Full text: Study week on the econometric approach to development planning

statistical method to handle a certain economic theory? Or does 
he mean that he is talking about methods of constructing a certain 
kind of theory? I think many of us consider the construction of an 
economic theory, including the specification of stochastic elements 
in the theory, as one thing, and to confront it with the facts as 
something different. If we have constructed a stochastic economic 
‘heory based on certain principles of economic behaviour, we have 
a model which can be interpreted as an indirect specification of the 
joint probability law of the observable economic variables. From 
such a model we may derive various kinds of « relations », expected 
values, and other kinds of statements concerning the properties of 
‘his joint probability law. It is perhaps unfortunate that we talk 
about relations between economic variables, when actually we should 
regard our economic theories as just indirect ways of saying someth- 
ing about the probabilistic aspect of the variables we are talking 
about. What do we actually mean when we say that a model or 
theory fits the facts? Do we mean that it fits the facts as these will 
be if the economy is not disturbed by changes in economic policy? 
Or do we mean that the model would fit the facts as these would 
be after a new kind of policy? The meaning may be one or the 
other, depending on what we are after. Moreover, a model that fits 
the facts in the first sense may often be used as a basis for extract- 
ing information concerning a model that fits the facts in the second 
sense, Some of the parameters to be estimated may be the same in 
ooth cases. But ultimately, we may not be so much interested in 
‘he joint probability law of the economic variables as it has been in 
a past period, our final interest may be related to a future joint 
probability law which has been modified by certain economic-po- 
litical actions. From this I think we may draw two conclusions, 
first that it is extremely important to specify the economic meaning 
of a theory or relation and, secondly, that closeness of fit for forec- 
asting purposes is by no means a decisive feature of a « good » eco- 
nomic theory. 
2] Wold - pag. 62

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