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Economic models and reality

Summary:
Economic models and reality The abandonment of efforts to match real structures has led to disaster, as models of economic theory have grown progressively distant from reality. Attempts to fix the problem have failed to address the cause. Economists look at bad models, and say we should replace these by better models. But the process by which models are evaluated, the underlying methodology, is not examined. The real problem lies much deeper than bad models and ludicrous assumptions. Bad assumptions would quickly be replaced by better ones if the methodology insisted on correction of models to match reality. The real problem is the lack of a progressive methodology. When our mental models are attempts to approximate reality, then, when they fail, we try

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Economic models and reality

Economic models and realityThe abandonment of efforts to match real structures has led to disaster, as models of economic theory have grown progressively distant from reality. Attempts to fix the problem have failed to address the cause. Economists look at bad models, and say we should replace these by better models. But the process by which models are evaluated, the underlying methodology, is not examined. The real problem lies much deeper than bad models and ludicrous assumptions. Bad assumptions would quickly be replaced by better ones if the methodology insisted on correction of models to match reality. The real problem is the lack of a progressive methodology. When our mental models are attempts to approximate reality, then, when they fail, we try to improve the match to reality. Our models become better as approximations to the hidden structures of reality. However, when we abandon efforts to match reality, our mental models can become progressively worse as approximations to reality while becoming better at providing a match to observations …

The problem can be fixed only if we adopt a realist philosophy of science. Critical realism offers an extremely useful alternative to current economic and econometric methodology. A realist philosophy has the possibility of learning from experience. Even if we start with ridiculous assumptions, we will modify them in face of empirical evidence to the contrary. In complete contrast, economists stubbornly stick to assumptions known to be false because the standard methodology says that false assumptions are not a problem for models. There is no hope for progress in economics until we abandon Friedman’s methodological prescriptions according to which the more ludicrous our assumptions, the better our model.

Asad Zaman

Yes indeed, critical realism offers a useful alternative to current economic methodology. In a time when scientific relativism is still on the march, it is important to keep up the critical realist claim for not reducing science to a pure discursive level.

Science is made possible by the fact that there exists a reality beyond our theories and concepts of it. It is this reality that our theories in some way deal with. Contrary to positivism, yours truly cannot see that the main task of science is to detect event-regularities between observed facts. Rather, the task must be conceived as identifying the underlying structure and forces that produce the observed events.

The problem with positivist social science is not that it gives the wrong answers, but rather that in a strict sense it does not give answers at all. Its explanatory models presuppose that the social reality is ‘closed,’ and since social reality is fundamentally ‘open,’ models of that kind cannot explain anything about​ what happens in such a universe. Positivist social science has to postulate closed conditions to make its models operational and then – totally unrealistically – impute these closed conditions to society’s real structure.

What makes knowledge in social sciences possible is the fact that society consists of social structures and positions that influence the individuals of society, partly through their being the necessary prerequisite for the actions of individuals but also because they dispose individuals to act (within a given structure) in a certain way. These structures constitute the ‘deep structure’ of society.

Our observations and theories are concept-dependent without therefore necessarily being concept-determined. There is a reality existing independently of our knowledge and theories of it. Although we cannot apprehend it without using our concepts and theories, these are not the same as reality itself. Reality and our concepts of it are not identical. Social science is made possible by existing structures and relations in society that are continually reproduced and transformed by different actors.

Explanations and predictions of social phenomena require theory constructions. Just looking for correlations between events is not enough. One has to get under the surface and see the deeper underlying structures and mechanisms that essentially constitute the social system.

The basic question one has to pose when studying social relations and events are​ what are the fundamental relations without which they would cease to exist. The answer will point to causal mechanisms and tendencies that act in the concrete contexts we study. Whether these mechanisms are activated and what effects they will have in that case it is not possible to predict, since these depend on accidental and variable relations. Every social phenomenon is determined by a host of both necessary and contingent relations, and it is impossible in practice to have complete knowledge of these constantly changing relations. That is also why we can never confidently predict them. What we can do, through learning about the mechanisms of the structures of society, is to identify the driving forces behind them, thereby making it possible to indicate the direction in which things tend to develop.

The world itself should never be conflated with the knowledge we have of it. Science can only produce meaningful, relevant and realist knowledge if it acknowledges its dependence of the​ world out there. Ultimately that also means that the critique Asad Zaman and yours truly wage against mainstream economics is that it doesn’t take that ontological requirement seriously.

Lars Pålsson Syll
Professor at Malmö University. Primary research interest - the philosophy, history and methodology of economics.

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