Home > Uncategorized > Economic modeling — a constructive critique

Economic modeling — a constructive critique

from Lars Syll

Behind the Model: A Constructive Critique of Economic Modeling (Strategies  for Social Inquiry): Amazon.co.uk: Spiegler, Peter: 9781107069664: BooksIf we have independent reasons to believe that the phenomena under investigation are mechanical in Mill’s sense, well and good: mathematical modeling will prove an apt mode of representation … But if we have independent reasons to believe that there is more going on in the phenomena under investigation than a mathematical model can suggest – that is, that the phenomena in question are not in fact mechanical in the required sense – then mathematical modeling will prove misleading … Moreover, as will be discussed, the empirical assessment of such models using econometric methods will not be sufficient to reveal that mismatch.

These problems cannot themselves be addressed through reforms to mathematical methods. That would simply be to produce a more refined version of the wrong tool for the job, like sharpening one’s knife when what is needed is a spoon. Rather than striving to improve the quality of mathematical models given the assumption that the subject matter under investigation is mechanical in Mill’s sense and therefore susceptible of mathematical analysis, we need to ask a prior question, which is whether there is sufficient reason to feel confident that the subject matter under investigation is mechanical in the first place. That means scrutinizing the subject matter in the first instance in non-mathematical ways … We as scientists must remain sensitive to information about the phenomena in which we are interested that lies outside our models’ conceptual maps. In the case of economics, what this requires is a new field dedicated to qualitative empirical methods that would play a similar role to that played by econometrics in the matter of quantitative empirical methods.

Highly recommended reading!

Using formal mathematical modeling, mainstream economists sure can guarantee that the conclusions hold given the assumptions. However, the validity we get in abstract model worlds does not warrantly transfer to real-world economies.

In their search for validity, rigour and precision, mainstream macro modellers of various ilks construct microfounded DSGE models that standardly assume rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative household/ consumer/producer agents with homothetic and identical preferences, etc., etc. At the same time, the models standardly ignore complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc., etc.

Behavioural and experimental economics — not to speak of psychology — show beyond any doubt that ‘deep parameters’ — peoples’ preferences, choices and forecasts — are regularly influenced by those of other participants in the economy. And how about the homogeneity assumption? And if all actors are the same – why and with whom do they transact? And why does economics have to be exclusively teleological (concerned with intentional states of individuals)? Where are the arguments for that ontological reductionism? And what about collective intentionality and constitutive background rules?

The rigour and precision in formal logic focus has a devastatingly important trade-off: the higher the level of rigour and precision, the smaller the range of real-world application. So the more mainstream economists insist on formal logic validity, the less they have to say about the real world.

And as Spiegler has it — to think we solve the problem by reforms to mathematical modeling is nothing but “a more refined version of the wrong tool for the job, like sharpening one’s knife when what is needed is a spoon.

  1. Roger Chittum
    January 12, 2023 at 6:38 pm

    I am not an economist, but I recall (perhaps inaccurately) that Milton Friedman responded to this argument by saying assumptions don’t matter as long as the model makes good predictions. Now ~50 years later, are there prominent economists who do not accept Syll’s “constructive critique?” In other words, is this a hot topic, or am I watching a dead horse being beaten?

    • robert r locke
      January 12, 2023 at 7:21 pm

      the validity of economics is determined historically and locally not “scientifically”. Just as Hegel said, philosophy is its history, so is economics.

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  3. Gerald Holtham
    January 14, 2023 at 4:18 pm

    Roger Chittum: I cannot say no-one respects Friedman’s position but it is widely and increasingly seen to be erroneous. You are watching the wrong horse being beaten, however.
    Everything in the second and third paragraph of Lars’ commentary after the extended quote is perfectly correct. What he says in the concluding two paragraphs is speculative and probably wrong.
    There are a great many useless models propounded in economics and sometimes they are fitted to data (generally unsuccessfully). Lars concludes that it is not possible to propound useful models and statistical testing is pointless. Lars believes in induction so perhaps he is “inducing” his conclusion from observation. Nevertheless the non sequitur should be obvious.
    Moreover, while he advises everyone not to sharpen the knife, he never tells us what his spoon looks like or where to find one.

    • Roger Chittum
      January 15, 2023 at 1:48 am

      From a 1/4/23 NYT article:

      “Average retail electricity costs in the 35 states that have partly or entirely broken apart the generation, transmission and retail distribution of energy into separate businesses have risen faster than rates in the 15 states that have not deregulated . . . . On average, residents living in a deregulated market pay $40 more per month for electricity than those in the states that let individual utilities control most or all parts of the grid. Deregulated areas have had higher prices as far back as 1998.”

