Home > The Economics Profession > Thin men acting in small worlds – or why economic models are both unreal and irrelevant

Thin men acting in small worlds – or why economic models are both unreal and irrelevant

from Lars Syll

In The World in the Model (reviewed here) Mary Morgan characterizes the modelling tradition of economics as one concerned with “thin men acting in small worlds”‘ and writes:

Strangely perhaps, the most obvious element in the inference gap for models … lies in the validity of any inference between two such different media – forward from the real world to the artificial world of the mathematical model and back again from the model experiment to the real material of the economic world. The model is at most a parallel world. The parallel quality does not seem to bother economists. But materials do matter: it matters that economic models are only representations of things in the economy, not the things themselves.

Now, a salient feature of modern neoclassical economics is the idea of science advancing through the use of “successive approximations”. Is this really a feasible methodology? I think not. 

Most models in science are representations of something else. Models “stand for” or “depict” specific parts of a “target system” (usually the real world). All theories and models have to use sign vehicles to convey some kind of content that may be used for saying something of the target system. But purpose-built assump- tions made solely to secure a way of reaching deductively validated results in mathematical models – like “rational expectations” or “representative actors” – are of little value if they cannot be validated outside of the model.

All empirical sciences use simplifying or unrealistic assumptions in their modeling activities. That is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.

Theories are difficult to directly confront with reality. Economists therefore build models of their theories. Those models are representations that are directly examined and manipulated to indirectly say something about the target systems.

But models do not only face theory. They also have to look to the world. Being able to model a “credible world,” a world that somehow could be considered real or similar to the real world, is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified.

One could of course also ask for robustness, but the “credible world,” even after having tested it for robustness, can still be a far way from reality – and unfortunately often in ways we know are important. Robustness of claims in a model does not per se give a warrant for exporting the claims to real world target systems.

Anyway, robust theorems are exceedingly rare or non-existent in economics. Explanation, understanding and prediction of real world phenomena, relations and mechanisms therefore cannot be grounded (solely) on robustness analysis. Some of the standard assumptions made in neoclassical economic theory – on rationality, information handling and types of uncertainty – are not possible to make more realistic by “de-idealization” or “successive approximations” without altering the theory and its models fundamentally.

If we cannot show that the mechanisms or causes we isolate and handle in our models are stable, in the sense that what when we export them from are models to our target systems they do not change from one situation to another, then they only hold under ceteris paribus conditions and a fortiori are of limited value for our understanding, explanation and prediction of our real world target system.

The obvious ontological shortcoming of a basically epistemic – rather than ontological – approach such as “successive approximations” is that “similarity” or “resemblance” tout court do not guarantee that the correspondence between model and target is interesting, relevant, revealing or somehow adequate in terms of mechanisms, causal powers, capacities or tendencies. No matter how many convoluted refinements of concepts made in the model, if the “successive approximations” do not result in models similar to reality in the appropriate respects (such as structure, isomorphism etc), the surrogate system becomes a substitute system that does not bridge to the world but rather misses its target.

So, I have to conclude that constructing “minimal economic models” – or using microfounded macroeconomic models as “stylized facts” or “stylized pictures” somehow “successively approximating” macroeconomic reality – is a rather unimpressive attempt at legitimizing using fictitious idealizations for reasons more to do with model tractability than with a genuine interest of understanding and explaining features of real economies.

Many of the model assumptions standardly made by neoclassical economics are restrictive rather than harmless and could a fortiori anyway not in any sensible meaning be considered approximations at all. Or as May Brodbeck had it:

Model ships appear frequently in bottles; model boys in heaven only.

    October 7, 2012 at 12:32 pm

    Economic models are not only unreal and irrelevant, they are dangerous because of their conclusions. Theoretical economists construct model based on unreal assumptions and conclude something that policymakers think as true and relevant to reality. Then, they promote in reality, what economists concluded in their fantasies. Consequences for real people are tragic. The problem however that economists never take responsibility for what they ideologically (theoretically) created. The continue teach their models and getting money for it, but real people suffer, not economists.

  2. October 7, 2012 at 3:39 pm

    Policy makers (The oligarchy) cherry pick the fantasies of so called “economists” and choose those that reinforce their interests, presenting them as “scientific knowledge” to a gullible world, including students in universities.
    That’s why some “economists” become famous and wealthy, and why others languish in the bushes.

  3. October 7, 2012 at 5:46 pm

    Just to add to my previous comment: The bandwagon effect kicks in with most “economists” wanting to share in the spoils by promoting the prevailing theory of the day.
    So you alternative guys end up in the cold, complaining bitterly about the state of the world.
    That is not to say that your theories are superior to that of the drones, as Lars has pointed out. Reality tends to defy description and prediction.

