12. Taking the theory to the data Taking the data to the theory Haavelmo’s probability approach to econometrics Summers critique of empirical economics On the difficult link between theory and empirical evidence

13. About the meaning of theoretical constructs (Haavelmo)

14. Theoretical, true and observable variables (Haavelmo)

15. Experimental design in macroeconomics

16. Testing a theory as opposed to a hypothesis Summers critique: Though sophisticated techniques have been used to test theoretical hypotheses the results have not been convincing! Why? Applying econometric methods or analyzing statistical models The role of the ceteris paribus assumptions in empirical models The role of expectations in empirical models Observed variables do not closely correspond to the true variables

17. Kenvin Hoover (2004): ”The Walrasian approach is totalizing. Theory comes first. Empirical reality must be theoretically articulated before it can be empirically observed. There is a sense that the Walrasian attitude is that to know anything, one must know everything. ” ”There is a fundamental problem: How do we come to our a priori knowledge? Most macroeconomists expect empirical evidence to be relevant to our under- standing of the world. But if that evidence only can be viewed through totalizing a priori theory, then it cannot be used to revise the theory.” ”The Marshallian approach is archaeological. We have some clues that a systematic structure lies behind the complexities of economic relaity. The problem is how to lay this structure bare. To dig down to find the foundations, modifying and adapting our theoretical understanding as new facts accumulate, becoming ever more confident in out grasp of the super structure, but never quite sure that we have reached the lowest level of the structure.”

18. The methodological approach A combination of deduction and induction General-to Specific in the statistical modelling Specific-to-General in the choice of information The role of the ceteris paribus assumption The role of endogenous and exogenous variables pulling and pushing forces