by Putting theories to the test Mainstream neoclassical economists often maintain — usually referring to the methodological individualism of Milton Friedman — that it doesn’t matter if the assumptions of the theories and models they use are realistic or not. What matters is if the predictions are right or not. But, if so, then the only conclusion we can make is — throw away the garbage! Because, oh dear, oh dear, how wrong they have been! The empirical and theoretical evidence is clear. Predictions and forecasts are inherently difficult to make in a socio-economic domain where genuine uncertainty and unknown unknowns often rule the roost. The real processes that underly the time series that economists use to make their predictions and forecasts do not
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Putting theories to the test
Mainstream neoclassical economists often maintain — usually referring to the methodological individualism of Milton Friedman — that it doesn’t matter if the assumptions of the theories and models they use are realistic or not. What matters is if the predictions are right or not. But, if so, then the only conclusion we can make is — throw away the garbage! Because, oh dear, oh dear, how wrong they have been!
The empirical and theoretical evidence is clear. Predictions and forecasts are inherently difficult to make in a socio-economic domain where genuine uncertainty and unknown unknowns often rule the roost. The real processes that underly the time series that economists use to make their predictions and forecasts do not conform with the assumptions made in the applied statistical and econometric models. Much less is a fortiori predictable than standardly — and uncritically — assumed. The forecasting models fail to a large extent because the kind of uncertainty that faces humans and societies actually makes the models strictly seen inapplicable. The future is inherently unknowable — and using statistics, econometrics, decision theory or game theory, does not in the least overcome this ontological fact. The economic future is not something that we normally can predict in advance. Better then to accept that as a rule “we simply do not know.”
It is of paramount importance that economists be frank with themselves and their audience. The limitations of current practice … must be recognized openly. If we are engaged in ex post facto explanation, we should be quite ready to say so, rather than pretend that our ‘theories’ can pass the same tests that theories of well-developed sciences can pass … Recognition of the character of current methodological practice will go a long way toward substituting fact for myth and thus open the way to new horizons of research.