  4. October 7, 2012 at 6:28 pm

    As Karl Menninger once put it: “The neurotic is one who builds castles in the sky, the psychotic is the one that moves in–and the psychiatrist collects the rent.” [but he did not say who really pays the “rent”]

    The problem is that neoclassical economics, and a lot of what is called–safely–“Heterodox Economics”, takes the tool for the reality and even pushes the tool (modeling) as a more accurate rendition of the “reality” than the reality itself–said to be “too messy” and “too realworldy” to grasp, model “holistically” or be able to use in policy and even analysis of phenomenon. And to top it off, the model freaks (it is so safe, use symbols and equations instead of words that may piss a lot of people off as they are “value-loaded”) is that most of them do not have any real grasp of isues of epistemology, formal logic never mind dialectical logic, aggregation and ceteris paribus fallacies and issues, etc. And you even find policies being recommended on the grounds not that they are supported by modeling and hard empirical data from it, but the reverse: that the policies will lead to conditions assumed by the models yet never in evidence in any capitalist economy anywhere at any time (all conditions for supposed “free markets, competitive capitalism, rationality, maximization, etc).

    Why does this stuff–poison–continue? Because a bunch of petit-bourgeois academics, and I am including some of the so-called “radicals” among them, who see themselves first and foremost in terms of careers and careerist job and academic titles, not in terms of mission on this earth and which side of eternal class warfare are they on, as actual neutrality is effectively impossible, who are basically meme merchants and wordsmiths, not, as evidenced from what they produce, any kind of real scientists doing real science, or knowing what real scientific method is all about, cranking out memes, themes and mantras as some of the commodities that make up some of the “goods and services” making up GDP.

    Desperate for tenure, a teaching gig, sabbaticals, promtions, paid travel to conferences at exotic locales, and the comforts of privileged academia, they crank out this sycophantic and toadying stuff called theory, in articles and journals no one will read except themselves and their toadies, creating new media when the mainstream will not publish them; stuff that cannot be used in any real world contexts, in any real struggles by any real people in need except the rich who always need more. See Dave Colander’s “The Spread of Economic Ideas” and “Why aren’t Economist as Important as Garbagemen?” among others.

    The compound question–or set of related questions–for any real “progressives” and purported real world political economy (real world economics is a contradiction in terms and as oxymoronic as military intelligence as economics was and is always anti-real-world hypothetico deductivism and pure metaphysics) is how does my work really matter to anyone but me and if it does, to whom does it matter, how, in what real world ways, in what real world contexts, by whom will it be used and in what real world struggles to serve what real world interests?

  5. October 7, 2012 at 7:04 pm

    It’s fashionable to talk about ‘collecting the rent’ and rent-seeking nowadays, but economists continue to ignore RENT – the return to land – conflating land and capital.

  6. October 7, 2012 at 9:17 pm

    Do not blame the messanger for the message.

    It is not theory per se or models per se that are to blame! It is neoclassical (or what I call mainstream theory which includes Samuelson’s version of Keynes, and the New Keynesians such as Stiglitz or Mankiw) theory or models that are to blame because they carry the wrong message developed on the basis of false axioms..

    Keynes’s general theory provided a model in which decision makers knew that they did not know the future and so behaved in ways which depended on whether they had animal spirits out the future [animals do not know the future] or they feared the future and so rushed to liquidity.

    Keynes rejected three basic axioms ( as I point out in my book THE KEYNES SOLUTION and in my POST KEYNESIAN MACROECONOMIC THEORY textbook) that makes his theory a good reflection of the world of experience. These three axioms that he threw over are (1) the ergodic axiom, (2) the neutral money axiom, and (3) the ubiquitous application of the gross substituon axiom — especially as applicable to liquid financials assets vis-a-vis real [nonliquid] assets.

    Keynes’s theoretical model is a useful approach to understanding reality.

    Paul Davidson

    • October 8, 2012 at 2:51 pm

      The “message” (bankrupt theory that is pure metaphysics and the ideology of “universal harmonies, partial equilibria and “tautological deductivism”) persist because of the “messengers” who put careerism in academia and meaningless notches on their CVs above sound theory that actually matters in the real world as well as better explaining aspects of that real world. Who else to blame for persistent messages designed to obscure rather than illuminate and change reality than the messengers. Why not the cliche about the baby and the bath water too?

  7. BC
    October 7, 2012 at 11:16 pm

    If implicit in so-called “economic” theories is the premise that the planet’s ecosystem is a sub-set of “the economy”, rather than the precise converse being the reality, then the theories have no basis in biophysical or thermodynamic reality, and are thus flawed from the start.

