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c. What is the father's purpose in using the analogy (what effect does he hope it will have on his son's
behavior)?
d. Does it matter, for the father's purpose, that there are significant differences between the things he
compares in his analogy?
e. Should it matter to his son that there are actually significant differences between the terms in his father's
analogy?
THE ECONOMETRICS SYSTEM
by William J. Reynolds
1.Last year Lawrence R.Klein, professor of economics at the University of Pennsylvania, became the
ninth American to win the Nobel Prize in Economics since the category's inception in 1968. Klein's prize,
5 and its $215,000 purse, was awarded for no single endeavor, but for Klein's trailblazing efforts in the
refinement and further development of the economic device call econometrics.
2.No, econometrics doesn't seek to determine the ramifications of converting to grams and liters.
10 Econometrics is perhaps best thought of as a tool by which economic theories-abstract ideas — are
empirically tested and expressed in quantitative terms (i.e., hard numbers).
3.While the roots of econometrics can be traced to the 1830s (in such works as Antoine Augustin
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Coumot's «Recherches surles principes mathematiques de la theorie des richesse», 1938), the seminal work
came about in the 1930s. With the world economy in the grip of a monumental global depression, the need
for developing a way to accurately predict the effects of economic policy became obvious. Jan Tinberg of
20 the Netherlands established much of the groundwork then, examining the inter dependence of separate
factors — variables such as productivity, consumption, employment, national income, retail prices and the
usual economic catch phrases — within an economic system, and even beyond: who can dispute that the
25 policies enacted in the other economies affect our own?
4. For his work Tinberg was awarded a Nobel Prize in 1969, but it is Lawrence Klein who is
acknowledged as having made the first practical application of econometrics in the 1950s, by using modem
30 computer-coded tools of statistical analysis to verify Tinberg's idea of interrelationship and to express those
relationships quantitatively, in terms of mathematical formulae.
5.These formulae are arrived at by painstaking recording the historical movements of goods and services
35 throughout an economy's various sectors — government, capital formation, household goods, etc. The
historical relationships of these sectors are studied and applied to the construction of equations that attempt
to forecast, for instance, how a given change in total after-tax income, coupled with a change in wholesale
prices, is likely to affect consumption.
40 6. Basic cause-and-effect, right? But it takes a comprehensive set of equations to account for all of the
significant variables and what will happen to them all — simultaneously — if something changes. This set
45 composes an econometric model and, since the model is only as good as the data it can accommodate, a
valid model must contain literally scores of formulae. At Pennsylvania, Klein works with a model that
strives to describe the total global economy — and which contains over 1,000 individual variables.
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7. Lately the validity of existing econometric models — specifically, their forecasting abilities — has
been questioned. The severity of recent economic occurrences such as the 1974 recession and the
significant inflation of a year ago were not indicated in the forecasts. There is concern among some econo
mists that
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the historical assumptions on which current econometrics is based may no longer be wholly applicable.
8. Nonetheless, economists and those who rely on economic information are in no hurry to disavow
themselves of any association with econometrics. Just last year, Business Week was publishing regular
60 quarterly forecasts based on information retrieved from Klein's system-model. Econometric predictions
might not be letter-perfect, but they're the best predictions available, at least by dint of being the only ones
available.
9. And since economists, like meteorologists, will forever be called upon to make predictions, they will
65 forever seek to fine-tune, improve and even reinvent their going-out-on-a-limb tools. If there's such a thing
as perpetual motion, this must surely be it.
10. No wonder economics is called the dismal science.
Exercise