Why economists should focus more on mechanisms and less on deductive-axiomatic models

25 Jan, 2012 at 23:57 | Posted in Theory of Science & Methodology | Comments Off on Why economists should focus more on mechanisms and less on deductive-axiomatic models

Stumbling and mumbling – Chris Dillow – has a nice piece on why people interested in real economies ought to focus on mechanisms rather than models of the deductive-axiomatic ilk:

Simon Wren-Lewis asks a good question about Robert Lucas‘s and John Cochrane‘s apparent misunderstanding of the balanced budget multiplier: how can very clever people make silly errors?

He suggests two good answers. I’d like to suggest a third. There are two different ways of thinking about economics – the model paradigm and the mechanism paradigm, and the former has crowded out the latter.

Simon says:

If you spend X at time t to build a bridge, aggregate demand increases by X at time t. If you raise taxes by X at time t, consumers will smooth this effect over time, so their spending at time t will fall by much less than X. Put the two together and aggregate demand rises.

This is clear and true. And it would be obvious to anyone using the mechanism paradigm. If you ask “What is the mechanism whereby higher taxes reduce consumer spending?” you pretty much walk into the notion of consumption smoothing. Equally, though, the paradigm also leads one to other reasons to be sceptical of the practical efficacy of the balanced budget multiplier.

But lots of brilliant economists don’t think merely in terms of mechanisms but rather build impressive models. And like photographers, they tend to fall in love with their models which distracts them both from others’ models and from mechanisms.

A good example of this lies in the idea of expansionary fiscal contraction. The virtue of this idea is that it draws our attention to mechanisms (a falling exchange rate, better corporate animal spirits, whatever) whereby fiscal contraction might boost the economy. The drawback is that these mechanisms are just unlikely to operate here and now. Yes, there’s a model that tells us that expansionary fiscal contraction can work. And there are models that say it can’t. But arguing about competing models misses the practical point.

Now, there is an obvious reply to all this. Models have the virtue of ensuring internal consistency, and thus avoiding potentially misleading partial analysis. However, I’m not sure whether this is an argument against mechanisms so much as against poor thinking about them.

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