This article, written by Frank Shostak, concerns itself with the real life application of Econometric modeling and the usefulness of this approach. Using Econometric has many advantages as the Economy can be measured based on smaller models that are supposed to predict the future of the Economy. In order to justify if Econometrics is a real-life-applicable theory, the dynamic simulations of the model have to be compared to real life data. Only if both types of the result show the same results, a model is valid enough to be used for real life scenarios. In Shostak opinion, the mathematical method used in Econometrics is not valid enough to be used for real-life application because "humans are not objects". In a laboratory, variables can be controlled which leads to a prediction of the outcome of the experiment, but "people have the freedom of choice to change their minds and pursue actions that are contrary to what was observed in the past". For example, a mathematical equation can't predict how much an individual is going to consume as well as save from his paycheck. This makes the mathematical method an invalid method for real-life scenarios in today's Economy. Another aspect of Econometrics is the probability theory. As Econometrics does not portray a homogenous group (for example needed in an insurance company as every client should have the same risk factors) but a unique, nonrepeatable event in each observation, the probability theory of Econometrics does not seem to be valid enough to be used for real-life applications. An example would be an entrepreneur using Econometrics to ensure success for his business. People's requirements are never constant with respect to a particular good. This would leave the Entrepreneur unsuccessful, as Econometrics is based on probability distribution in theory but not praxis. Shostak also states that assuming that a change in a government policy would impact the Economy in the way the model predicted, all other variables, including human beings, would have to be "frozen". Concluding the argumentation of the validity of Econometric models, the author claims them to be "clumsy and extrapolative" having "nothing to do with reality".
This article, published by Roberto Pedace, is written in favor of Jan Tinbergen's model of Econometrics. By listing ten applications of this economic model, the article is focussing on the positive impact of Econometrics on roadblocks that appear in Economics or in Businesses. With the use of Econometrics, macroeconomic indicators like the expected effects of monetary and fiscal policies can be predicted and reduce the amount of time it takes to fix the economy after a recessionary or expansionary gap. Also, Econometrics is useful when estimating the impact of immigration on native workers as an increase in the supply of workers will decrease equilibrium wages. The theory also takes the influence of minimum-wage laws on employment levels into account as well as the association between insurance coverage and individual health outcomes. As Econometrics also suggests that existing profit levels and government regulations can affect the market structure, the theory labels factors that make it easier for a firm to exit and enter a specific market. The article also highlights that Econometrics can influence a business revenue by creating a healthy relationship between management techniques and worker productivity. It is important to know that the use of high-performance work practices can affect the productivity of the business and Econometrics allows managers to use policies that will let managerial efficiency be as high as possible. By calculating the net effect of dividend announcements, Econometrics predicts investor behavior on stock market prices which is another important use of the Theory. Also, it can calculate the predicted revenue from a marketing campaign, allowing business to know exactly how much (more) they want to spend on their advertisement. Lastly, Econometrics is important when calculating the impact of a firm's tax credits on research and development expenditures as well as estimating the impact of cap-and-trade policies on pollution levels. Overall, the article is listing the many possible uses of Econometrics in the Economy in order to run a business well and increase revenue as much as possible.
This article published on the website Wikipedia in 2016 occupies itself with the various critiques of the Theory of Econometrics. The different aspects of critiques are the difficulties in model specification, the Lucas critique, the Austrian School critiques as well as other mainstream critiques. The author states that "in published econometric work, economists tend to rely excessively on statistical techniques and often fail to use economic reasoning for including or excluding variables." Often, two variables seem to be correlated but also "casually unrelated" at the same time due to a high bias by the researcher when selecting variables. This can be eliminated by running statistical tests with different specified models and to not makes assumptions from "fragile" proves. The Lucas Critique designed by Robert Lucas, states that econometric models for the prediction of certain econometric policies were skewed when being overly simplified. In his opinion, policy conclusions drawn from such models were biased, as economists would change their expectations of the future and also change their behavior. A good econometric model should present effects of policy change as well as equations that give rational expectations. The Austrian School of Economics generally rejects Econometrics because it appears to be ineffective at isolation causal relationships. Other critiques by American economist Lawrence Summers state that Econometrics does not prove anything that a future theory can build on. Overall this article is on the negative end of the spectrum, emphasizing the disadvantages that come with the use of Econometrics in an Economy.
This article by Karl-Friedrich Israel is debating true theories might be "proven wrong" as they might be incomplete and not apply to some particular set of facts and lists conditions, a theory must fulfill in order to function properly. As Economist Keynes gave a thorough critique of Tinberg's work and listed some of the conditions that apply to his Tinberg's theory of Econometrics. The factors, observed in the critique were completeness, measurability, independence. linearity as well as arbitrariness. In terms of completeness, it is important that all factors are present in one model (in Tinberg's case the business cycle) as otherwise, changes can occur which could even be falsely be interpreted as the results of the existing factors. Measurability means that all factors that are present also have to be measurable. In Tinberg's business cycle, for example, government policies are not measurable even though they have a big impact on the business cycle. It is also important that the factors are independent of each other to avoid correlations of any type. Linearity means that all types of relationships have to be taken into account, in Tinberg's case only linear relationships are considered which is, in Keynes eyes, not an accurate representation of reality as not every factor is linear related to another. Adding the presence of time-lags in Tinberg's model, which demonstrates that his model can't be applied arbitrarily, Keynes concludes that the theory of Econometrics is thoroughly thought through but also shows "devastating inconsistencies" which prove Tinberg's theory to be, not wrong, but incomplete.