IDENTIFICATION PROBLEMS ARE THE REASON “NATURE DOES NOT RUN VERY GOOD EXPERIMENTS.” Paul Romer explains what has happened in macroeconomics as the result of economists struggling with the “identification problem”. He begins the second paragraph of his essay: “In the 1960s and early 1970s, many macroeconomists were cavalier about the identification problem. They did not recognize how difficult it is to make reliable inferences about causality from observations on variables that are part of a simultaneous system.” The abstract of his paper says: “The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque.”
Of course, as I have posted a number of times, including here, I was taught by Professor John Meyer in the 1960’s that “Nature does not run very good experiments”, which is another way of expressing the thought that there are difficult and perhaps insoluble identification problems that have to be confronted in trying to determine relationships among economic data.
Another implication of Professor Meyer’s observation is that it is difficult to make progress in economics, and we should not be surprised when economics does not make progress.