Keynes on models and economics

1 Mar, 2021 at 13:45 | Posted in Economics | 1 Comment

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time … I also want to emphasise strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values. I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worth while falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations of the apple as to how far it was from the centre of the earth.

John Maynard Keynes (letter to Harrod, 1938)

1 Comment

  1. Reviewing Fischer Black’s 1986 essay “Noise”, I was reminded of the above passage from Keynes by these words from Black:
    Why do people trade on noise?
    One reason is that they like to do it. Another is that there is so much noise around that they don’t know they are trading on noise. They think they are trading on
    Neither of these reasons fits into a world where people do things only to maximize expected utility of wealth, and where people always make the best use of available information. Once we let trading enter the utility function directly (as a way of saying that people like to trade), it’s hard to know where to stop. If anything can be in the utility function, the notion that people act to maximize expected utility is in danger of losing much of its content.

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