I am currently reading Tony Lawson’s seminal Economics and Reality – seminal for philosophers of economics, though sadly not a staple read for the average Economics PhD. His broad target is the methodologies underlying modern neoclassical economic thought – economic “pure theory”, and the use of econometrics. Although an econometrician by profession and background, he argues for a radical philosophical departure from the metaphysics and epistemology of the neoclassical tradition. Also, he taught John Latsis, one of my most engaging and awesome tutors. So in many ways, a cool guy. I went to see him in Cambridge last December, and I was struck by how warm he was to me, a stranger. He has a youthful manner despite his age, and a lot of humility despite his success. I imagine this is because he has always been on the naughty side of the economics fence.

The following post reconstructs Lawson’s arguments concerning the validity of the search for econometric laws of human economic nature.

Posts to follow will look at, among other things, the application and extension of Lawson’s critique of econometrics in the field of development economics.

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I. What is Econometrics?

“Economics, so far, has not led to very accurate and universal laws like those obtaining in the natural sciences.” – Haavelmo (1944)

Haavelmo’s observation led him to develop probabilistic methods in what we nowadays recognise as statistics or econometrics (the latter being the application of the former in economic research). However, Lawson contends that we are no closer today to the holy grail of physical law, despite sixty years of econometric research and applications. The answer, in Lawson’s view, is to abandon the project as it has been, and adopt a fundamentally different approach in our methodology.

(It seems that the holy grail is nonetheless still holy – although I haven’t read enough of Lawson to get a good grasp of his take on this, he thinks that economics can be a successful science – although with a different conception of science than the law-like conception.)

The use of econometrics is to extract information about the true population values of certain variables from finite, sample size information. To take a step back, econometrics as a whole has two major projects.

The first project in econometrics is to develop metrics that describe different kinds of distributions of values – that is, the population moments – and how to estimate them from finite sample set data. This gives us probabilistic estimates of what true population values are, to tell us what to expect to see from yet unseen population data. This project is extremely philosophically interesting in its own right; when we make inferences from finite samples (the height of all the people in the room) to larger or potentially infinite populations (the height of all people), we must use probabilistic methods of reasoning.

Probabilities pile up in all parts of statistics. Take a variable that we are investigating – the wage someone earns – and we are testing the hypotheses that women’s wages differ from men’s wages. We have two populations of interest: all of the women in the economy, and all of the men. If we had access to all the wage data, then we would be able to just say whether the population averages were different. However, if we only have access to sample subsets of the populations, then we can use frequentist probabilistic hypothesis testing.

In this case, we find that x differs from y with statistical significance of p. Imagine that there is an underlying distribution of wages for men and for women, for which the averages are the same. Say we were to pluck, at random, men and women from the population to use in our samples, and we did this 100 times, generating 100 different samples (which can be overlapping: so we release the people back into the wild each time). In p% of these 100 different samples, we would find that the sample means differed from one another. How low does p have to be for us to be sure that we’re not in that sceptical scenario? That’s one way in which probability underlies statistics. But it goes deeper: the only reason that we can use this method of probabilistic inference at all is because we think the Central Limit Theorem applies in this case.

One side-question so far, for this first project: How does this work in a Bayesian and not a frequentist model of probability? Is there an alternative interpretation? I don’t quite understand Bayesianism, because I don’t get what credences actually mean. Are they meant to relate to a mental process that actually occurs, or that we can consciously be aware of, or that we can introspect about philosophically?

The second major project in econometrics, which relies on but goes further than the first project, is to estimate the causal effect of independent variables x1, x2…xn on a dependent variable of interest, y. How do we here interpret the idea of “causal effect”? I believe that econometricians themselves are going beyond the idea of apparently constant conjunctions, which is what they are often portrayed as looking for. When we say that we have found a robust econometric relationship from a regression of  x on y, I believe that we mean something like this:

(Mechanism) There is some well-picked-out mechanism that operates between x and y, such that a change in x will feed through to (i.e. “cause”) a change in y.

We are not saying something like this:

(Constant Conjunction) A difference in x will always be found to be accompanied by a corresponding difference in y.

