Transforming Structural Econometrics
This book began with a complaint and a vision. We complained that mainstream economics has offered the ‘rational individual’ as the basic building block in model construction, with ‘methodological individualism’ as the accompanying scientific program, facing a virtually insuperable obstacle in the form of the problem of induction. In fact, the problem of induction does not obstruct research at all, as we have demonstrated, but that is because actual research does not adhere to the methodology. We developed our proposal to overcome the problem of induction and establish the existence of law like regularities in economics, justifying the assumption of a ‘data generating mechanism’; this led to our MTC diagram, which summarized our methodology. The MTC diagram helped us to answer the following question: to what degree may we expect our model to fulfil its objective; that is, to work. The vision we proposed argued for a different starting point, from a self-replacing system – a socio-economic system – which acts as a data generating mechanism. On this basis we proposed ‘methodological institutionalism’ as an alternative to methodological individualism, contending that there are law like relations to be discovered in the economy, though they are not quite the same as the law like relations in the physical sciences.
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