Friday, January 30, 2015

Dinner with Haavelmo

The student magazine at TSE (TSEconomist) asked some of us to tell them with which thinker of the past we would like to have dinner. Here is my answer.

If I was to have dinner with an economist of the past, it would probably be Trygve Haavelmo. His 1944 Econometrica paper “TheProbability Approach in Econometrics” is for me a milestone for econometrics and applied economics, and, let’s be bold, economics in general. I read it several times and continue reading it regularly. Each time, I discover a novel gem. This paper laid out the ground for applied work in economics with a sound statistical basis but also taking into account the specificities of our field, as for example the existence of interdependence and equilibrium relationships. This paper inspired the subsequent work of the Cowles Commission that forms the basis of the econometrics curriculum that we teach. 

But this paper is also so much more than theoretical econometrics. It is a paper about epistemology, how and why we can do research in economics. I think the views Haavelmo expressed in this paper are so deep that they implicitly structured how applied research in economics has been conducted until the late 80s. And in some of his views, you also see the nascent credibility revolution coming: Haavelmo coined the term natural experiments (actually, Josh Angrist, the modern proponent of this approach, directly attributes the term to him) and he also insisted heavily on setting up a design of experiments with each economic theory, because, in his own words: “Our guard against futile speculations is the requirement that the results of our theoretical considerations are, ultimately, to be compared with some real phenomena.” He also said that “What makes a piece of mathematical economics not only mathematics but also economics is, I believe, this: When we set up a system of theoretical relationships and use economic names for the otherwise purely theoretical variables involved, we have in mind some actual experiment, or some design of an experiment, which we could at least imagine arranging, in order to measure those quantities in real economic life that we think might obey the laws imposed on their theoretical namesakes”. 

What I would love to talk to him about is why he did not promote much more the experimental method in economics. My understanding of his paper is that, at some point, he abandons all hope of ever conducting experiments in economics and settles for something else, namely modelling what we do not know, the confounding factors. He uses an analogy with physics, saying that we have to model the forces of friction because we cannot run experiments in a vacuum. I think this approach was wrongheaded and contributed to mixing science with engineering for a long time in economics. I would also ask him why, despite the repeated failures of the approach that he proposed, and that he acknowledged repeatedly, in his 1958 speech  as a president of the EconometricSociety, and in his 1989 Nobel prize speech, he blamed the theory instead of blaming the method and putting experiments back into the picture. I would also love to discuss with him the exciting direction that economics is taking now, with more use of experiments for testing theories and policies, and the novel and welcome approach of testing the predictions of structural models againstpolicy changes.

Finally, because Trygve did not seem like a funny guy, I might also invite David Hume to take part. Apart from being my favorite philosopher, he was nice and charming fellow and would for sure cheer us up. Oh, and he also basically invented the notion of counterfactual that is crucial for causal analysis. That would be some dinner!

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