Sunday, October 3, 2021

Good economic models

Explaining Unit 2 of CORE’s e-book "The Economy" in the new degree on History, Politics and Economics at my university, I’m discussing with my students what is a good model in economics, and they have to do a task about it.

Models can be in text (like with Ronald Coase), in graphical or mathematical form, and usually come in a combination of these different languages. Marx worked with models and some economic concepts are models implicitly, like the use of GDP to measure the standards of living: good for some questions (inequality, growth), very imperfect for others, like welfare. There are many different models.

"The Economy" says that a good economic model has four attributes:

It is clear: It helps us better understand something important.

It predicts accurately: Its predictions are consistent with evidence.

It improves communication: It helps us to understand what we agree (and disagree) about.

It is useful: We can use it to find ways to improve how the economy works.

The economic historial Robert Allen (in a great article linked in unit 2 of "The Economy," reviewing the work of another economic historian, Gregory Clark) says that “models can help to organize and guide the collection of information, but they are no substitute for research.” I couldn’t agree more.

Sometimes it is said that an economic model is like a map. It is true that it shares with a map the fact that it is a simplification, that it focuses in what is important for some purpose and leaves aside other unimportant details. However, models are logical constructions which do not try to mirror reality ex ante (although to be relevant they must be related to real facts), but to be able to ask relevant questions and hypotheses. Everything in a map should be true (at scale), which is not a priori the case in economics. An economic model might explore a hypothetical case: what would it happen if… which is not the case in a map. But once I said this in a CORE workshop and several colleagues disagreed, so perhaps I have unjustifiably less faith in the map metaphor.

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