Econometric Madness

The well-known econometrician Hal White has died.

Econobrowser writes:

Hal was one of the world's leading econometricians. One of his core beliefs was that the models and assumptions that we bring to the data are inevitably flawed and misspecified in some way. It might seem that if you believe that, there's no hope in trying to do econometrics. But some of Hal's most remarkable discoveries concerned how to form valid inference even if part of what you assumed was fundamentally wrong.

Wow. The great economists, Ludwig von Mises, Murray Rothbard and Friedrich Hayek all taught that in the field of human action, including economics, there are no constants like there are in the physical sciences. Thus, there are no equations that can be written that make any sense.

Assuming a variable is a constant is a good way to cause trouble, regardless of what mathematical gymnastics are used to attempt to "form valid inference even if part of what you assumed was fundamentally wrong."

Long Term Capital Management blew up because of such attempts as did, more recently, subprime mortgage syndication.