Are economic models ‘true enough’?
from Lars Syll
Stylized facts are close kin of ceteris paribus laws. They are ‘broad generalizations true in essence, though perhaps not in detail’. They play a major role in economics, constituting explananda that economic models are required to explain. Models of economic growth, for example, are supposed to explain the (stylized) fact that the profit rate is constant. The unvarnished fact of course is that profit rates are not constant. All sorts of non-economic factors — e.g., war, pestilence, drought, political chicanery — interfere. Manifestly, stylized facts are not (what philosophers would call) facts, for the simple reason that they do not actually obtain. It might seem then that economics takes itself to be required to explain why known falsehoods are true. (Voodoo economics, indeed!) This can’t be correct. Rather, economics is committed to the view that the claims it recognizes as stylized facts are in the right neighborhood, and that their being in the right neighborhood is something economic models should account for. The models may show them to be good approximations in all cases, or where deviations from the economically ideal are small, or where economic factors dominate non-economic ones. Or they might afford some other account of their often being nearly right. The models may diverge as to what is actually true, or as to where, to what degree, and why the stylized facts are as good as they are. But to fail to acknowledge the stylized facts would be to lose valuable economic information (for example, the fact that if we control for the effects of such non-economic interference as war, disease, and the president for life absconding with the national treasury, the profit rate is constant.) Stylized facts figure in other social sciences as well. I suspect that under a less alarming description, they occur in the natural sciences too. The standard characterization of the pendulum, for example, strikes me as a stylized fact of physics. The motion of the pendulum which physics is supposed to explain is a motion that no actual pendulum exhibits. What such cases point to is this: The fact that a strictly false description is in the right neighborhood sometimes advances understanding of a domain.
Catherine Elgin thinks we should accept model claims when we consider them to be ‘true enough,’ and Uskali Mäki has argued in a similar vain, maintaining that it could be warranted — based on diverse pragmatic considerations — to accept model claims that are negligibly false.
When criticizing the basic (DSGE) workhorse model for its inability to explain involuntary unemployment, its defenders maintain that later elaborations — especially newer search models — manage to do just that. However, one of the more conspicuous problems with those “solutions,” is that they — as e.g. Pissarides’ ”Loss of Skill during Unemployment and the Persistence of Unemployment Shocks” QJE (1992) — are as a rule constructed without seriously trying to warrant that the model immanent assumptions and results are applicable in the real world. External validity is more or less a non-existent problematique sacrificed on the altar of model derivations. This is not by chance. For how could one even imagine to empirically test assumptions such as Pissarides’ ”model 1″ assumptions of reality being adequately represented by ”two overlapping generations of fixed size”, ”wages determined by Nash bargaining”, ”actors maximizing expected utility”,”endogenous job openings”, ”jobmatching describable by a probability distribution,” without coming to the conclusion that this is — in terms of realism and relevance — far from ‘negligibly false’ or ‘true enough’?
Suck on that — and tell me if those typical mainstream — neoclassical — modeling assumptions in any possibly relevant way — with or without due pragmatic considerations — can be considered anything else but imagined model worlds assumptions that has nothing at all to do with the real world we happen to live in!