Wednesday, February 15, 2012

Layers of Truth

Today, Charles Hugh Smith proudly declares "The Grand Failure of the Econometric Model."

In one sense, and the sense he means, CHS is correct that the econometric model fails to deliver the certainty that its adherents claim.

But in the more important and accurate sense, CHS is flat wrong.  The econometric model is not offered for its truth but for its capacity to create false certainty.  All econometric models claim to model probabilities and, therefore, describe the present and predict the future.  The problem is that at best these models consider only risk and do not model uncertainty, but calculating probabilities requires modeling both risk and uncertainty.  The utility of the models only arises when they are used by advocates of the current control system to drive false certainty and, therefore, influence behavior.

The econometric model is nothing more or less than propaganda used to shape public opinion.  To claim that the model has failed because it does not predict the future is to miss the point that the model has succeeded greatly for its intended purpose of controlling human behavior.