Why do I think that the mechanism view is what econometricians are actually saying? Well, take the spectre that is haunting econometric civilisation: omitted variable bias. Fear of omitted variable bias has led to improvements upon improvements upon the theory of instrumental variables and identification.

To illustrate omitted variable bias, most textbooks drag out the too-familiar case of estimating the effect of some policy intervention on the education of a bunch of kids. One might have the theory that class size is inversely proportional to exam performance, because more intensive teaching produces better results. However, class size is also correlated with family income, which may be correlated with amount of help that the pupil gets at home. If we were simply to regress exam performance on class size, we would have a biased estimate of the effect of class size on performance, because we would be “counting in” the added effect of family income on performance. This is what we call omitted variable bias.

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II. Lawson’s argument for the abandoning of econometrics as we know it

The first part of Lawson’s argument is the empirical claim that econometric forecasting has been largely useless. As Kay (1995:19) says in a study of 34 UK forecasting groups: “Economic forecasters do not speak with discordant voices; [keeping an eye on each other] they all say more or less the same thing at the same time. And what they say is almost always wrong. The differences between forecasts are trivial relative to the differences between all forecasts and what happens.”

The second part of Lawson’s argument is that econometric forecasting will  necessarily continue to be useless. This is because the law-like view of the world underlying econometric forecasting does not hold in interesting ways for the social world. Lawson’s broad strategy in Economics and Reality is that of transcendental analysis. This means that he asks, of the different methodologies of orthodox economics, the question: What would the social/economic world have to be like for such methodologies to work? He then shows us that the ontology presupposed by econometrics and economic theory is not rich enough to account for the real social world.

Every methodology presupposes a metaphysics; that is, every way of investigating the social world presupposes a certain view of the nature of what there is to be investigated. The methodology of econometrics presupposes the metaphysics of “regularity stochasticism”:

(Regularity stochasticism) For every measurable economic state of affairs y, there exists a set of conditions x1, x2…xn, such that y and (x1…xn) are regularly conjoined under some well-behaved probabilistic function.[1]

“In other words”, as Lawson says, “stochastic closures are everywhere assumed to hold; for any event y a stable and recoverable relationship between a set of conditions (x1…xn) and the expected value of y (conditional upon x1…xn) is postulated.”

What does it take for stochastic closures to hold for the economic structures we want to investigate? Two conditions: intrinsic and extrinsic closure.

Intrinsic closure: the objects of study cannot in themselves change. That is, the object of study – say, an individual – must have an internal structure such that they behave in the same way in response to a set of economic events – say, being offered the choice between two goods at a certain price. If the internal structure of the individual changes, e.g. depending on mood, time since last meal, or other internal states, then the regularity breaks down.

Extrinsic closure: external forces, not accounted for under the system under study, must not impinge on the objects of study. That is, there must not exist external (exogenous) influences that can significantly affect our dependent variable y, that are not accounted for in our dependent variables (x1…xn). If there are, and these external influences impinge on our system of study, then our regularities may break down, or even be spurious.

Lawson argues that individuals are sufficiently complex that intrinsic closure does not hold, and that the social world is sufficiently rich that extrinsic closure does not hold either. However, because econometrics is joined to these two assumptions, we see economists on the one hand looking for extrinsic closure, creating models of isolated systems (“closed economies”) or adding ever more variables to their regressions; and on the other hand, looking for intrinsic closure, characterising individuals as atomistic (“in effect as lacking intrinsic structure”[2]).

The search for isolated systems and atomistic individuals sets us off in “the search for systems so large that they exclude nothing, couched in terms of single individuals so small that they include nothing. This is the direction in which the familiar responses to econometric failure ultimately lead”. Lawson calls us, as philosophers and economists, to abandon this search by abandoning the regularity stochasticism view of the social world, and start searching in another direction.


