Laws and limits of econometrics

We discuss general weaknesses and limitations of the econometric approach. A template from sociology is used to formulate six laws that characterise mainstream activities of econometrics and their scientific limits. We discuss proximity theorems that quantify by explicit bounds how close we can get to the generating mechanism of the data and the optimal forecasts of next period observations using a finite number of observations. The magnitude of the bound depends on the characteristics of the model and trajectory of the data. We look at one possible future of econometrics using advanced econometric methods interactively with a web browser. A fundamental issue that bears on all practical economic analysis is the extent to which we can expect to understand economic phenomena by the process of de-veloping a theory, taking observations and fitting a model. An especially relevant question in practice is whether there are limits on how well we can predict future observations using empirical models that are obtained by such processes. Not only are we interested in whether there are such limits, we also want to find some quantitative expression for them and to address the issue of whether these limits are attainable in practical empirical work. Forty years of empirical experience i