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Is economic theory simply absurd?
Ariel Rubinstein wonders. His conclusion:
As in the case of a good fable, a good model can have an enormous influence on the real world, not by providing advice or by predicting the future, but rather by influencing culture. Yes, I do think we are simply the tellers of fables, but is that not wonderful?
Hat tip to Peter Klein.
Posted by Tyler Cowen on December 13, 2006 at 12:38 PM in Economics | Permalink
Comments
"I'm not sure whether you will take this as a confession or a boast, but we are basically story-tellers, creators of make-believe economic systems." - Robert Lucas in What Economists Do
Posted by: Michael Greinecker at Dec 13, 2006 12:51:50 PM
"All models are metaphors, and all metaphors are lies." - Deidre McCloskey
Posted by: Keith at Dec 13, 2006 12:58:06 PM
"... but some metaphors are useful." -Box (sort of)
Posted by: Jason Voorhees at Dec 13, 2006 1:22:41 PM
Small maybe a-propos question? Why on
earth is there such a concern in econ with
models? Is there no worthwhile way to do econ
without constructing, attacking, modifying, etc
models? It seems bizarre to me, and like a
symptom of ... I dunno, a hyper-geeky approach
to life or something, like spending your time
trying to understand human life by tinkering
with robots. Harmless and amusing, I guess, if
only the models weren't constantly being imposed
on the rest of us.
Posted by: MIchael Blowhard at Dec 13, 2006 1:41:30 PM
No, there's no worthwhile way to do economics without models. In fact, there's not even any way to think about economics without a model, regardless of whether you're a professional economist or not. That's because as soon as you suggest any answer to the question of "What would happen if we did X?" then you've cooked up a model. There's a quote by Keynes that's appropriate: "Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." That is, there is no such thing as the "rest of us".
Naturally, most models are wrong, because they're stories about how the world works, and the story may or may not have any connection with reality. So you need a way to tell. That means two things. First, the model has to be rigorous enough to be testable. Does it make predictions? Does it tell a causal story you can test? A necessary condition for this is casting it into mathematical form, because natural language is too imprecise to even tell if the story being proposed is inconsistent or not.
This isn't a sufficient condition, though. Deirdre McCloskey points out that in addition to being in mathematical form, you're model must make predictions that are specific enough that you can unambiguously tell from the data you have whether they're true or not. Mathematical economics is not nearly as careful about this as it ought to be. But being careful in that way would require more math and more stringent modelling, not less.
Posted by: Neel Krishnaswami at Dec 13, 2006 2:23:58 PM
How about we just dispense with formal economics altogether? After all, what real value to the world do economists add? It's scientists and engineers and inventors who advance technology, as well as the curious motivated non-academic person. It's business people who use their networking and social skills and ability to manage and lead who harness the abilities of these innovators, thereby transmitting useful (and sometimes not-so-useful, even harmful) technologies through society. About the only use for economists is in the area of central banking, and for this strict modelling with microeconomic assumptions isn't really as necessary as an on-going project of analyzing data with ad-hoc models that are never meant to be definitive or final. Economics, and therefore economists, are not the answer to any malaise of society, such as underdevelopment and poverty. In many ways, Rubinstein's Jungle Economy is an equally useful way of viewing the world, one that is rather similar to some Marxist views.
As a final consideration, research in happiness suggests that relative wealth matters a lot to people, as do changes in wealth, rather than wealth it self. Thus, it is possible that the optimal growth path of an economy, from GDP x to GDP y (to use, for simplicity of this argument, the usual economic measure of welfare) is not one that gets as there as fast as possible i.e. higher growth rates are better, but one that grows as slowly as possible while simultaneously growing above the threshold level where the change in income is noticed by the average individual. What would be even better is growth rates of income across demographics oscillating between two values (both positive), so that at different times the rate at which person A's income is increasing can be above or below person B's income. This allows for relative dynamics while simultaneously resulting in improvement on net, which is also important to people.
Posted by: The Tsunami at Dec 13, 2006 2:53:13 PM
"Why on earth is there such a concern in econ with
models?"
You basically understand a economic argument if and only if you can build a model about it.
