Defending econometrics: lessons from investment analysis

In this paper various methodological problems in the use of econometric techniques are explored. In the first section, some basic ideas about the path of economic theorising are explored. In the second section, the goals of prediction and enhancing understanding are presented and the processes of achieving these goals via inductive versus deductive methods are analysed. The role for econometrics is explored building upon the early debates between Tinbergen and Keynes and later debates emerging from the critical realist critiques of econometrics. The ideas are illustrated with some examples from the literature on fixed asset investment.