Stylized fact

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In social sciences, especially economics, a stylized fact is a simplified presentation of an empirical finding. [1] Stylized facts are broad tendencies that aim to summarize the data, offering essential truths while ignoring individual details.

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A prominent example of a stylized fact is: "Education significantly raises lifetime income." Another stylized fact in economics is: "In advanced economies, real GDP growth fluctuates in a recurrent but irregular fashion".

However, scrutiny to detail will often produce counterexamples. In the case given above, holding a PhD may lower lifetime income, because of the years of lost earnings it implies and because many PhD holders enter academia instead of higher-paid fields. Nonetheless, broadly speaking, people with more education tend to earn more, so the above example is true in the sense of a stylized fact.

Origin of the term

When describing what is generally regarded as the first econometric macro model ever developed, Jan Tinbergen (1936) introduces the concept of stylization as follows: "To get a clear view, stylisation is indispensable. The many phenomena must be grouped in such a way that the picture becomes clear, yet without losing its characteristic traits. Of course every stylisation is a hazardous venture. The art of the social economist's work lies in this stylisation. Some stylisations have been unwieldy, others have been unrealistic. But stylisation is essential. The alternative is barrenness." [2]

The term "stylised facts" was introduced by the economist Nicholas Kaldor in the context of a debate on economic growth theory in 1961, [3] expanding on model assumptions made in a 1957 paper. [4] Criticizing the neoclassical models of economic growth of his time, Kaldor argues that theory construction should begin with a summary of the relevant facts. However, to handle the problem that "facts as recorded by statisticians, are always subject to numerous snags and qualifications, and for that reason are incapable of being summarized", [5] he suggests that theorists "should be free to start off with a stylised view of the facts – i.e. concentrate on broad tendencies, ignoring individual detail". [5] With respect to broad tendencies that result from such a process, Kaldor coins the term "stylized facts".

Examples

Stylized facts are widely used in economics, in particular to motivate the construction of a model and/or to validate it. Examples are:

Uses

Already in the original paper, Kaldor used his stylized facts of economic growth to argue in favor of his suggested model in comparison to older neoclassical models of economic growth. This idea has been highlighted subsequently by Boland, that the advantages of one model over the other can be set in a clear perspective via the reference of the stylized facts the respective models can explain. [8] Additionally, stylized facts can be used to look "under the hood of models", i.e. be used to validate assumptions of model in a focused way. [9] This can be of particular importance in more complex models. Econophysics/Statistical finance begins from stylized facts. Furthermore, the considerable potential of Stylized Facts for Information Systems research has been investigated and discussed in recent years. [10]

Criticism and derivation

Already in an early response Solow pinpointed a possible problem of stylized facts, by stating that "there is no doubt that they are stylized, though it is possible to question whether they are facts". [11] The criticized practice of deriving stylized facts ad hoc is still quite prevalent in economics. Still, some possible approaches to derive stylized facts from empirical evidence have been suggested, such as surveying experts, statistically analysing large data sets (especially suitable for financial markets [12] ) or aggregating both qualitative and quantitative data from different empirical methods by following a systematic process. [9]

See also

Related Research Articles

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<span class="mw-page-title-main">Macroeconomics</span> Study of an economy as a whole

Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output/GDP and national income, unemployment, price indices and inflation, consumption, saving, investment, energy, international trade, and international finance.

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<span class="mw-page-title-main">Nicholas Kaldor</span> Hungarian-British economist

Nicholas Kaldor, Baron Kaldor, born Káldor Miklós, was a Hungarian economist. He developed the "compensation" criteria called Kaldor–Hicks efficiency for welfare comparisons (1939), derived the cobweb model, and argued for certain regularities observable in economic growth, which are called Kaldor's growth laws. Kaldor worked alongside Gunnar Myrdal to develop the key concept Circular Cumulative Causation, a multicausal approach where the core variables and their linkages are delineated.

<span class="mw-page-title-main">Robert Solow</span> American economist (1924–2023)

Robert Merton Solow, GCIH was an American economist and Nobel laureate whose work on the theory of economic growth culminated in the exogenous growth model named after him.

<span class="mw-page-title-main">Economic model</span> Simplified representation of economic reality

An economic model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework designed to illustrate complex processes. Frequently, economic models posit structural parameters. A model may have various exogenous variables, and those variables may change to create various responses by economic variables. Methodological uses of models include investigation, theorizing, and fitting theories to the world.

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A macroeconomic model is an analytical tool designed to describe the operation of the problems of economy of a country or a region. These models are usually designed to examine the comparative statics and dynamics of aggregate quantities such as the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the level of prices.

Tobin's q, is the ratio between a physical asset's market value and its replacement value. It was first introduced by Nicholas Kaldor in 1966 in his paper: Marginal Productivity and the Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani. It was popularised a decade later by James Tobin, who in 1970, described its two quantities as:

One, the numerator, is the market valuation: the going price in the market for exchanging existing assets. The other, the denominator, is the replacement or reproduction cost: the price in the market for newly produced commodities. We believe that this ratio has considerable macroeconomic significance and usefulness, as the nexus between financial markets and markets for goods and services.

Verdoorn's law is named after Dutch economist Petrus Johannes Verdoorn (1949). It states that in the long run productivity generally grows proportionally to the square root of output. In economics, this law pertains to the relationship between the growth of output and the growth of productivity. According to the law, faster growth in output increases productivity due to increasing returns. Verdoorn argued that "in the long run a change in the volume of production, say about 10 per cent, tends to be associated with an average increase in labor productivity of 4.5 per cent." The Verdoorn coefficient close to 0.5 (0.484) is also found in subsequent estimations of the law.

