The model of all economic models (wonkish)

Published on RWER Blog, by Lars Syll, Dec 6, 2015.

Mainstream economists want to explain social phenomena, structures and patterns, based on the assumption that the agents are acting in an optimizing (rational) way to satisfy given, stable and well-defined goals. The procedure is analytical. The whole is broken down into its constituent parts so as to be able to explain (reduce) the aggregate (macro) as the result of interaction of its parts (micro).

Building their economic models, modern mainstream (neoclassical) economists ground their models on a set of core assumptions (CA) — describing the agents as ‘rational’ actors — and a set of auxiliary assumptions (AA). Together CA and AA make up what I will call the ur-model (M) of all mainstream neoclassical economic models. Based on these two sets of assumptions, they try to explain and predict both individual (micro) and — most importantly — social phenomena (macro) … //

… Most mainstream economic models — elaborations on the ur-model — are abstract, unrealistic and presenting mostly non-testable hypotheses. How then are they supposed to tell us anything about the world we live in? And where does the drive to build those kinds of models come from? I think one important rational behind this kind of model building is the quest for rigour, and more precisely, logical rigour. Formalization of economics has been going on for more than a century and with time the it has become obvious that the preferred kind of formalization is the one that rigorously follows the rules of formal logic. As in mathematics, this has gone hand in hand with a growing emphasis on axiomatics. Instead of basically trying to establish a connection between empirical data and assumptions, ‘truth’ has come to be reduced to, a question of fulfilling internal consistency demands between conclusion and premises, instead of showing a ‘congruence’ between model assumptions and reality. This has, of course, severely restricted the applicability of economic theory and models … //

… Confronted with the empirical failures of their models and theories, even these mainstream economists often retreat into looking upon their models and theories as some kind of ‘conceptual exploration,’ and give up any hopes/pretenses whatsoever of relating their theories and models to the real world. Instead of trying to bridge the gap between models and the world, one decides to look the other way. But restricting the analytical activity to examining and making inferences in the models is tantamount to treating the models as a self-contained substitute systems, rather than as surrogate systems that the modeler uses to indirectly being able to understand or explain the real target system. Trying to develop a science where we want to be better equipped to explain and understand real societies and economies, it sure can’t be enough to prove or deduce things in model worlds. If theories and models do not — directly or indirectly — tell us anything of the world we live in, then why should we waste time on them? (full text).


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