Oskar Morgenstern Questions the Accuracy of Economic Data, the Very Basis for Econometrics

A Morgensternian critique of econometrics is different from other critiques that focus on econometrics as practiced by prominent economists. Edward Leamer (1983), in an influential article, stated that econometric analysis is not taken seriously due to the amount of “data mining” and “number crunching.” Econometricians make implicit assumptions about the distribution of errors, the functional form, and the variables in the model. According to Leamer statistical interference is based on opinions and whims. In a similar way, Deirdre McCloskey and Steven Ziliak (2008) criticize the procedure of econometricians and the abuse of significance testing. Too often statistical significance is confused with real world significance. Morgenstern’s critique is, however, on a different level. The critique of econometric practices and techniques does not deal with the accuracy of the underlying data but takes it as given. Morgenstern more fundamentally questions the accuracy of economic data and, consequently, the very basis for econometrics.

It is indeed surprising to note how much the problem of accuracy in economic data has been neglected. This is not the case in the physical sciences (Preston and Dietz 1991). Within the physical sciences the error of observation is always explicitly mentioned, yet in economics there is simply no error estimate. This means that economists do not know the accuracy of the economic data presented to them. This is even more troubling when one considers that in social or economic data there are more possible sources of error than in the physical sciences. Economists, therefore, face the question of why the problem of accuracy of economic data is rarely mentioned or passed over in silence in economics, while in the physical sciences this problem is widely acknowledged.

—Philipp Bagus, “Morgenstern’s Forgotten Contribution: A Stab to the Heart of Modern Economics,” American Journal of Economics and Sociology 70, no. 2 (April 2011): 542. 

The Keynesian Multiplier Story Is More of a Myth Than an Accurate Description of the Economic Process

Keynes (1933, 1936), by his elaboration of Richard Kahn’s earlier (1931) argument, thus exalts consumption spending to a magical significance in macroeconomic analysis, contrary to the classical emphasis on production and saving for investment in order to promote the growth of output and employment (Ahiakpor 1995). Such popular claims as “the current U.S. economic expansion is being driven by consumer spending” also reflects the Keynesian multiplier view.

The Keynesian multiplier analysis has become a staple in macroeconomic education at the introductory and higher levels, without students being warned of the concept’s fundamental misrepresentation of how an economy works. . . .

Some previous analysts have cast doubts on the validity or meaningfulness of Keynes’s argument, such as Pigou (1933, 1941), Robertson (1936), Hawtrey (1950, 1952), Hazlitt (1959), Haberler (1960), Rothbard (1962), and Hutt (1974), but with hardly any success in limiting its widespread acceptance and teaching in macroeconomics. . . .

In this article, I argue that the earlier criticisms have not been effective mainly because they miss pointing out the real illusion of the Keynesian multiplier story. If one asked some fundamental questions, such as “From where does the initial spender get the income to spend?” or “What is saving other than the purchase of financial assets and not the hoarding of cash?” (the classical definition of saving) we find that the Keynesian multiplier story is more of a myth than an accurate description of the economic process.

—James C. W. Ahiakpor, “On the Mythology of the Keynesian Multiplier: Unmasking the Myth and the Inadequacies of Some Earlier Criticisms,” American Journal of Economics and Sociology 60, no. 4 (October 2001): 746-747.

The 5 Principal Pillars Upon Which Keynes Founded His “New Economics” Are ALL Badly Flawed

Keynes founded his New Economics on five principal pillars, all of which are faulty:

1. Saving is nonspending, and does not provide the funds for investment spending as the classical economists had explained;
2. Consumption spending sustains and drives economic expansion through a multiplier process;
3. The rate of interest is determined by the supply and demand for money (cash) or liquidity, not by the supply and demand for “capital” or savings;
4. There are no equilibrating tendencies in a monetary economy to restore it to full employment once involuntary unemployment emerges; and
5. The classical theories of interest, the price level, inflation, and the law of markets (or Say's law) are all founded on the premise that full employment always exists.

Keynes successfully persuaded most of his audience, including many economists, of the above claims about classical economics mainly by changing the meaning of some key economic terms, although none of his claims is valid. Neither does a monetary economy work the way Keynes claims, nor are the classical principles founded on the assumption of full employment.

—James C. W. Ahiakpor, “On the Future of Keynesian Economics: Struggling to Sustain a Dimming Light,” American Journal of Economics and Sociology 63, no. 3 (July 2004): 585-586.