The Solow–Swan model or exogenous growth model is an economic model of long-run economic growth. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity largely driven by technological progress. At its core, it is an aggregate production function, often specified to be of Cobb–Douglas type, which enables the model "to make contact with microeconomics". The model was developed independently by Robert Solow and Trevor Swan in 1956, and superseded the Keynesian Harrod–Domar model.

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Kaldor's facts are six statements about economic growth, proposed by Nicholas Kaldor in his article from 1961. He described these as "a stylized view of the facts", which coined the term stylized fact.

The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a neoclassical economics academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936). It was formulated most notably by John Hicks (1937), Franco Modigliani (1944), and Paul Samuelson (1948), who dominated economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s, 60s, and 70s.

<span class="mw-page-title-main">Luigi Pasinetti</span> Italian economist (1930–2023)

Luigi L. Pasinetti was an Italian economist of the post-Keynesian school. Pasinetti was considered the heir of the "Cambridge Keynesians" and a student of Piero Sraffa and Richard Kahn. Along with them, as well as Joan Robinson, he was one of the prominent members on the "Cambridge, UK" side of the Cambridge capital controversy. His contributions to economics include developing the analytical foundations of neo-Ricardian economics, including the theory of value and distribution, as well as work in the line of Kaldorian theory of growth and income distribution. He also developed the theory of structural change and economic growth, structural economic dynamics and uneven sectoral development.

<span class="mw-page-title-main">History of macroeconomic thought</span>

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<span class="mw-page-title-main">Anwar Shaikh (economist)</span> American economist

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Bowley's law, also known as the law of the constant wage share, is a stylized fact of economics which states that the wage share of a country, i.e., the share of a country's economic output that is given to employees as compensation for their work, remains constant over time. It is named after the English economist Arthur Bowley. Research conducted near the start of the 21st century, however, found wage share to have declined since the 1980s in most major economies.

Nicholas Kaldor in his essay titled A Model of Economic Growth, originally published in Economic Journal in 1957, postulates a growth model, which follows the Harrodian dynamic approach and the Keynesian techniques of analysis. In his growth model, Kaldor attempts “to provide a framework for relating the genesis of technical progress to capital accumulation”, whereas the other neoclassical models treat the causation of technical progress as completely exogenous.

The Cambridge capital controversy, sometimes called "the capital controversy" or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that started in the 1950s and lasted well into the 1960s. The debate concerned the nature and role of capital goods and a critique of the neoclassical vision of aggregate production and distribution. The name arises from the location of the principals involved in the controversy: the debate was largely between economists such as Joan Robinson and Piero Sraffa at the University of Cambridge in England and economists such as Paul Samuelson and Robert Solow at the Massachusetts Institute of Technology, in Cambridge, Massachusetts, United States.

References

  1. ↑ Cooley, Thomas, ed. (1995). Frontiers of Business Cycle Research. Princeton University Press. p. 3. ISBN   978-0-691-04323-4.
  2. ↑ The full text of Tinbergen's 1936 paper, originally written in Dutch, is available in English as 'An economic policy for 1936', in Klaassen et al., eds. (1959, pp. 37–84). There the quoted phrases are found on p. 41, in a somewhat different wording. This translation is taken from Don, H. and Verbruggen, J. 2006. Models and methods for economic policy;60 years of evolution at CPB Statistica Neerlandica 60)2.
  3. ↑ Kaldor, Nicholas (1961). "Capital Accumulation and Economic Growth". In Lutz; Hague (eds.). The Theory of Capital. London. pp. 177–222.{{cite book}}: CS1 maint: location missing publisher (link)
  4. ↑ Kaldor, Nicholas (1957). "A Model of Economic Growth". The Economic Journal. 67 (268): 591–624. doi: 10.2307/2227704 . JSTOR   2227704.
  5. 1 2 Kaldor 1961, p. 178
  6. ↑ Cont, Rama (2001). "Empirical properties of asset returns: stylized facts and statistical issues". Quantitative Finance . 1 (2): 223–236. doi:10.1080/713665670. S2CID   5625400.
  7. ↑ Kahn, James A. (1987). "Inventories and the Volatility of Production". American Economic Review . 77 (4): 667–679. JSTOR   1814538.
  8. ↑ Boland (1987). "Stylized Facts". In Eatwell, J.; Milgate, M.; Newman, P. (eds.). The New Palgrave Dictionary of Economics. Vol. 4. London: Macmillan Press. pp. 535–536. ISBN   978-0-333-37235-7.
  9. 1 2 Heine, Bernd-O.; Meyer, Matthias; Strangfeld, Oliver (2005). "Stylised Facts and the Contribution of Simulation to the Economic Analysis of Budgeting". Journal of Artificial Societies and Social Simulation. 8 (4): 4.
  10. ↑ Houy, Constantin; Fettke, Peter; Loos, Peter (2015). "Stylized Facts as an Instrument for Literature Review and Cumulative Information Systems Research". Communications of the AIS (CAIS). 37 (1): 225–256.
  11. ↑ Solow (1969). Growth Theory: an Exposition (Paperback ed.). New York, NY: Oxford Univ. Press. p. 2.
  12. ↑ Cont, R. (2001). "Empirical Properties of Asset Returns: Stylized Facts and Statistical Issues". Quantitative Finance. 1 (2): 223–236. doi:10.1080/713665670.
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