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...his mistaken conclusion (as see it), Sutton delivers masterful analysis of some basic issues in empirical economics. For this analysis, Sutton's short book is well worth reading.
Sutton's main object of inquiry is the "standard paradigm" of empirical economics. The standard paradigm, Sutton explains, looks for simple, stable patterns built from a few observable variables. A stable pattern, when found, becomes the deterministic part of a testable model having broad application. The jostling of many secondary factors disturbs the effects of these few primary factors. These disturbances are the stochastic part of the model. Finding the right division between primary and secondary factors is an essential task of econometrics. In Sutton's story, Trygve Haavelmo taught us to look for "two sharply separable classes of mechanisms at work, one yielding large systematic influences captured in the equations of the model, while the other is a secondary influence" (p. 18).
J. M. Keynes and F. A. Hayek criticized the standard paradigm early on, Sutton says. They challenged the idea that "the operation of the economy could be captured in a 'complete' yet usefully simple model of the kind that Haavelmo and his colleagues had in mind." They "focused on the difficulty of 'letting the data decide' between candidate models." Some variables operate sporadically; others are hard to measure. Both Keynes and Hayek, Sutton reports, "objected to the adequacy of using such a vehicle for testing rival theories" (p. 26). His endnote 1.1 gives a nice account of Keynes's famous exchange with Tinbergen. Unfortunately, he gives no cites for Hayek's views of that time. His anachronistic reference to Hayek's Nobel lecture correctly notes Hayek's belief in "the importance of testability" (p. 32, n. 11). (An appreciation of Hayek's notion of "pattern prediction" [1955] would have illuminated Sutton's "class-of-models approach" to econometric testing.)
Sutton says the purpose of his book is "to argue ... that the early concerns voiced by such critics as Keynes and Hayek, while they may indeed have been exaggerated, were not misplaced" (p. 32). (He does not tell us in what respects either critic exaggerated.) But Sutton goes on to make the curious argument...
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