Home > Uncategorized > The failure to start from real, concrete questions and issues in the real world

The failure to start from real, concrete questions and issues in the real world

from Gerald Holtham  (originally a comment)

The biggest problem, it seems to me, is not the tools that economists use but the failure to start from real, concrete questions and issues in the real world. Someone builds a model of a real situation. It may be useful or not but if it is ingenious it gets published. People then play tunes on the model; they seek to “generalise” it in various ways. We embark on a process of theoretical development for its own sake, increasingly divorced from the original problem and all too often from any real application at all. The usual destination is then sterility.
I have seen mathematical queuing theory fruitfully applied in the study of development aid and mathematical game theory successfully applied in auction design. The secret of success was that the axioms of the model were ad hoc – designed for a real, specific situation that was successfully analysed.

An example of the opposite process is Dornbusch’s application of rational expectations theory to exchange rates. It was a neat, ingenious model and helped to create a fashion that made it obligatory to specify rational . i.e. model-consistent, expectations in every application. Few seemed to notice that the Dornbusch model implied exchange rates would move in a saw-tooth pattern of sudden abrupt moves and gradual reversions while in fact exchange rates tend to follow a more symmetrical cyclical pattern of ups and downs. The reason is Dornbusch assumed similar agents with similar information sets. In practice we have diverse agents with diverse information sets generating endogenous as well as exogenous uncertainty. By ignoring reality and concentrating on development of “the theory” macroeconomcs went mad and led to the sterility that pfeffertag notes.

Deductive logic is a necessary part of the tool kit and so is mathematical modelling but you have to tailor your starting assumptions to a specific situation and keep your eye on the real world. You also have to accept empirical refutation when it smacks you in the face.

  1. July 15, 2021 at 12:40 am

    Yes. Long ago, during the Vietnam war era, I left graduate school in Santa Barbara knowing what an economic model was by osmosis, I had previously studied some math and sciences and skipped ahead to corporate San Fransisco. This story will be short.

    There was no place for me to build a theoretical economic model of corporation hemorrhaging millions and millions of dollars. What did I do? I commissioned the building of an interactive version of the accounting system. My model didn’t invent anything. Using it required an interesting form of democracy. The company made millions and I went back to farming.

  2. Edward Ross
    July 15, 2021 at 1:35 am

    In reply to Gerald Holthan and Garrett Connelly, From my background in farming and rural industries i agree with both of you ,Because from my experience if something broke , you had to found out why it broke , before you could fix it. Furthermore hypothesizing on how to fix it by trying to use unsubstantiated theories did nothing to solve the problem. My point here is that for economics to be relevant it has to start from observing what is happening in the real world before constructing irrelevant economic theories. Ted

  3. July 15, 2021 at 1:49 am

    Yes. A few months ago I had this piece in RWEReview:
    A modest proposal for generating useful analyses of economies: a brief note

    Click to access Davies95.pdf

  4. Meta Capitalism
    July 15, 2021 at 2:34 am
  5. Ken Zimmerman
    July 15, 2021 at 7:07 am

    Gerald writes, “The biggest problem, it seems to me, is not the tools that economists use but the failure to start from real, concrete questions and issues in the real world.”

    This is a start but far from complete. Humans create their ways of life through interactions with agents, both human and nonhuman. Human cultures have no other origin. This is the origin of any and all “real concrete questions and issues in the real world.” We know this ‘real world’ since it’s our everyday world. The concern that we face as scientists, as economists, or just as ordinary people is how do new worlds emerge? The answer is in same way the existing world was created—via interactions. This is sometimes depicted as a dialog in which we set up some process to question events and people in the  world around us. And then, removing our own expectations we wait for those people and events to answer. Gradually, after many iterations new answers emerge and eventually a new world, perhaps.  Can economists do this work? Yes. Have they shown any desire to do this work? No. Till this changes economists will continue to create fixed economies that cannot change.

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