    Just as war is politics by other means, economics is politics, i.e., intellectuals creating theoretical rationalizations for the social, economic, and political power relations associated with Anglo-American empire and war to defend and sustain empire; therefore, economics is politics is war by other means.

    Economists are the imperial ministerial priests for the false religion of neo-classical and neo-Keynesian economics, the principle belief of which is perpetual growth of population and resource consumption on a finite planet.

  8. Steve
    October 8, 2012 at 12:00 am

    Indeed, theory and models tend to be inaccurate because they do not study the data on the actual commercial level. Immersing oneself in the daily activities and realities of businesses reveals that cost accounting SYSTEMICALLY ENFORCES individual monetary scarcity in comparison to prices on every dollar that enters or re-enters the ACTUAL economy. In other words price inflation is a part of the normal operation of the economy. That means that the only way to overcome price inflation is to GIVE PEOPLE SUPLEMENTAL MONEY, NOT LOAN IT TO THEM, and then to control any inflation that might occur with a general discount in prices to the consumer. Reality will always trump theory which is at least once removed from reality, and often lacking in key factors that reality reveals. C. H. Douglas did the proper empirical study of commercial REALITIES over 90 years ago, and the world has stumbled around in the dark ever since because it chose theory over reality. Studying realities is wisdom. Believing Intricate theories as we have recently come to see…is a very dicey proposition.

  9. October 8, 2012 at 2:13 am

    I think “Economics” is where “Science” used to be in the middle ages, before anyone got their hands dirty: You start with an idea and make sure that the “facts” fit the theory and develop a cheer squad in the process.
    Then you can drown out anyone with contrary ideas.

  10. DRONGO
    October 8, 2012 at 7:46 am

    Logic and reasoning in neoclassical models – Trees make the wind blow.
    Neoclassical models include only what you can observe and for what there is a data.

  11. October 8, 2012 at 5:11 pm

    I’ve often wondered just why, exactly, neoclassical economics seemed to excuse itself from the need for empirical data. My only conclusion (as has already been mentioned): mathematical modeling can be made to justify the status quo.

    • Steve
      October 8, 2012 at 7:07 pm

      You have to honor both data and wisdom. However, you must understand that there is a hierarchy to thinking and that wisdom is at its pinnacle. If this hierarchy is not acknowledged folly quickly ensues.

      • October 8, 2012 at 7:21 pm

        “Wisdom is at its pinnacle.” Really. So humanity must’ve reached perfection last night and someone forgot to tell me.

  12. October 14, 2012 at 1:51 pm

    There is a big difference between science, by which we can best be guided to knowledge of ourselves and the world we inhabit, and the ideology that underpins the preternatural disciplines of politics, economics and demography.

    Ideologies need to be named and debunked. As things stand now, there is much confusion about what is and what is not science. Ideologues in politics, economics and demography are consciously and deliberately misrepresenting themselves as scientists. If demography is not a science; if Demographic Transition Theory is not scientfic, how can demographers gather themselves in an International Union of the Scientific Study of Population (IUSSP). If economics is not a science; if neoclassical economic theory is not scientific, how can the Nobel Prize (presumably an award for outstanding achievement in science) be given annually in Economics. At least the Nobel Peace Prize, often awarded to politicians for exceptional achievements, is not confused with the awards to scientists. Such willful misrepresentations of science need to be exposed for the ideologies they are.

    Are economists and demographers political hacks? They are not scientists. While many too many deniers of what is real shout out attractive falsehoods and are heard, those who tell the truth about the human population are ridiculed and marginalized. In large part the colossal global predicament facing the human community in our time is a result of widely shared preternatural demographic theories and consensually validated specious economic theories. Unscientific models have been dishonestly and deceitfully presented and defended as science on our watch. Demographic and economic theorists consciously and deliberately failed to acknowledge and incorporate into their theories well-established scientific knowledge regarding biological evolution, human population dynamics and well known physical ‘rules of the house’ of the planetary home we inhabit. They uniformly fail to recognize a difference between the way the natural world works and the way they think. For example, economists assume the resources of a finite and frangible Earth can supply infinite products. At the behest of corporate benefactors and political powerbrokers, demographers and economists bear primary responsibility for directing the human community down a ‘primrose path’ that is marked by skyrocketing overpopulation, rampant overproduction, outrageous overconsumption, unconscionable hoarding as well as extraordinary resource depletion and widespread environmental degradation. Most experts of demography and economics self-righteously hold onto outdated theories that serve to confuse the public and deny what could be real. A paradigm shift and drastic action to redo demographic and economic thought will be required so that experts in these fields of research embrace relevant science rather than conveniently overlook it.

  13. sergio
    February 6, 2013 at 4:35 am

    May be this model is real and relevant?

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