      There are many confounding factors that vary among States, such as the need to harden distribution systems against wild fires, the mix of electricity sources such as renewables versus fossil fuels, and requirements to reduce air emissions. Is the information in the block quote statistically valid evidence that one of the 15 States not already deregulated would be much more likely to get higher consumer rates than lower rates if it deregulated? I guess Friedman would have to say yes even if he is a market fundamentalist. What would Syll or Holtham say, and why?

    • Meta Capitalism
      January 16, 2023 at 12:48 am

      Moreover, while he advises everyone not to sharpen the knife, he never tells us what his spoon looks like or where to find one. (Gerald Holtham, RWER, 1/14/2023)

      I think when Lars highlights an author’s book and highly recommends reading it there is a pretty good chance there are some auxiliary spoons in the drawer and that Lars is in agreement with. In fact, Spiegler does just that; he presents the case that there are complementary methodologies that have been in use informally (but often backgrounded to emphasize the mathematical models). You can lead a horse to a drawer of spoons, but you cannot make them use the utensil unless they are thirsty enough, I guess.

  4. rsm
    January 15, 2023 at 8:08 am

    《Using formal mathematical modeling, mainstream economists sure can guarantee that the conclusions hold given the assumptions. 》

    If the assumptions lead to other conclusions that contradict the proved conclusions, what good are the formal guarantees?

    Is the mathematical consensus as afraid of admitting inconsistency exists, as it was of admitting that planets could orbit in anything other than circles? Is Hilbert’s program considered completed despite Gödel’s disproofs? Did the ancient consensus fear their system would spin out of control if the sun did not move around the earth, and does the current consensus that Hilbert’s Program actually succeeded similarly fear only chaos and anarchy can result from giving up consistency? Why are consensuses so often wrong?

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  5. yoshinorishiozawa
    January 16, 2023 at 8:59 am

    It is good that Lars Syll now distinguishes mainstream and heterodox economics and he poses his criticism only against the mainstream. However, there are on his post three points of criticism of different characters.

    (1) Mill’s methodology and the notion of mechanism
    Methodology and and economics that are produced by a single person are in principle independent. They should be judged independently. However, is it reasonable to cite and repeat John Stuart Mill’s methodology to criticize contemporary economics? He had only a very classical view on sciences of the middle 19th century.

    In the history of economics, Mill is often characterized as the last great economist among classical political economists (except Marx and marxians, who prefer to classify him as one of vulgar economists). While he inherits many aspects of classical economics (as opposed to neoclassical economics), he was the person who opened the way to neoclassical economics. See my paper “An origin of the neoclassical revolution in economics: Mill’s ‘reversion’ and its consequences”
    (those who want to read the paper, please request it at y@shiozawa.net)

    In the standard understanding, neoclassical economics started with the introduction of mathematical optimization (a part of calculus) but, as Hicks remarked it, it is rather superficial change in economics. A deeper change was the turn from economics of production to economics of exchange. Mill contributed to this change at a crucial point (i.e., the introduction of demand and supply function).

    (2) Lars Syll is right to point this:

    [T]he models standardly ignore complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc.

    However, he omits observing that theories and models (in heterodox economics) that try to incorporate “complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation” are often very mathematical. See Alan Kirman’s Complexity Economics (2010) for example. Chapter 2 treats random graphs and network theory, which is a new mathematics that appeared in the second half of the 20th century. To refute optimization formulation of economic behavior that is the core of neoclassical economics, the theory of computing complexity is useful (which is also a mathematics that appeared in the later half of the 20th century). It explains why there are so many problems that are impossible to get an optimal solution (ubiquity of intractable problems). See Chapter 1 (with the same title as the book itself) of our book Microfoundations of Evolutionary Economics.

    Ousting mathematics does not lead to a construction of an alternative to mainstream economics.

    (3) Lars Syll’s criticism is often banal and shallow. Let me cite an example:

    Behavioural and experimental economics — not to speak of psychology — show beyond any doubt that ‘deep parameters’ — peoples’ preferences, choices and forecasts — are regularly influenced by those of other participants in the economy.

    This is the criticism that Samuel Bowles once pointed out in his textbook Microeconomics: Behavior, Institutions, and Evolution(2004). Bowles is a respectable economist who was one of founders of Radical Economics and is now an influential leader of CORE Econ movement. Although his idea of “evolutionary social science” tries to extend economics into a more general science that comprises social and political aspects, its core theory is generalizations of Walrasian economics, which he calls post Walrasian approach. The expression “post Walrasian approach” is ambiguous. It may indicate a new approach that refutes Walrasian economics. I wondered and reflected much about it. My conclusion is that it only means economics that removes this and that assumption but admits the validity of Walrasian economics as the core of economics (hence mainstream neoclassical economics). [In fact, some heterodox economists are enraged that CORE Econ is too neoclassical in theory, if it includes much more economic history than the standard mainstream economics textbooks.]

