Money and Markets: Essays in Honor of Leland B. Yeager

Good ideas and bad regressions 69among variables. . . . econometrics is concerned with testing the theoreticalpropositions embodied in these relations, and with estimating the parametersinvolved.(Kmenta 1986: 203)Econometrics, the result of a certain outlook on the role of economics, consists ofthe application of mathematical statistics to economic data to lend empiricalsupport to the models constructed by mathematical economics and to obtainnumerical results.(Tintner 1968: 74)The method of econometric research aims, essentially, at a conjunction of economictheory and actual measurements, using theory and technique of statisticalinference as a bridge pier.(Haavelmo 1944: preface)These quotes point to what most would agree are the two main goals of empiricalresearch: measurement and testing. Econometrics can be used to measure conceptslike the elasticity of demand or the MPC, and can be used to test hypotheses derivedfrom theories and econometrics.Holcombe (1989) argues for a third use of empirical methods. In Holcombe’sview, regression methods are a lens with which to view the world, sometimesrevealing relationships that are not otherwise obvious. When used in this way,econometric methods can lead to the development of a new theory. Holcombecites the Phillips curve as an example of a theory developed from empiricalobservation.Although I am sympathetic to this use of econometric methods, I am notcomfortable with the implications of this use for the goal of hypothesis testing. Onecannot snoop around the data for a new theory and then use the same data set fortesting. If a trade-off between unemployment and inflation is suggested by the data,one should test the theory using different data. However, one might use the samedata set for measurement.The empirical research found in papers in the area of public choice, whichusually follows a theory section, is used for hypothesis testing and measurement. 1Empirical research in the area of the sociology of economics, which usually doesnot follow a theory section, is conducted to find a result. This use of empiricalresearch is consistent with Holcombe’s view that regression methods provideanother way to view the world. Unfortunately, the empirical results are not used todevelop a new theory which is later tested on new data. The empirical result is theend of the story. Empirical work in the sociology of economics is a search forcorrelations.As I state earlier, I see no harm in learning about the world through a regressionmodel. The problem with the use of regression methods to find theories is thatauthors rarely, if ever, confess to having done so. Researchers pretend that theEmpirical Results section of the paper is included for the goals of measurement