krstić, 2009). Traditionally classical economists only rely on deductive theories, gained on the basis of complex maths (for example: existence of microeconomic axiom about concurrent balance is based on fix point theorems). In accordance to the latter, 1682 Introduction to the Scientific Problem of Econometric Methodology classical economy cannot be described as science of world facts (Sherlock b.l.). Anyhow, it is possible to apply scientific method in the state economic research in the same way as researching gravity and evolution of bodies. Moreover, we can say that exactly scientificity of its method, gives the economy status of science which can not be easily accepted. On the basis of studied literature it is possible to make inferences whether specific discipline is scientific dependent on the definition of science. In order to evaluate scientificity of the economy it is important to study its scientificity on the basis of various philosophical definitions of science. Philosopher Karl Popper believed that the statement is scientific only when it is supported with logical option of mistake. This definition of science, the so called falsification, means valuing scientific statement and checking, when comparing it to the world (Popper, 1959, p. 41). The statement is not scientific if it does not have any chance of risk to be false; in other words—if there is not any way to check the statement against observed facts or happening. Popper named this distinction “line of demarcation”. On the basis of this definition Popper claims that we cannot be certain whether whichever science theory is real. Confirmation of scientific theory means, there is no existent evidence that contradicts it. Despite all that, there is still a possibility of contradiction in the future. For instance we cannot be certain whether the statement “Tomorrow, the sun will rise up in the east” is true only because it is a scientific assertion. It will probably be logical to picture oneself “a sunrise in the west” although we are pretty certain this is not going to happen, despite of previous experiences, which have always been consistent with the assertion. Popper summarizes, the latter does not prove that the statement will never be disproved. He comprehends scientific behaviour as a process of conjunction and disproval. An explanation of defined facts could be based on conjuncture, guessing and the theory of how the facts are related to each other. If the following observations are inconsistent with the theory, it means that the theory is disproved and has to be replaced with the new one or a conjuncture. On the contrary,

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