    Let us come back to Lars Syll’s post above. How those deep parameters are influenced with each other is the very theme that Kirman treated in his Chapter 2 “The Structure of Interaction” above cited. However, the criticism that “peoples’ preferences, choices and forecasts” are not individually given mindsets implicitly admits that people optimize at each moment of time their preference under some constraints. The criticism remains at a superficial level. It implicitly assumes that coordinations in the markets works by equilibrating the demand and supply by price adjustment. This is but a false vision created by neoclassical economics. We must escape from this deeply entrenched vision of the market economy. Lars Syll’s criticism does not contribute to the change of this paradigm of economics.

    If he has any objections, please develop his theory and prove that his methodology and ontology can contribute in any fashion to the needed paradigm change. If it is impossible for a historian of philosophy of science and methodologist, please try to find some promising theories instead of disseminating anti-mathematical propaganda that often works reactionary to the efforts of creating a new alternative economics.

    • Meta Capitalism
      January 18, 2023 at 9:31 am

      I am much more fundamentalist than pluralist, because I believe a new unified economics is necessary and possible that can replace mainstream economics…. I believe it is necessary to provide new foundations for almost all heterodox economics…. [O]ur theory provides microfoundations …

      (Shiozawa Yoshinori, RWER, Response to Mr. T. Confessing his fundamentalist anti-pluralism, RWER, 12/19/2022)

  6. gerald holtham
    January 20, 2023 at 10:22 pm

    Roger Chittum I cannot answer your question because I have not studied the issue you are talking about. I can say this, however. If the data are available to measure the other influences you discuss such as different fuels and different regulations one could have a very good shot at determining whether the hypothesis that privatisation made matters worse was sustainable and supported by evidence or not. The conclusion would not be certain but here’s the point. There is no other means of resolving the question than by scrutinising the data and subjecting them to statistical analysis. For all the words exchanged on this blog that remains the case. As the poet said “she who scorns a man must die a maid”. And he/she who scorns empirical analysis, often necessarily statistical, must resign themselves to endless a priori discussion and exchange of prejudices, without hope of resolution.

  7. gerald holtham
    January 20, 2023 at 10:30 pm

    Meta, Do me a favour or, as the Americans say, give me a break. Take Roger Chittum’s question in this thread. How would Lars tackle it? You don’t know; I don’t know. I don’t think he knows. He is content to quibble because no approach would give the perfect answer. At the end of the day you have decide what is the best you can do, make allowances for the inevitable flaws and not overclaim.

  8. gerald holtham
    January 20, 2023 at 11:37 pm

    PS I take the Spiegler point fundamentally to be that propositions at one level of analysis can be informed by results from a different level. That is not to be denied. The fact that individuals doe not behave consistently or optimise successfully does not prove that a macro system does not behave “as if” it were doing so. But it surely makes that implausible proposition even more implausible. Complementary methods can enrich our understanding but they won’t lead to definite conclusions if only because of emergent properties that separate levels of analysis. Therefore even using auxiliary methods we cannot prove general theories or propositions. If you apply Lars’ epistemological standards, Spiegler is in the same hole as the rest of us.

  9. yoshinorishiozawa
    January 21, 2023 at 3:42 am

    Any science including economics has various phases or moments in its research.

    One is trial and error phase. In this phase, various methods must be tried. This is what almost all researchers are doing. Methodologically, it is unwise to restrict tools and methods to specific kinds. Even if it seems anarchic, anything goes in this phase. Rejecting mathematics a priori is not a good advice. When a result is gotten, it is judged good or bad by some (often ambiguous) criterion that is different from whether the method used is good or not.

    Another is the phase or moment of synthesis and systematization. If economics is a science, it is natural that it seeks a unified and coherent system of theories. The final goal in this phase is a new unified economics. If this goal were attained (I am not saying that it was attained), we will have a unified economics and at that time the actual neoclassical economics will be rejected as obsolete economics.

    Almost all researchers know these two phases or moments and use different research methods or guiding principles, consciously or unconsciously. Mathematics can be a powerful tool of unification.

    In a final stage of “normal science” (in Thomas Kuhn’s sense), axiomatic-deductive reasoning may be a useful method in presenting the final form achieved. However, economics has not arrived at this stage. It is far from that. To use Kuhn’s terms, it is in the phase of “paradigm change.” Even though, unification moment is always necessary. If not, economics will be a disparate set of miscellaneous knowledge. This is also the reason why economics does not seek to be a historical science.

    • January 21, 2023 at 9:11 pm

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