DeLong, Summers & Krugman on models

from Lars Syll

Larry Summers, Brad DeLong, and Paul Kugman are having an extended discussion on the role of models in economics on their blogs this week.

That’s good. Since the model is the message in economics today, that is actually the most important discussion possible to have in economics.

Krugman is arguing that models are not ‘always the right guide for policy, but still necessary for disciplining our policy preferences.’ According to Krugman, ‘the discipline of thinking things through in terms of models is really important.’

This emphasis on the value of modeling should come as no surprise. Paul Krugman has always — although sometimes admitting that economists have a tendency to use  ‘excessive math’ and ‘equate hard math with quality’ — vehemently defended  the formalization and mathematization that comes with the insistence of using a model building strategy in economics.

But if these math-is-the-message-modelers aren’t able to show that the mechanisms or causes that they isolate and handle in their mathematically formalized macromodels are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ these mathematical models do only hold under ceteris paribus conditions and are consequently of limited value to our understandings, explanations or predictions of real economic systems. Building models only to show Krugmanian  ‘self-dicipline’ is setting the aspiration level too low.

According to Keynes, science should help us penetrate to ‘the true process of causation lying behind current events’ and disclose ‘the causal forces behind the apparent facts.’  We should look out for causal relations. But models — mathematical, econometric, or what have you — can never be more than a starting point in that endeavour. There is always the possibility that there are other (non-quantifiable) variables – of vital importance and although perhaps unobservable and non-additive not necessarily epistemologically inaccessible – that were not considered for the formalized mathematical model.

The kinds of laws and relations that ‘modern’ economics has established, are laws and relations about mathematically formalized entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made mathematical-statistical ‘nomological machines’ they are rare, or even non-existant. Unfortunately that also makes most of contemporary mainstream endeavours of mathematical economic modeling rather useless. And that also goes for Krugman and the rest of the ‘New Keynesian’ family.

The DeLong-Summers-Krugman discussion is certainly a question of methodology. And it shows the danger of neglecting methodological issues — issues mainstream economists regularly have almost put an honour in neglecting.

Being able to model a ‘disciplined’ 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 (in terms of resemblance, relevance, etc.). At the very least, the minimalist demand on models in terms of credibility has to give away to a stronger epistemic demand of appropriate similarity and plausibility. One could of course also ask for a sensitivity or robustness analysis, but the credible world, even after having tested it for sensitivity and 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.

In his plaidoyer for disciplining thought by the ‘reasoning tools’ that we call models, Krugman puts too much emphasis on modelling as an epistemic genre. Even if epistemology is important and interesting in itself, it ought never to be anything but secondary in science. The primary questions asked have to be ontological. First after having asked questions about ontology can we start thinking about what and how we can know anything about the world. If we do that, I think it is more or less necessary also to be more critical of the reasoning by modelling that has come to be considered the only and right way to reason in mainstream economics for more than sixty years now.

On the all-important question of ‘external validity’ of economic models, Krugman obviously halts at stressing the heuristic epistemological value of disciplining thought by modeling it:

What, after all, are economic models for? They are definitely not Truth. They are, however, a way to make sure that the stories you tell hang together, that they involve some plausible combination of individual behavior and interaction of those plausibly behaving individuals.

Read literally this is, of course, an absolutely absurd standpoint. If we can’t warrant that the premises (assumptions) on which our model conclusions build are true, then what’s the value of the logically correct deductions we are supposed make with our models? From false assumptions anything logically follows!

Krugman, as most other mainstream economists, subscribes (although not very consciously or explicitly) to a deductive-nomological view on scientific explanation and prediction (an explanation of an event being nothing but a prediction of  its occurrence), in which prediction and explanation  are things to deduce from law-like hypotheses and a set of antecedent/initial conditions.  But — and on this both Hempel and Popper were very explicit — to count as adequate/sound, the explanans must be true. Explanation and prediction in the models we construct and use is not only a question of logical form.  Models that intend to say something about the real world — and the policy models that DeLong, Summers and Krugman discuss certainly do — can’t escape dealing with ‘Truth’!

Model reasoning as an ‘object to enquire’ into activities, is anyway not, from a scientific point of view, on a par with the much more important question if these models really have export-certificates to the real world or not.

Questions of external validity are important more specifically also when it comes to microfounded policy models. It can never be enough that these models somehow are regarded as internally consistent. One always also has to pose questions of consistency with the data. Internal consistency without external validity is worth nothing.

Yours truly has for many years been urging economists to pay attention to the ontological foundations of their assumptions and models. Sad to say, economists have not paid much attention — and so modern economics has become increasingly irrelevant to the understanding of the real world.

I have spent a considerable part of my life building economic models, and examining the models that other economists have built. I believe that I am making reasonably good use of my talents in an attempt to understand the social world.

I have no fellow-feeling with those economic theorists who, off the record at seminars and conferences, admit that they are only playing a game with other theorists. If their models are not intended seriously, I want to say (and do say when I feel sufficiently combative), why do they expect me to spend my time listening to their expositions? Count me out of the game.

Robert Sugden