"This isn't a sufficient condition, though. Deirdre McCloskey points out that in addition to being in mathematical form, you're model must make predictions that are specific enough that you can unambiguously tell from the data you have whether they're true or not."
There is almost no such model. That´s why one has to make "identifying assumptions" when doing econometrics.
"In many ways, Rubinstein's Jungle Economy is an equally useful way of viewing the world, one that is rather similar to some Marxist views."
There is no production in Rubnsteins Jungle economy, so the explanatory power is kinda limited.
Posted by: Michael Greinecker at Dec 13, 2006 3:13:31 PM
Is there any way to think about anything without models? Seriously, I think not.
Posted by: josh at Dec 13, 2006 4:12:12 PM
First, I think that someday we'll likely end up dispensing with each of the separate social sciences and they'll all fuse into one "social science." This fused social science will probably borrow the modeling and empirical methodologies most currently practiced in formal economics today, but it will use these methodologies to test a wider variety of theories than those implied by the straight-up rational choice model. The rational choice model will still likely provide a good base case. We're already seeing such work in the field of behavioral economics.
In the meantime, economics does a pretty good job giving advice about economic development. Following export-led growth works better than import substitution, for instance. Cost-benefit analysis can identify good investments for nations to make, especially those that supplement and generate robust market growth.
I think economics is at its most useful when it comes to teaching people the basic insights of opportunity costs and sunk costs and cumulative compund effects and good basic economic decisionmaking. Based purely on anecdotal things I've heard and witnessed, a lot of small businessmen learn economic decisionmaking through a lot of effort and trial and error, when people could learn economic decisionmaking the easy way if they'd be better about listening to economists.
This also brings me to problems with the practice of economics. The insights from things like opportunity cost and sunk costs and other things are not as redily understood by people as economists might think, or at least as economists might model.
The distributional consequences of this could be highly underrated. Even in an economic system where economic theory does a good job of predicting the market equilibrium, if the "smart economist" agents are few in number and the "dumb non-economist" agents are many, the "smart economists" may end up very well off and the "dumb noneconomists" may do very poorly. So the distributional consequences of differences in the ability to "think economically" could be very important.
In addition, in an economic system with high returns to imitative behavior, there may be a wide deviation from the rational choice economic equilibrium.
Posted by: Keith at Dec 13, 2006 6:44:14 PM
Would people still engage in economic activity if their were no economists?
I think so.
Like baseball announcers and sex advisors...economists are really just entertainers...
Posted by: alphie at Dec 13, 2006 7:18:14 PM
"No, there's no worthwhile way to do economics without models. In fact, there's not even any way to think about economics without a model, regardless of whether you're a professional economist or not. "
Yet Adam Smith didn't seem locked into any models ....
The Keynes quote doesn't mention models.
"You basically understand a economic argument if and only if you can build a model about it."
Couldn't that have more to do with how you understand an ecnomic argument than with economic arguments (and understanding) generally?
"Is there any way to think about anything without models? Seriously, I think not."
An amazing assertion!
Posted by: Michael Blowhard at Dec 13, 2006 7:55:20 PM
Sometimes we experience just the opposite of what economic models explain.For example in many Indian cities, there are wayside second hand book sellers sitting beneath shadowy trees.You can purchase a second hand Samuelson (his clasic 'Foundations'), Lucas and Sargent (their 'Rational Expectations and Econometric Practice'-I purchased this book at a throw away price of just $0.48 from a Mumbai way side seller), Keynes or even Smith from such sellers.Contrary to the 'Lemons model', here buyer knows the quality of the product and the seller is under information assymmetry.
Posted by: G.Visakh Varma at Dec 13, 2006 8:50:39 PM
The opposite also happens confirming economic models.For example in Bangalore city in India there are highly educated second hand book sellers-some of them are retired officials-who perfectly know which books are running out of print,which are scarce,which is the rarest first edition ,and the like.They price books according to scarcity, oldness of the edition etc so that you need to pay a higher price."Select Book House" off Brigade Road Bangalore, "Sudha Book House" near Rajaji Nagar entrace Bangalore and the like are examples of such second hand rare book shops. Here seller retains better knowledge and the 'Lemons theory' works.
Posted by: Samy at Dec 13, 2006 9:09:24 PM
My two cents:
"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually to slave to some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."
