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dietwald Posted: Wed, Jan 9 2008 12:30 PM


I understand the general argument against econometrics (Which I first came across in Callahan’s “Economics for Real People”). Here’s my question, though: I have done a number of correlation analyses between, for example, the proportion of the workforce active in agriculture and the GDP/capita, from which one can conclude that above a certain level of people active in the agricultural sector (around 10%), the GDP/capita of the respective countries tends to be rather low.

I found similar correlations between the so-called ‘corruption’ indices, regulation indices, and the GDP/capita of countries, leading me to the conclusion that so-called corruption is simply a measure of a countries average wealth, the relative wealth of foreigners in these countries, and the level of regulation (which also means that much of the work done by Transparency International is pointless at best).


Would the “Austrian” reservation against econometrics also apply to such rather straight-forward correlation between, admittedly, crude measures?

I would appreciate feedback,


"There can be no truly moral choice unless that choice is made in freedom" Murray N. Rothbard
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DougM replied on Thu, Jan 10 2008 2:44 PM

The Austrian reservation would apply, although this does not mean that your correlations are invalid or useless. What they can’t do is tell us about cause and effect.


One of the first lessons in any statistics class is that correlation does not imply causation. Correlation can mean either that a) A causes B or b) B causes A or c) something else is causing both A and B. Using your agricultural workforce and GDP example (and assuming that the study is valid), the results could mean either that eliminating agriculture will cause an increase in GDP, an increase in GDP would cause a diminution of agricultural employment, or that something else entirely causes both a reduction in agricultural employment and an increase in GDP. Operating solely on the results of the study, there is no way to know which one of these is the case.


The Austrian theory tells us that, as more capital is employed for each unit of labor, productivity per unit of labor increases. The additional productivity results in an increase in the quantity and quality of agricultural products using less labor, so labor moves on to producing other goods and services. Consequently, the study supports the Austrian position. However, it would also support the position that GDP would increase if all of the farmers became biochemists. There is no way to know which conclusion to draw without resorting to economic theory. There is also no way to know if the results would be the same if economic conditions change. Even if you extended your study back to the limit of historical data, there is no guarantee that future conditions won’t be different from all historical conditions.


These problems persist even when the study addresses the simplest of relationships and is conducted objectively and honestly. Any ambiguity or attempt to manipulate the data only compounds the problems.

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dietwald replied on Fri, Jan 11 2008 11:10 PM

Thank you - your answer confirmed what I thought would be the answer. I have thought a little bit more about this, and 'discovered' something interesting: imagine a particular region is for some odd reason the only region in the entire world that can produce a certain substance that for some reason becomes an absolute necessity for survival. The only way to gather this substance is by manual agricultural labor (it doesn't matter why) - if the entire population of this country would become active in this type of agriculture, they all would probably become very well off.

Hence, it's not agricultural work as such that plays a role here, but the problem is probably labour productivity: engaging a lot of people in work that doesn't pay a lot is not good for the economy...  (I know I didn't word this properly, but you get probably get the drift). 

Thanks for the feedback.  

"There can be no truly moral choice unless that choice is made in freedom" Murray N. Rothbard
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RobertCR replied on Sun, Jan 13 2008 1:38 AM

Right, it has a great deal to do with labor productivity.  One of the reasons for poverty in areas with high employment in agriculture is the fact that the capital structure is so incredibly limited.  This problem exists for at least two reasons:  the region has been recently exposed to better technology and is taking time to reap the benefits, or trade is so stifled with regions that do have capital to sell that the capital structure isn't allowed to grow more efficient.

Since so many people have to work in agriculture just to produce enough food to get by, there are fewer workers available to produce those things wealthy nations take for granted.

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