## Analogue economies and reality

23 Mar, 2017 at 00:54 | Posted in Economics | 2 Comments

Modelling by the construction of analogue economies is a widespread technique in economic theory nowadays … As Lucas urges, the important point about analogue economies is that everything is known about them … and within them the propositions we are interested in ‘can be formulated rigorously and shown to be valid’ … For these constructed economies, our views about what will happen are ‘statements of verifiable fact.’

The method of verification is deduction … We are however, faced with a trade-off: we can have totally verifiable results but only about economies that are not real …

How then do these analogue economies relate to the real economies that we are supposed to be theorizing about? … My overall suspicion is that the way deductivity is achieved in economic models may undermine the possibility to teach genuine truths about empirical reality.

1. In fact, there are three economic worlds we need to distinguish them very carefully.
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1. Real world(real economies): real economic activities such as production, wealth, etc.

2. Sensor world(measurable economies): economic and financial accounts such as NIPA, FOFA, etc for real economy measurements
3. Model world(analogue economies): math equations such as regression equations, AS/AD equilibrium equations, behavioral equations, SFC monetary circuits equations, etc.
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Most economic models including SFC contradict economic data and accounting identities in the sensor world. Thus, so-called economic models are inconsistent, but they are “complete” without any constraint from Godel’s incompleteness theorems since the models can deduce any temporally valid or falsified statements from inconsistent models.
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For example,
In real world, produced goods and services for each defined time period t.
In senor world, ∀ t GDP(t) = I(t)+C(t)+G(t)+ X(t) – M(t)
In model world, ∃ t GDP(t) = f(t) + error(t), error(t) is optimized over fixed time periods T.
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These two temporal logic statements are contradicted since ∀ t ( if error(t) ≠ 0, then GDP(t) ≠ f(t)). For model consistency, we can only include one of them into the model no matter what types of methodological logic we used including both monotonic logic in mathematical systems and non-monotonic logic in a form of “Assume X unless ~ X or non-existent X can be approved” for scientific methodology.

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Here is the economic model inconsistency theorem (a meta theorem derived from Godel’s incompleteness theorems).
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If any economic model contradicts accounting data or identities, then one of two cases is true:
(a) the model is inconsistent,
(b) two accounting axioms(my expense is your income and my liability is your asset) are wrongly assumed in underlying economic and financial accounting systems.

2. Can you really get inside a real economy in order to experiment with it and to influence it? Even if you had 10 million Dollars, it is unlikely that much would result from how you used it this sum. So in practice, the only way for most of us to study in order to to understand about our social system is to model it and to use this analogy for purposes of simulation. If the analogy is close to the real thing it might prove to be so complicated as to confuse us and fail to provide a good understanding. So we need models of aggregate properties or analogues that are good approximations to the real thing.

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