Home > Uncategorized > Economic models and reality

Economic models and reality

from Lars Syll

assumptionsThe abandonment of efforts to match real structures has led to disaster, as models of economic theory have grown progressively distant from reality. Attempts to fix the problem have failed to address the cause. Economists look at bad models, and say we should replace these by better models. But the process by which models are evaluated, the underlying methodology, is not examined. The real problem lies much deeper than bad models and ludicrous assumptions. Bad assumptions would quickly be replaced by better ones if the methodology insisted on correction of models to match reality. The real problem is the lack of a progressive methodology. When our mental models are attempts to approximate reality, then, when they fail, we try to improve the match to reality. Our models become better as approximations to the hidden structures of reality. However, when we abandon efforts to match reality, our mental models can become progressively worse as approximations to reality while becoming better at providing a match to observations …

The problem can be fixed only if we adopt a realist philosophy of science. Critical realism offers an extremely useful alternative to current economic and econometric methodology. A realist philosophy has the possibility of learning from experience. Even if we start with ridiculous assumptions, we will modify them in face of empirical evidence to the contrary. In complete contrast, economists stubbornly stick to assumptions known to be false because the standard methodology says that false assumptions are not a problem for models. There is no hope for progress in economics until we abandon Friedman’s methodological prescriptions according to which the more ludicrous our assumptions, the better our model.

Asad Zaman

Yes indeed, critical realism offers a useful alternative to current economic methodology. In a time when scientific relativism is still on the march, it is important to keep up the critical realist claim for not reducing science to a pure discursive level.

Science is made possible by the fact that there exists a reality beyond our theories and concepts of it. It is this reality that our theories in some way deal with. Contrary to positivism, yours truly cannot see that the main task of science is to detect event-regularities between observed facts. Rather, the task must be conceived as identifying the underlying structure and forces that produce the observed events.

The problem with positivist social science is not that it gives the wrong answers, but rather that in a strict sense it does not give answers at all. Its explanatory models presuppose that the social reality is ‘closed,’ and since social reality is fundamentally ‘open,’ models of that kind cannot explain anything about​ what happens in such a universe. Positivist social science has to postulate closed conditions to make its models operational and then – totally unrealistically – impute these closed conditions to society’s real structure.

What makes knowledge in social sciences possible is the fact that society consists of social structures and positions that influence the individuals of society, partly through their being the necessary prerequisite for the actions of individuals but also because they dispose individuals to act (within a given structure) in a certain way. These structures constitute the ‘deep structure’ of society.

Our observations and theories are concept-dependent without therefore necessarily being concept-determined. There is a reality existing independently of our knowledge and theories of it. Although we cannot apprehend it without using our concepts and theories, these are not the same as reality itself. Reality and our concepts of it are not identical. Social science is made possible by existing structures and relations in society that are continually reproduced and transformed by different actors.

Explanations and predictions of social phenomena require theory constructions. Just looking for correlations between events is not enough. One has to get under the surface and see the deeper underlying structures and mechanisms that essentially constitute the social system.

The basic question one has to pose when studying social relations and events are​ what are the fundamental relations without which they would cease to exist. The answer will point to causal mechanisms and tendencies that act in the concrete contexts we study. Whether these mechanisms are activated and what effects they will have in that case it is not possible to predict, since these depend on accidental and variable relations. Every social phenomenon is determined by a host of both necessary and contingent relations, and it is impossible in practice to have complete knowledge of these constantly changing relations. That is also why we can never confidently predict them. What we can do, through learning about the mechanisms of the structures of society, is to identify the driving forces behind them, thereby making it possible to indicate the direction in which things tend to develop.

The world itself should never be conflated with the knowledge we have of it. Science can only produce meaningful, relevant and realist knowledge if it acknowledges its dependence of the​ world out there. Ultimately that also means that the critique Asad Zaman and yours truly wage against mainstream economics is that it doesn’t take that ontological requirement seriously.

  1. Edward Opton
    May 25, 2020 at 10:51 pm

    The analysis makes sense, so far as it goes, but it doesn’t go far enough. The complete picture must include at least two additional features.

    1. The main consumers–and funders!–of the economics profession and its publications are the rich. They are the beneficiaries of our socio-economic-political system as it exists. They are powerfully motivated to protect and to perpetuate their privileged positions. Virtually everyone wants to protect what they have. A sinecure of $20 million per year is a powerful motivation not to rock the boat. Maintaining the status quo includes endowing tenured professorships for academics who toe the party line. That line is: extreme inequality is an immutable law of nature, so attempts to reduce inequality would be, by definition, doomed to failure and, even worse, in the words of Hayek, would condemn us to tread the road to serfdom.

    Those who disagree are not in a position to endow professorships, fund foundations, or create competitors to Fox “News.”

    2. Understanding the psychological and sociological forces that underlie the politics of economic life is as important as understanding the rational calculus of supply and demand, double entry bookkeeping, and the advanced algebra of tradeoffs between risk and reward. Few Establishment economists are equipped to risk deviating from the narrow–and profitable–path of the official mainstream.

  2. John deChadenedes
    May 25, 2020 at 10:55 pm

    I see the model-building activity of economists as capricious, career-serving, and largely non-useful. If an engineer built an exquisitely detailed model of a highway bridge but ignored the fact that a bridge has to be connected to the earth at both ends, he would not be considered a good engineer.. I think economists similarly ignore two fundamental reality-based aspects of the economy: What is the economy? and What is the purpose of the economy? I say the economy is a complex set of knowledge, tools, practices, traditions, and relationships. Its purpose is to provide everything people need for secure, healthy, and productive lives. A model that is not grounded in these two fundamentals might as well be a bridge that looks elegant as it plummets into the gorge, not having been firmly connected to the earth at either end.

  3. Frank Salter
    May 26, 2020 at 11:20 am

    This is repeating and adding to my comments to “How economic models became substitutes for reality”, 21 May.

    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 generallyl 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.

    An example of real scientific modelling is an example of the orbits of two blackholes at https://phys.org/news/2020-04-spitzer-telescope-reveals-precise-black.html which describes what was done and at https://www.youtube.com/watch?v=El4StwNM8E0 there is a simulation of these supermassive black holes orbiting each other. These demonstrate how precise a model can be in matching reality.

  4. May 26, 2020 at 8:57 pm

    Vancouver B.C. with 26 community centers and computer-operated light-rail connecting the whole city could be our teacher in social welfare, health care, community centers and transportation. Imagine a country without Wall Street and the Pentagon! Community centers have cushioning and multiplying effects as surrogate classrooms and counseling centers. Working and non-working persons can feel part of the modern project. $4 casserole dinners, community laundry services and three hours of free computers are examples of social caring. Life begins again when we abandon the myths and fairy-tales that have been our false teachers! No, the market is not self-healing! No, financial markets do not return to equilibrium! No, CEOs are not job creators and workers are not only burdensome cost factors! No, tax avoidance and speculation are not productive investments! No, the state is not a bottomless treasure chest for special interests and private interests but “nature’s trust” (cf. Mary Woods), the real risk-taker and the guardian of the public interest! No, competition and cooperation are not choices but are interdependent! No, caring, sharing and the social state are not weaknesses but forms of social justice brighter than the morning and evening stars! (cf. Aristotle)

  5. Ken Zimmerman
    June 18, 2020 at 3:23 pm

    I won’t repeat my earlier comments. Check my comments in “How the model became the message in economics” and “Pandemic Aware Economics, Public Health Business Models and (Im)possible Futures.”

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