Having briefly discussed the needs of the economic policy-maker, let us now turn our attention to the efforts of the econometric model-builder. In particular we have in mind models of the type constructed for the United States economy by Tinbergen, Klein, and Colin Clark. In all of these models an attempt is made to represent the economy by a set of equations for the most part linear in nature. The variables appearing in these equations are divided into two types: endogenous and exogenous. Each of these models contains as many equations as there are current endogenous variables. Each equation, other than purely definitional equations, is imagined to hold only in a statistical sense. The equations having been set up, their parameters are estimated so as to fit the model to some existing body of data. Various ways of doing this have been used, but are not relevant to the major interests in this paper. There are two additional characteristics of what has been done or not done to which we specifically wish to draw attention.

The specification of which variables are to be considered exogenous is either done on the basis of theoretical convenience from the standpoint of limiting the field of interest or is done on the basis of some a priori knowledge of unspecified source. In any case, the specification is not subjected to any test whatsoever.