Why economic models do not explain

from Lars Syll

In physics, we have theories and centuries of experience and experiments that show how gravity makes bodies move. In economics, we know there is nothing equivalent. Mainstream economists necessarily have to load their theories and models with sets of auxiliary structural assumptions to get any results at all in their models.

So why then do mainstream economists keep on pursuing this modelling project?

Mainstream ‘as if’ models are based on the logic of idealization and a set of tight axiomatic and ‘structural’ assumptions from which consistent and precise inferences are made. The beauty of this procedure is, of course, that if the assumptions are true, the conclusions necessarily follow. But it is a poor guide for real-world systems. As Hans Albert has it on this ‘style of thought’:

A theory is scientifically relevant first of all because of its possible explanatory power, its performance, which is coupled with its informational content … Clearly, it is possible to interpret the ‘presuppositions’ of a theoretical system … not as hypotheses, but simply as limitations to the area of application of the system in question. Since a relationship to reality is usually ensured by the language used in economic statements, in this case the impression is generated that a content-laden statement about reality is being made, although the system is fully immunized and thus without content. In my view that is often a source of self-deception in pure economic thought …

The way axioms and theorems are formulated in mainstream economics often leaves their specification without almost any restrictions whatsoever, safely making every imaginable evidence compatible with the all-embracing ‘theory’ — and theory without informational content never risks being empirically tested and found falsified. Used in mainstream ‘thought experimental’ activities, it may, of course, ​be very ‘handy’, but totally void of any empirical value.

Some economic methodologists have lately been arguing that economic models may well be considered ‘minimal models’ that portray ‘credible worlds’ without having to care about things like similarity, isomorphism, simplified ‘representationality’ or resemblance to the real world. These models are said to resemble ‘realistic novels’ that portray ‘possible worlds’. And sure: economists constructing and working with that kind of models learn things about what might happen in those ‘possible worlds’. But is that really the stuff real science is made of? I think not. As long as one doesn’t come up with credible export warrants to real-world target systems and show how those models — often building on idealizations with known to be false assumptions — enhance our understanding or explanations about the real world, well, then they are just nothing more than just novels.  Showing that something is possible in a ‘possible world’ doesn’t give us a justified license to infer that it therefore also is possible in the real world. ‘The Great Gatsby’ is a wonderful novel, but if you truly want to learn about what is going on in the world of finance, I would recommend rather reading Minsky or Keynes and directly confront real-world finance.

Different models have different cognitive goals. Constructing models that aim for explanatory insights may not optimize the models for making (quantitative) predictions or deliver some kind of ‘understanding’ of what’s going on in the intended target system. All modelling in science have tradeoffs. There simply is no ‘best’ model. For one purpose in one context model A is ‘best’, for other purposes and contexts model B may be deemed ‘best’. Depending on the level of generality, abstraction, and depth, we come up with different models. But even so, I would argue that if we are looking for what yours truly has called ‘adequate explanations’ (Ekonomisk teori och metod, Studentlitteratur, 2005) it is not enough to just come up with ‘minimal’ or ‘credible world’ models.

The assumptions and descriptions we use in our modelling have to be true — or at least ‘harmlessly’ false — and give a sufficiently detailed characterization of the mechanisms and forces at work. Models in mainstream economics do nothing of the kind.

Coming up with models that show how things may possibly be explained is not what we are looking for. It is not enough. We want to have models that build on assumptions that are not in conflict with known facts and that show how things actually are to be explained. Our aspirations have to be more far-reaching than just constructing coherent and ‘credible’ models about ‘possible worlds’. We want to understand and explain ‘difference-making’ in the real world and not just in some made-up fantasy world. No matter how many mechanisms or coherent relations you represent in your model, you still have to show that these mechanisms and relations are at work and exist in society if we are to do real science. Science has to be something more than just more or less realistic ‘story-telling’ or ‘explanatory fictionalism’. You have to provide decisive empirical evidence that what you can infer in your model also helps us to uncover what actually goes on in the real world. It is not enough to present your students with epistemically informative insights about logically possible but non-existent general equilibrium models. You also, and more importantly, have to have a world-linking argumentation and show how those models explain or teach us something about real-world economies. If you fail to support your models in that way, why should we care about them? And if you do not inform us about what are the real-world intended target systems of your modelling, how are we going to be able to value or test them? Without giving that kind of information it is impossible for us to check if the ‘possible world’ models you come up with actually hold also for the one world in which we live — the real world.