Time to reject the privileging of economic theory over empirical evidence? A reply to Lawson

The present financial and economic crisis has revealed a systemic failure of academic economics and emphasised the need to re-think how to model economic phenomena. Tony Lawson seems concerned that critics of standard models now will fill academic journals with contributions that make the same methodological mistakes, albeit in a slightly different guise. In particular, he is rather sceptical of the usefulness of mathematical statistical models, such as the Cointegrated VAR model, as a way of learning about economic mechanisms. In this paper I discuss whether this is a relevant claim and argue that it is likely to be based on a misunderstanding of what a proper statistical analysis is and can offer. In particular, I argue that the strong evidence of (near) unit roots and (structural) breaks in economic variables suggests that standard economic models need to be modified or changed to incorporate these strong features of the data. Furthermore, I argue that a strong empirical methodology that allows data to speak freely about economic mechanisms, such as the CVAR, would ensure that important signals in the data are not silenced by prior restrictions. Adequately applied such models would provide us with an early warning system signalling when the economy is moving seriously out of equilibrium. Copyright The Author 2010. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.