by Economists using ‘importantly wrong’ models Mainstream economists who want to defend their use of models often quote statistician George Box, saying that “all models are wrong, but some are useful.” But the important lesson taken from Box ought to be another quotation from the same paper: “since all models are wrong the scientist must be alert to what is importantly wrong. It is inappropriate to be concerned about mice when there are tigers abroad.” What is ‘importantly wrong’ with mainstream economists’ models — standardly assuming rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing
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Lars Pålsson Syll considers the following as important: Economics
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Economists using ‘importantly wrong’ models
Mainstream economists who want to defend their use of models often quote statistician George Box, saying that “all models are wrong, but some are useful.” But the important lesson taken from Box ought to be another quotation from the same paper: “since all models are wrong the scientist must be alert to what is importantly wrong. It is inappropriate to be concerned about mice when there are tigers abroad.”
What is ‘importantly wrong’ with mainstream economists’ models — standardly assuming rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative agents with homothetic and identical preferences, etc. — and standardly ignoring complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc. — is that we are supposed to believe that they somehow help us understand and explain real-world economies.
Yours truly is, to say the least, far from convinced. Rather than helping understand real-world economic issues, mainstream economics is more of an ill-advised plaidoyer for voluntarily taking on a methodological straight-jacket of unsubstantiated and known to be harmfully false and ‘importantly wrong’ assumptions. ‘Importantly wrong’ models and theories building on that kind of reasoning are nothing but a pointless waste of time.
Many mainstream economists working in the field of economic theory think that their task is to give us analytical truths. That is great — from a mathematical and formal logical point of view. In science, however, it is rather uninteresting and totally uninformative! The framework of the analysis is too narrow. Even if economic theory gives us ‘logical’ truths, that is not what we are looking for as scientists. We are interested in finding truths that give us new information and knowledge of the world in which we live.
Scientific theories are theories that ‘refer’ to the real world, where axioms and definitions do not take us very far. To be of interest to an economist or social scientist that wants to understand, explain, or predict real-world phenomena, the pure theory has to be ‘interpreted’ — it has to be an ‘applied’ theory. An economic theory that does not go beyond proving theorems and conditional ‘if-then’ statements — and does not make assertions and put forward hypotheses about real-world individuals and institutions — is of little consequence for anyone wanting to use theories to better understand, explain or predict real-world phenomena.
Building theories and models on unjustified patently ridiculous and ‘importantly wrong’ assumptions we know people never conform to, does not deliver real science. Real and reasonable people have no reason to believe in ‘as-if’ models of ‘rational’ robot imitations acting and deciding in a Walt Disney world characterised by ‘common knowledge,’ ‘full information,’ ‘rational expectations,’ zero transaction costs, given stochastic probability distributions, risk-reduced genuine uncertainty, and other laughable nonsense assumptions of the same ilk. Science fiction is not science.
Much work done in mainstream theoretical economics is devoid of any explanatory interest. And not only that. Seen from a strictly scientific point of view, it has no value at all. It is a waste of time. And as so many have been experiencing in modern times of austerity policies and market fundamentalism — a very harmful waste of time.