Economics vs. reality

24 Jul, 2016 at 09:41 | Posted in Economics | 1 Comment

Denicolò and Zanchettin, in an article published by the prestigious Economic Journal, claim to have shown among other things that “stronger patent protection may reduce innovation and growth.” As a prelude to forty pages of mathematics, they state of their model, “The economy is populated by L identical, infinitely lived, individuals … There is a unique final good in the economy that can be consumed, used to produce intermediate goods, or used in research …” Not only are all the people in this model world identical and immortal, they only produce a single product. The product has properties that are entirely unreal—not so much science fiction as pure magic. The conclusion may be justified, or not; but the idea that a model so remote from reality can be used to make public policy recommendations is, to anyone but a fully certified neoclassical economist, staggering.

The mathematization of economics since WW II has made mainstream — neoclassical — economists more or less obsessed with formal, deductive-axiomatic models. Confronted with the critique that they do not solve real problems, they  often react as Saint-Exupéry‘s Great Geographer, who, in response to the questions posed by The Little Prince, says that he is too occupied with his scientific work to be be able to say anything about reality. Confronting economic theory’s lack of relevance and ability to tackle real probems, one retreats into the wonderful world of economic models. One goes in to the “shack of tools” — as my old mentor Erik Dahmén used to say — and stays there. While the economic problems in the world around us steadily increase, one is rather happily playing along with the latest toys in the mathematical toolbox.

Modern mainstream economics is sure very rigorous — but if it’s rigorously wrong, who cares?

Instead of making formal logical argumentation based on deductive-axiomatic models the message, I think we are better served by economists who more  than anything else try to contribute to solving real problems. And then the motto of John Maynard Keynes is more valid than ever:

It is better to be vaguely right than precisely wrong