Does economics — really — need models?

1 November, 2016 at 13:17 | Posted in Theory of Science & Methodology | 4 Comments

A common idea among mainstream — neoclassical — economists is the idea of science advancing through the use of ‘as if’  modeling assumptions and ‘successive approximations’. But is this really a feasible methodology? I think not.

Most models in science are representations of something else. Models ‘stand for’ or ‘depict’ specific parts of a ‘target system’ (usually the real world).  All theories and models have to use sign vehicles to convey some kind of content that may be used for saying something of the target system. But purpose-built assumptions — like ‘rational expectations’ or ‘representative actors’ — made solely to secure a way of reaching deductively validated results in mathematical models, are of little value if they cannot be validated outside of the model.

60088455All empirical sciences use simplifying or unrealistic assumptions in their modeling activities. That is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.

The implications that follow from the kind of models that mainstream economists construct are always conditional on the simplifying assumptions used — assumptions predominantly of a rather far-reaching and non-empirical character with little resemblance to features of the real world. From a descriptive point of view there is usually very little resemblance between the models used and the empirical world. ‘As if’ explanations building on such foundations are not really any explanations at all, since they always conditionally build on hypothesized law-like theorems and situation-specific restrictive assumptions. The empirical-descriptive inaccuracy of the models makes it more or less miraculous if they should — in any substantive way — be able to be considered explanative at all. If the assumptions that are made are known to be descriptively totally unrealistic — think of e.g. ‘rational expectations’ — they are of course likewise totally worthless for making empirical inductions. Assuming that people behave ‘as if’ they were rational computers doesn’t take us far when we know that the ‘if’ is false.

To give up the quest for truth and to merely study the internal logic of credible worlds is not compatible with scientific realism.  And assessing the adequacy of a theory or model solely in terms of “the interests of the theorist” or “on purely aesthetic grounds” does not seem to be a warranted scientific position. That would be lowering one’s standards of fidelity beyond reasonable limits. Theories and models must be justified on more grounds than their intended scope. Scientific theories and models must have ontological constraints and the most non-negotiable of these is – at least from a realist point of view – that they have to be coherent to the way the worlds is.

Even though we might say that models are devised “to account for stylized facts or data” as science philosopher Tarja Knuuttila — in ‘Isolating Representations Versus Credible Constructions? Economic Modelling in Theory and Practice,’ Erkenntnis 1989 — has been arguing, using models as ‘stylised facts’ somehow ‘approximating’ reality are rather unimpressive attempts at legitimizing fictitious idealizations for reasons more to do with model tractability than with a genuine interest of understanding and explaining features of real economies.

Knuuttila notices that most economic models fall short of representing real systems. I agree. Mainstream neoclassical economic theory employs very few principles, and among those used, bridge principals are as a rule missing. But instead of criticising this, she rather apologetically concludes that “the connections between the models and the data, or what is known about economies more generally, are just looser than what is traditionally assumed.” To my ears this sounds like trying to turn failure into virtue. Why should we be concerned with economic models that are “purely hypothetical constructions”?

mrquesA consistent autonomist vision … maintains that it is possible to learn from models just by constructing and manipulating them, without making any reference to their capacity to refer to any extra-model reality. In several of her works, Tarja Knuuttila claims that models are constructed freely, and that valuable information is obtained from them just by constructing, examining and, particularly, manipulating them. The problem that philosophy of economics must solve however is to show how models can offer relevant and reliable knowledge about our world, and in this regard Knuuttila solution seems to be merely verbal and is based in a semantic displacement. Nobody doubts that through constructing and manipulating “objects” something is learned. Mathematics does it all the time in reference to some kind of abstract entity. Learning is also possible through manipulating material objects (for example, the magic cube). But the philosophical problem that demands solution is whether the construction and manipulation of theoretical economic models allows us to learn something about our world, the empirical world that surrounds us, particularly about real market economies, and whether what is thus learned can somehow be used to design and to implement successful economic policies. The arguments of Knuuttila, avoid approaching these issues. In my opinion it is far more enlightening to interpret these models as the accomplishment of mere intellectual exercises …

If … economic processes are open ended, intervenible, based on expectations and pervaded by unavoidable conflicting interests, I do not see how theoretical models could provide significantly better knowledge than what is offered by practical knowledge and common sense.

Constructing minimal macroeconomic ‘as if’ models — or using microfounded macroeconomic models as ‘stylised facts’ somehow ‘successively approximating’ macroeconomic reality — is a rather unimpressive attempt at legitimizing using fictitious idealizations for reasons more to do with model tractability than with a genuine interest of understanding and explaining features of real economies. Many of the model assumptions standardly made in mainstream economics are restrictive rather than harmless and can therefore not in any sensible meaning be considered approximations at all.

Economics building on such a modeling strategy does not  produce science. As long as mainstream economists can not come up with anything even approaching a reasonable account of what are the practical results of their theoretical modeling endeavours, they have to live with the fact that most science theoreticians, philosophers, and methodologists dismiss economics as an empirically relevant science.

4 Comments »

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  1. “But purpose-built assumptions — like ‘rational expectations’ or ‘representative actors’ — made solely to secure a way of reaching deductively validated results in mathematical models, are of little value if they cannot be validated outside of the model.”
    .
    Little value to whom, and using what metric?
    .
    http://prospect.org/article/gop-pols-wont-raise-minimum-wage-so-voters-are-about-to
    .
    To paraphrase Donald Rumsfeld, you fight the popularity of populism with the models you have–not the models you might want or wish to have at a later time.
    .
    “Constructing minimal macroeconomic ‘as if’ models — or using microfounded macroeconomic models as ‘stylised facts’ somehow ‘successively approximating’ macroeconomic reality — is a rather unimpressive attempt at legitimizing using fictitious idealizations for reasons more to do with model tractability than with a genuine interest of understanding and explaining features of real economies.”
    .
    Do you not find it odd that none of these tractable fictitious idealizations suggest that the minimum wage or capital gains tax rate should be raised to increase aggregate demand?
    .
    Coincidence?
    .
    Really?

  2. Suppose I complain to a neighbor about the barking at night of his dog. Already I have built a model in both our mind’s eyes. We both think about the unwanted noise that results. So when a more complex subject like economics comes along for discussion there is no alternative but to model it too.

    In the case of the dog one can arrange a dog silencer, which measures the sound-level and when it exceeds a specific amount it makes a high-pitched whistle which we cannot hear but the dog does, and which indicates to it to be quirt. Consequently, for this model to be effective, it not only has a descriptive aspect but also a numerical one having a measured value.

    Until the experts in economics recognize that their models also need numbers to define their relative importance and possible treatment, some of us will be continuing to foolishly claim that no model is necessary.

  3. What part of the theory of evolution involves modeling assumptions?

  4. Thornton, the model is not an assumption. It is simply a necessary part of the argument or situation being considered (which itself can include assumptions). If the model has evolved, then it came indirectly at about the same time as we began to give names to the various aspects of nature.

    I forgot to mention before that because the matters being considered in economics and particularly in macroeconomics have many different conceptual parts, that the model usually requires a diagram for its clear presentation, although the model comes first and the need for drawing it later.


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