Home > Uncategorized > How economic models became substitutes for reality

How economic models became substitutes for reality

from Asad Zaman

The problem at the heart of modern economics is buried in its logical positivist foundations created in the early twentieth century by Lionel Robbins. Substantive debates and critiques of the content actually strengthen the illusion of validity of these methods, and hence are counterproductive. As Solow said about Sargent and Lucas, you do not debate cavalry tactics at Austerlitz with a madman who thinks he is Napoleon Bonaparte, feeding his lunacy.  Modern macroeconomic models are based assumptions representing flights of fancy so far beyond the pale of reason that Romer calls them “post-real”.   But the problem does not lie in the assumptions – it lies deeper, in the methodology that allows us to nonchalantly make and discuss crazy assumptions. The license for this folly was given by Friedman (1953, reproduced in Maki 2009A): “Truly important and significant hypotheses will be found to have ‘assumptions’ that are wildly inaccurate descriptive representations of reality”. In this article, I sketch an explanation of how economic methodology went astray in the 20th Century, abandoning empirical evidence in favor of mathematical elegance and ideological purity. Many authors have noted this problem – for instance, Krugman writes that the profession (of economists) as a whole went astray because they mistook the beauty of mathematics for truth.

To begin with, it is important to understand that modern economics is entirely based on models. read more

  1. May 22, 2020 at 2:22 am

    Recently a series of posts focus on the gap between theoretical models and realities (or empiricism). This is very interesting. I’d like to simplify the discussions with a single point that models themselves don’t really matter, but the pivot is what model. A clean, pure, accurate and hence mathematical model, as restricted to big data and theorists’ limited calculative power, have to be simple and far from realities — because theorists must end up their papers somewhere. However, a model justifying complexities, subjectivities, pluralities, conflicts, innovations and developments tend to tell readers that: “I am not so capable, I have to stop here, now please go to realities to study the details. This handover also has been justified by me.” That is, a good and correct theory will volitionally and automatically bridge itself with empirical methods. This is a continuation of my last comment ( https://rwer.wordpress.com/2020/05/16/the-representative-agent-a-theoretical-cul-de-sac/ ), please visit my site for further readings. Thanks!

  2. Frank Salter
    May 23, 2020 at 9:54 am

    Whenever I read articles like this and most economics papers, I realise that the world I experience must be quite different than that understood by the authors of the articles and papers. This is especially true here. My training in engineering included modelling. It is well understood. Physical models are subject to being interpreted by applying dimensional analysis to the results. Dimensional analysis is almost never applied by economists. So all the errors which dimensional analysis would have prevented remain extant.

    However, the models being discussed here are essentially mathematical. Again I find the nature of the discussion bewildering. Models are arguments by analogy. A well understood logical system. However economists general fail to understand it. For a valid argument to be recognised, the analogy has to be proven first and then the model is a useful tool. Without such proof the so called model is NOT a model at all, merely irrelevant scribblings.

  3. Craig
    May 24, 2020 at 12:48 am

    Your observations are correct Asad.

    Unfortunately mathematics and science have become 95% memorization and then addiction to that memorization. Wisdom however, is being in the present moment and integrating the truths in apparent opposites so that one can actually see and control their own abstractions moment to moment instead of, like Marley’s ghost, them blinding, distracting and/or weighing down one’s conclusions.

    The ancients utilized debt jubilee’s to resolve its build up, but the debt always grew back to de-stabilizing levels. That is a clear sign that an old/present paradigm has gone on too long. When paradigm/pattern concept change occurs “emergent qualities” generally drop out and a new level of simple truth, workability and applicability comes to the body of knowledge/area of human endeavor that the paradigm applies to. Let us be smarter than the ancients.

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