Home > Uncategorized > The WHY of crazy models

The WHY of crazy models

from Asad Zaman

I was professionally trained as an economist, and learned how to build models with the best. As described in detail in a previous post on “The Education of An Economist“, it was only by accident that, a long time after graduate school, I learned of glaring conflicts between the theory I had been taught, and the historical evidence about effects of free trade and trade barriers. Further exploration along this direction dramatically widened the chasm between the economic theories I had learnt, and the historical and empirical evidence all around me. This led me to a set of puzzles which I have been struggling with for the past two decades. [1] Why is that economists are not aware of the conflict between economic theories and empirical evidence? [2] Why is it that economists do not care, when such conflicts are pointed out to them? In “Trouble With Macro“, Romer expresses these same two points as follows:  “The trouble is not so much that macroeconomists say things that are inconsistent with the facts. The real trouble is that other economists do not care that the macroeconomists do not care about the facts. An indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error.

Once we move from the easy-to-establish fact that economists use crazy models, to the much more difficult meta-question of WHY economists use crazy models, one apparently obvious answer suggests itself: read more

  1. Econoclast
    January 21, 2020 at 6:05 pm

    Thanks for this terrific essay, Asad.

    In my own education I recall one class devoted to “normative versus positive economics”, then years of sort of unconscious, or at least not explicit, indoctrination in positivism. Then the subsequent decades of my life dealing with intelligent people in diverse professions who are imprisoned in the delusion of objectivity. All this in spite of many who have read Kuhn’s classic. Western “knowledge” is Western hubris, it seems to me.

  2. ghholtham
    January 22, 2020 at 4:40 pm

    I have puzzled over the same question. Because there is usually in the economic literature an article that utterly demolishes the crazy model and another article that points in a different direction. I’ll give an example: the efficient market hypothesis in finance theory was exploded theoretically by an article in 1980 by Grossman and Stiglitz that showed an informationally efficient financial market was actually impossible – no evidence needed; it was an incoherent notion. In the presence of uncertainty, diverse players in the market and some cost of getting and assimilating information, market prices could not reflect all available information. The profession took no notice and ignored evident empirical violations of the efficient market hypothesis – excess volatility etc. Then 20 years later when Kahneman and others began to publish material on cognitive biases some economists woke up and started producing models with cognitive biases that explained departures from market efficiency. No doubt, cognitive biases exist but the joke is you don’t need them to explain “irrational” markets. Uncertainty about what other people know will produce markets like that even if everyone is procedurally rational.

    How to explain this behaviour by economists? I think it is driven by the sociology of the profession. You need to publish. The most prestigious publications come from generating “results” i.e. theorems derived by analytically solving simple models. If an approach does not lend itself to that sort of solution but requires computer simulation or other “messy” methods it gets ignored. Then other economists teach what’s in the journals. The optimal career move for an academic economist is to plough on down the furrow, not take a huge risk that you can start a new furrow of your own.

    There has also been an ideological element. Models that depict a self-stabilising system that cannot be improved by collective action, not only have a certain neat aesthetic charm to some, they also provide an illustration of why government action is unnecessary or self-defeating. This appeals to political conservatives. Call me naïve but I think this ideological explanation, while present, is less powerful than the sociological one.

    • Meta Capitalism
      January 23, 2020 at 12:46 am

      No doubt, cognitive biases exist but the joke is you don’t need them to explain “irrational” markets. ~ Gerald Holtham

      Just noting how much I love reading your comments Gerald. I think you have hit the nail on the head by directing it toward the “sociology of the profession.” Ken might call it the “culture” of a given field. Everybody has an ideology so-to-speak, but that doesn’t mean everyone acts solely in terms of ideology alone. Some people, despite biases, try to hold two contradictory thoughts in their head at the same time in a desire to learn something new. The publish or perish dilemma holds across academic disciplines to one degree or another. Payson (2017) discusses these issues at length. He even proposes an code of ethics for economic professors.

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