Are economic models ‘true enough’?

13 November, 2015 at 19:39 | Posted in Theory of Science & Methodology | 2 Comments

Stylized facts are close kin of ceteris paribus laws. They are ‘broad generalizations true in essence, though perhaps not in detail’. They play a major role in economics, constituting explananda that economic models are required to explain. Models of economic growth, for example, are supposed to explain the (stylized) fact that the profit rate is constant. The unvarnished fact of course is that profit rates are not constant. All sorts of non-economic factors — e.g., war, pestilence, drought, political chicanery — interfere. Manifestly, stylized facts are not (what philosophers would call) facts, for the simple reason that they do not actually obtain. It might seem then that economics takes itself to be required to explain why known falsehoods are true. (Voodoo economics, indeed!) This can’t be correct. truth_and_liesRather, economics is committed to the view that the claims it recognizes as stylized facts are in the right neighborhood, and that their being in the right neighborhood is something economic models should account for. The models may show them to be good approximations in all cases, or where deviations from the economically ideal are small, or where economic factors dominate non-economic ones. Or they might afford some other account of their often being nearly right. The models may diverge as to what is actually true, or as to where, to what degree, and why the stylized facts are as good as they are. But to fail to acknowledge the stylized facts would be to lose valuable economic information (for example, the fact that if we control for the effects of such non-economic interference as war, disease, and the president for life absconding with the national treasury, the profit rate is constant.) Stylized facts figure in other social sciences as well. I suspect that under a less alarming description, they occur in the natural sciences too. The standard characterization of the pendulum, for example, strikes me as a stylized fact of physics. The motion of the pendulum which physics is supposed to explain is a motion that no actual pendulum exhibits. What such cases point to is this: The fact that a strictly false description is in the right neighborhood sometimes advances understanding of a domain.

Catherine Elgin

Catherine Elgin thinks we should accept model claims when we consider them to be ‘true enough,’ and Uskali Mäki has argued in a similar vain, maintaining that it could be warranted — based on diverse pragmatic considerations — to accept model claims that are negligibly false.

Hmm …

When criticizing the basic (DSGE) workhorse model for its inability to explain involuntary unemployment, its defenders maintain that later elaborations — especially newer search models — manage to do just that. However, one of the more conspicuous problems with those “solutions,” is that they — as e.g. Pissarides’ ”Loss of Skill during Unemployment and the Persistence of Unemployment Shocks” QJE (1992) — are as a rule constructed without seriously trying to warrant that the model immanent assumptions and results are applicable in the real world. External validity is more or less a non-existent problematique sacrificed on the altar of model derivations. This is not by chance. For how could one even imagine to empirically test assumptions such as Pissarides’ ”model 1″ assumptions of reality being adequately represented by ”two overlapping generations of fixed size”, ”wages determined by Nash bargaining”, ”actors maximizing expected utility”,”endogenous job openings”, ”jobmatching describable by a probability distribution,” without coming to the conclusion that this is — in terms of realism and relevance — far from ‘negligibly false’ or ‘true enough’?

Suck on that — and tell me if those typical mainstream — neoclassical — modeling assumptions in any possibly relevant way — with or without due pragmatic considerations — can be considered anything else but imagined model worlds assumptions that has nothing at all to do with the real world we happen to live in!

2 Comments »

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  1. I don’t know Professor. Catharine Elgin seems pretty reasonable to me. Its easy for me to agree with you about the assumptions you point out in the Pissarides paper, but where do you draw the line? Even Keynes made assumptions, some of which are not Always true. Is it your intent to say that all assumptions should be checked to make sure they are reasonable? I can agree with that. Or is it that no assumptions can be valid if they are ever wrong in any way?

  2. “Or is it that no assumptions can be valid if they are ever wrong in any way?”

    Correct. Basically an economist who wants to understand a complex social interactive system like a national economy has to at least start with as much as possible on the drawing board.In other words he has to work like an investigator. Do you think someone investing a crime should make unrealistic assumptions? The fact is if you are going to understand many of the causal relationships that exist in an economy your investigation has to be wide and deep. Most likely this will call on inter-disciplinary skills. Once you have established this, you then start identifying the critical causes and relationships. You are then excluding things that do not matter for the sake of tractability. Gradually you have your narrative down to a simple a form as possible, but no more. This is how an historian works, but not a modern macro-economist, who immediately thinks in terms of a model, even before he has done those crucial steps I have outlined earlier. Very often it is precisely what is not in those models which is what we need to know.

    Krugman talks in terms of ‘implicit models’. This is silly. If for example, I have identified that a crucial cause of inflation was a large increase in the money supply (and I identified this with primary evidence gathered from lenders, central banks, goverments, borrowers and consumers) I do not need to say “we can explain this with the Quantity Theory of Money”. That is irrelevant. What is important is how I trace the link between the expansion of money in circulation and inflation.

    Most likely though there will be other causes of inflation occurring at the same time. This is why your investigation must be comprehensive and also another reason your investigation must not contained by a model


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