HISTORIAS                    Manuel Espejo

What is Econometrics for?

 

Econometrics, as a branch of economics, utilizes mathematical, statistical, and computational tools in conjunction with economic theory to analyze economic data and make predictions. Many academic programs in economics and business administration include econometrics courses, even though it's often considered challenging and, for most economists, its utility is limited. In practice, only a small percentage of economists, primarily those in institutions such as central or commercial banks, statistical institutes, and research centers, use econometric techniques. However, the subject continues to hold a prominent place in educational curricula worldwide. Why is this the case?

Econometrics is purportedly employed to make predictions and explain economic behaviour by analyzing data, often time series. To illustrate what econometrics entails, consider a numerical series like 2, 4, 6, 8… From a logical standpoint, one might predict that the next number in the series is 10, which seems reasonable. However, from an epistemological perspective, this may not hold true. For instance, if the series represents the sales of photographic materials based on chemical emulsion, it might actually conclude as 2, 4, 6, 8, 3, 0, reflecting the industry's decline with the rise of digital photography. Econometrics cannot foresee disruptive changes that might fundamentally alter an industry.

This example highlights that daily occurrences, such as technological disruptions, social shifts, regulatory changes, and government interventions, are commonplace in the economic sphere but defy mathematical anticipation or modeling. Social reality is inherently intricate and resists straightforward prediction, rendering many economists skeptical about econometrics' predictive value. While econometrics gathers and combines available data to make future projections, these forecasts are often unreliable. Short-term predictions might hold some validity, but in the medium- or long-term, econometric forecasts often prove futile. This stands in stark contrast to the physical, natural, or health sciences, where statistical and mathematical methods yield predictive insights. The reason for this difference lies in the predictability of natural facts compared to the unpredictability of human decisions.

Human actions are influenced by a multitude of factors—changing opinions, societal trends, evolving technologies, governmental policies, among others—making extrapolation of human events into the future exceptionally challenging. Complex and advanced societies exhibit an abundance of decision-making factors that affect individuals, rendering econometric analyses less reliable as societal complexity increases.

So, why do we study econometrics, and what purpose does it serve? It could be argued that econometrics serves not a scientific, but an organic or institutional role. Practitioners in the social sciences may aspire to emulate the scientific rigor of natural sciences. Economics, in its quest to mitigate criticism aimed at social sciences, has sometimes resorted to excessive mathematical formalism, even when it's not necessary. As a result, economics has introduced various mathematical constructs that serve more as a facade to lend credibility to economic disciplines. However, market prices and the intricacies of market dynamics often elude mathematical calculation or explanation. The incorporation of mathematical procedures in economics can be viewed as an ideological effort to mask the fact that economics cannot always be distilled into mathematical models.

Economic laws are, fundamentally, social trends. While economic events frequently exhibit patterns, numerous exceptions and unique circumstances arise that defy mathematical explanation. In essence, econometrics can be seen as a kind of scholastic discipline, akin to the medieval trivium and quadrivium, characterized by formal complexity but limited practical utility.