… or why economic models are both unreal and irrelevant - Published on RWER Blog, by Lars Syll, Oct. 7, 2012.
In The World in the Model (reviewed here) Mary Morgan characterizes the modelling tradition of economics as one concerned with “thin men acting in small worlds”‘ and writes:
Strangely perhaps, the most obvious element in the inference gap for models … lies in the validity of any inference between two such different media – forward from the real world to the artificial world of the mathematical model and back again from the model experiment to the real material of the economic world. The model is at most a parallel world. The parallel quality does not seem to bother economists. But materials do matter: it matters that economic models are only representations of things in the economy, not the things themselves.
Now, a salient feature of modern neoclassical economics is the idea of science advancing through the use of “successive approximations”. 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) … //
… Anyway, robust theorems are exceedingly rare or non-existent in economics. Explanation, understanding and prediction of real world phenomena, relations and mechanisms therefore cannot be grounded (solely) on robustness analysis. Some of the standard assumptions made in neoclassical economic theory – on rationality, information handling and types of uncertainty – are not possible to make more realistic by “de-idealization” or “successive approximations” without altering the theory and its models fundamentally.
If we cannot show that the mechanisms or causes we isolate and handle in our models are stable, in the sense that what when we export them from are models to our target systems they do not change from one situation to another, then they only hold under ceteris paribus conditions and a fortiori are of limited value for our understanding, explanation and prediction of our real world target system.
The obvious ontological shortcoming of a basically epistemic – rather than ontological – approach such as “successive approximations” is that “similarity” or “resemblance” tout court do not guarantee that the correspondence between model and target is interesting, relevant, revealing or somehow adequate in terms of mechanisms, causal powers, capacities or tendencies. No matter how many convoluted refinements of concepts made in the model, if the “successive approximations” do not result in models similar to reality in the appropriate respects (such as structure, isomorphism etc), the surrogate system becomes a substitute system that does not bridge to the world but rather misses its target.
So, I have to conclude that constructing “minimal economic models” – or using microfounded macroeconomic models as “stylized facts” or “stylized pictures” 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 by neoclassical economics are restrictive rather than harmless and could a fortiori anyway not in any sensible meaning be considered approximations at all. Or as May Brodbeck had it: Model ships appear frequently in bottles; model boys in heaven only.
Student debt and the workplace, on RWER Blog, by David Ruccio, Oct. 8, 2012;
Factoid of the day: employment in Greece – 2004-2012: on RWER Blog, via Elstat, Oct. 5, 2012.