And also, see Axel Leijonhufved's "Life Among the Econ." A classic satire of life in an econ department.
Posted by: Katherine at Dec 13, 2006 10:12:49 PM
The laws of demand and diminishing marginal returns are absurd? I think not.
Posted by: indiana jim at Dec 14, 2006 1:45:21 AM
"Couldn't that have more to do with how you understand an ecnomic argument than with economic arguments (and understanding) generally?"
Yes and no. There are certainly ecnomists who don't think that way, but even the most brillint of them often make strong assumptions implicitely that only come out when the informal idea is translated to a formal model.
Posted by: Michael Greinecker at Dec 14, 2006 4:14:31 AM
Kind of like the brilliant Karl Rove and his model that showed a permanent Republican majority, Michael?
Posted by: alphie at Dec 14, 2006 5:36:47 AM
Well, I guess one needs to define "model", but really everything you perceive, and every prediction you make, is some kind of a model. The baseball goes up into the air, you predict where it comes back down based on your model of how the laws of physics operate. In any case, all you're "seeing" is a bunch of energy with your brain modeling into existence what that stuff "looks" like. Theres nothing yellow about yellow.
Posted by: josh at Dec 14, 2006 7:36:44 AM
Ten years ago or so, a former editor of the AER asserted that "game theory is THE paradigm of economics". I asked him: But what about demand and supply (aka the laws of demand and dimiishing marginal returns)? His response? "Not anymore"
Now that I'd call ABSURD.
Posted by: indiana jim at Dec 14, 2006 8:02:45 AM
Michael, Josh -- Isn't that an *awfully* broad definition of "model"? Ie., more or less "everything you bring to a given experience and problem, conscious and unconscious, examined and unexamined, trained and untrained, intellectual and instinctual and emotional"? But maybe that's what economists mean by "a model," what do I know? And if it is, I've certainly got no quarrel with it!
Posted by: Michael Blowhard at Dec 14, 2006 12:34:23 PM
"How about we just dispense with formal economics altogether? After all, what real value to the world do economists add? It's scientists and engineers and inventors who advance technology ... In many ways, Rubinstein's Jungle Economy is an equally useful way of viewing the world, one that is rather similar to some Marxist views."
You answered your own question. We need economists to keep debunking wrong economists - like Marx. We would have no entrepreneurs or inventors if we all still believed in Marx's economic theories.
Until totalitarianism and sloth of bureaucracy are eliminated, we need economists to help us understand why we should get rid of them.
Posted by: liberty at Dec 14, 2006 12:48:28 PM
libery is making a good point,
Just as the self interest of businessmen does not uniformly lead them to take action that promote free trade and open market competition, so the self interest of SOME economists does not lead them do work that is beneficial to society writ large.
But bad economist are not the only ones that make good economists worth having around. For example, bad politicians, bad environmentalists (the kind who ignore cost), etc.
And also good economists are worth having around to teach the good economics and to create more of it.
Posted by: indiana jim at Dec 15, 2006 6:34:07 AM
So the propositions we get are:
1. People are going to study economics and economies.
2. Incorporating some basic insights like opportunity cost generates conclusions, like the fact that trade acts like a productivity-enhancing technological innovation, that many people find very surprising.
3. It's very difficult very quickly to use language in a precise enough way to logically explore these issues further, especially if you also want to be clear and concise.
4. That makes it desirable to use mathematical models. In addition, mathematical models enable communication and understanding across languages.
Posted by: Keith at Dec 15, 2006 8:37:12 AM
Keith,
Without a doubt mathematics is an especially useful tool in economics, however, there is a growing body of evidence that Don Gordon's hypothesis (that there is a negative relation between mathematical complexity and the generation of operational propositions in economics) must be taken seriously if economics is to be about explaining things that we observe.
Posted by: jim at Dec 15, 2006 9:51:34 AM
Jim, you're absoutely right.
One reason why behavioral economics will overtake game theory as the real useful tool of the future, in my opinion, is because behavioral economics can readily incorporate insights from other social sciences into simpler models and predict behavior, rather than using some of the more rococo mathematical optimization to try to explain human behavior. The latter method just doesn't seem to generate good predictions.
Posted by: Keith at Dec 15, 2006 11:39:43 AM