[1] Lawson, Economics and Reality, p76

[2] Lawson, Economics and Reality, p79

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(UPDATED 14/09/2011 – rephrasings and reorganising of material)

At the end of last Hilary term (March 2011), I was lucky enough to attend the National Union of Students Women’s Campaign Conference – three days of intense discussion, collaboration and learning about our common feminist goals. I think the most important thing I gained from the conference is that I got to know so many other student campaigners, and we built, in a very short time, a surprisingly constructive, supportive community. We asked many questions of each other. A very common question was on how to deal with conflict in the course of our political activities. I think this is a vital question to engage with for the members of any political campaign, and it’s one of the questions that captures the most emotional energy. So I’m writing this, partly for fellow politically-minded people, but also partly aimed at myself.

Conflict is important disagreement between people. It is not only endemic to campaigners, for whom a political strategy for social change is crucial. Conflict is also present in the life of anyone who disagrees with someone at some point over an emotive issue.

Yet the presence of conflict is often seen as a sign of failure. Many people I know, including myself, sometimes see the onset of an argument as a negative reflection of ourselves; a failing to pre-empt the argument by diffusing the point of disagreement. This self-blame is grounded on the presumption that being in superficial accord with those around you is the best state of things, and this presumption often comes with a feeling that you have done something wrong in provoking sincere, serious dispute with someone.

Maybe it’s about our upbringing. What isn’t? Maybe it’s about the gendering of our upbringing. What isn’t? (Okay, I’m being facetious.) But whatever it is, this instinct to please can be destructive of personal and social development.

You take a moral stance because you believe in it; and the stronger your belief, the more you stand your ground. By the very fact that you are setting out to change people’s minds, you will encounter countless people who don’t see things your way. If someone doesn’t see it like you, what does that say to your belief? It can’t be evidence of the wrongness of your belief, because the existence of those people is presumed by the political nature of your project. This is a truism, yet is unappreciated when we take disagreement itself to be a negative mark on us. Furthermore, it takes two people to disagree passionately; if you are engaged in disagreement with another person, and the disagreement is passionate, this is because they are standing their ground as well as you are standing yours. The issue is important to both of you; and it cannot be a negative mark on you that it is important for you.

This is of course not a recommendation, practical or sociable, that provoking disagreement in every situation is wise. For that you have your social judgment. I just want to reaffirm that the existence of disagreement in itself is not reason to think you have done wrong in the interaction.

You might think that this is such obvious advice that nobody could need it. But say you are discussing some political issue with a friend over dinner, or even a half-stranger in some kind of discussion forum. Over your wandering conversation, you hit upon disagreement about a fundamental issue. Say you’re a liberal egalitarian and she is a fervent let-the-market-eat-everything Nozickian libertarian, or sexist, or perhaps libertarian and sexist (mmm, unappealing). Say you decide to challenge her, and let’s assume it’s a sunny morning in your mind, and you are able to engage your shiniest argumentative powers. She retorts just as coherently, and you have a heated argument. At the end of it, she is still as fervent a Nozickian as before.

What has gone wrong? Why is there still disagreement? Why was there disagreement to begin with? Even worse, you reckoned it was a good day for you; if you can’t win the argument on your best form, when will you ever be able to win it? And now arises these self-directed, slightly self-blaming questions.  So let’s try to diagnose what’s gone on that causes these feelings and questions. I’m going to describe one part of this unease, which I shall call meta-ethical unease.

(Meta-ethical unease) There was conflict in the first place – that was bad enough. You don’t disrespect your friend; you reckon that if a belief is good enough for her, it could be good enough for you too; and so the fact that you disagree so much makes you feel uncomfortable in the first place. As Cohen puts it (elsewhere, differently) – the very thought that you could have had very, very different flags pinned to your moral mast, had you been born in different lands, makes you feel uncomfortable about hoisting yours so highly.

Then, not only was there conflict in the first place, but secondly, you were unable to resolve it – that’s the other half of the unease. You tried your best, and if you can’t communicate your ideas well, then who else can do it for you? Maybe you lost your cool, and resent yourself for not having argued in a more dispassionate and academic way. (Some of my friends reading this from outside the Land of Oz – Oxford – will find this kind of self-resentment completely laughable. It kinda is, and that tells us something too.)

The origin of this kind of meta-ethical unease with conflict is a mistaken faith in political rationalism. (Well – I’m sure one can feel this way without ever having read Rawls – but the philosophical basis for this unease is, I think, with rationalism.) Some forms of liberal universalism posit the existence of a standard, normal, or “right” method of value-acquisition by which everyone, or everyone regular, can converge on the same set of values. These are liberal universal values. This view of value-acquisition is analogous to strict methodological/epistemological views of belief-formation; if you check your deductions, check your evidence, and check your sources, you will converge on the true set of beliefs, like everyone else – as long as you’re doing it right. However, value-acquisition is very different, psychologically and methodologically, from belief-formation.

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A schoolchild who has not done her sums properly might be blamed by her teacher for being too hasty. Whose rebuke, then, are we afraid of when we attempt to match our moral sums against others’, and find that our answers don’t match?

That’s just one question for the atheist moral realist or quasi-realist; what does it mean to get morality wrong, and why does it matter for ourselves?

I think the most fruitful direction to take that question in is this: we are afraid of our own rebuke; not being faithful to some component of ourselves.

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The question that I started this essay off considering, however, is slightly different. If political rationalism leads one very quickly into a fear of conflict, what do other meta-ethical and meta-political positions tell us about conflict, and about our reactions to them? Which meta-ethical position sustains the most healthy attitude towards conflict? It seems that the more relativistic one’s meta-ethical position, or the less realist, the less soul-cringing one engages in upon discovering conflict. However, I don’t think relativistic meta-ethics is able to fully support first-order ethical views, so we should ask the slightly different question: Which meta-ethical position, that supports first-order ethical views, sustains the most healthy attitude towards conflict?

Returning to the cashing-out of the unease with conflict in the scenario I gave, here is a fuller way of contrasting meta-ethical unease with another form of unease:

(Meta-ethical unease) It is possible that there is someone else with a fundamentally different ethical position to yours. That is, there are processes of socialisation, or psychological processes, which you (believe you) haven’t experienced, but which someone else has, that has led them to different views.

(Pragmatic unease) There’s –at least- one agent in the world who seriously disagrees with you, and so they form a pragmatic block to your ability to enact your political goals.

Furthermore, you’re finding it difficult to change their mind. This adds to the

(Meta-ethical unease) – not only are there processes of socialisation or psychology that result in moral views completely different to yours, but the processes of socialisation you are used to (e.g. intellectual debate) are not robust enough to displace theirs. This could be seriously problematic if the process of socialisation you are using is a fundamental part of your meta-political or meta-ethical system. For example, the epic process of considered discussion is the postulated basis for how people approach consensus in a hypothetical Parliament that determines the values embedded in the political theory (Rawls).

(Pragmatic unease) – not only are there people who will block you, but it’s hard to stop them from blocking you by trying to change their mind. You will have to look to other means.

The meta-ethical unease we experience leads us to question how it is that people come to hold abhorrent views, or to lack compassion, or to be so morally different from you, when otherwise, you are similar in background and socialisation. The Kantian has some ways of looking at amoral people (people who lack morals, or lack what we recognise as morals, rather than people who do evil wilfully, who are immoral) – the Humean has others. Which is more humane? Are amoral people stupid, closed-minded, or dispassionate, non-empathetic, psychopathic?

(To be clear, I’m not yet concerned with moral behaviour, i.e. whether one follows the norms one professes to adopt, but with the acquisition of those norms – although the line between holding and acting on a value may be very hard to draw.)

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I want to take this direction of inquiry further into a pragmatic understanding of the decisions we face in everyday life. Which meta-ethical diagnosis can lead us not to a binary on/off understanding of moral norm acquisition, but can lead us to understand how our own moral norms can be bent, lost, and questioned afresh?

We all belong to cultures in which abhorrent views about the value of humans and other living things have been held, or still are widely held – views about the value of certain races, genders, sexual proclivities. As whole cultures, as extended families with a shared heritage of socialisation, we are therefore not wholly good or evil, but our shared tradition contains many strands of moral better and worse.

It seems that in each of us, there are the seeds of moral compassion, that lead us to acquire norms and values about how to treat others. How are these seeds sown? And how do we avoid our own moral droughts?

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p.s. apologies for general misuse and abuse of the term “socialisation”; if you would like to suggest some corrections, please do! I never studied sociology, my big social science blind spot.