This is the introduction of my recently published paper “Models and Reality: How did models divorced from reality become epistemologically acceptable?” (May 3, 2020). Real World Economics Review, Issue 91, p20-44, March 2020. Available at SSRN: https://ssrn.com/abstract=3591782
1: Intro: From Surrogates to Substitutes
The problem at the heart of modern economics is buried in its logical positivist foundations created in the early twentieth century by Lionel Robbins. Substantive debates and critiques of the content actually strengthen the illusion of validity of these methods, and hence are counterproductive. As Solow said about Sargent and Lucas, you do not debate cavalry tactics at Austerlitz with a madman who thinks he is Napoleon Bonaparte, feeding his lunacy. Modern macroeconomic models are based assumptions representing flights of fancy so far beyond the pale of reason that Romer calls them “post-real”. But the problem does not lie in the assumptions – it lies deeper, in the methodology that allows us to nonchalantly make and discuss crazy assumptions. The license for this folly was given by Friedman (1953, reproduced in Maki 2009A): “Truly important and significant hypotheses will be found to have ‘assumptions’ that are wildly inaccurate descriptive representations of reality”. In this article, I sketch an explanation of how economic methodology went astray in the 20th Century, abandoning empirical evidence in favor of mathematical elegance and ideological purity. Many authors have noted this problem – for instance, Krugman writes that the profession (of economists) as a whole went astray because they mistook the beauty of mathematics for truth.
To begin with, it is important to understand that modern economics is entirely based on models. There is a lot of merit to the idea that economic knowledge must be encapsulated in models. This is because economic systems are complex and interactive. We may well have strong intuitions about some local aspects of the system, but when we put all our intuitions about the different parts together, something unexpected may emerge. This is now well known as the phenomenon of complexity, and emergent behavior. This also explains the central importance of mathematics in modern economics. When we want to piece together parts of a complex system into a whole, mathematics is necessarily and inevitably involved, because the required integration cannot be done intuitively and qualitatively. The central hypothesis which drives this paper is that the relationship between economic models and reality shifted over the course of the 20th century. The nature of this shift can be described by borrowing some insightful terminology from Maki (2018). He defines two types of models. One is a surrogate model: such a model is a simplification which attempts to match some complex reality, and can be judged by the degree of resemblance it achieves. The second type is a substitute model: the imagined mini world of the model is a substitute for the target maxi real world, rather than an attempt to approximate the latter. As Maki (2018)) notes: “surrogate models can be wrong (or right), while substitute models cannot even be wrong about the world (since they are not presented and examined as being about the world).” Our main thesis in this paper is that economists started to use models as surrogates, but eventually fell in love with their own creations, and began to treat them as substitutes for the real thing. The goal of this paper is to sketch how and why this happened.
2:A middle-brow history of methodology
Our goal in this essay in NOT to add to the debunking of economics – this task has been done in many books and essays, and the debunking has been contested by many other books and essays. A balanced state of the art survey is available in Uskali Maki (2002) who opens the book with:
“Fact or fiction? Is economics a respectable and useful reality-oriented discipline or just an intellectual game that economists play in their sandbox filled with imaginary toy models? Opinions diverge radically on this issue, which is quite embarrassing from both the scientific and the political point of view.”
Instead of joining this debate, we take the second option as a given: economics is an intellectual game that economist play with toy models. We are interested in the meta-question of how did this become possible? What are the trends in history of thought which allowed the development of models completely divorced from reality?
A book length detailed treatment of the answer to this question has been provided by Manicas (1987) in “A history and philosophy of the social sciences.” The central thesis of this “embarrassingly ambitious” book challenges the very notion of “social science”, suggesting that it was built on the wrong foundations. A very brief outline of the central ideas of this book is as follows.
- The practices of the modern sciences which emerged in the sixteenth and seventeenth centuries were incorrectly characterized. For various historical reasons, this remained unrecognized in the more refined and sophisticated ‘philosophies’ of science which subsequently came to be articulated.
- Social sciences took their modern shape in the early 20th Century as the result of a deliberate attempt to apply the ‘scientific method” to the production of knowledge about human societies. But the understanding of the scientific method was deeply flawed. As a result, the “methodology” adopted for use in social science was also deeply flawed.
According to Manicas, “The upshot is the possibility of a thoroughgoing revolution in the received ideas of science, natural and social. It allows us to ask whether there is a huge gap between the ideology of science and practices in the physical sciences, and whether, more disastrously, the social sciences have been ideologically constituted in the sense that they were based on a misconception about what the physical sciences are.”
In a commentary on Rodrik’s (2015) defence of economic methodology, Maki (2018) writes that “The portrait of economics offered by philosophers of economics… (is)… too refined for practicing economists, but the degree of refinement… (in understanding economic methodology)… currently held by practicing economists is often too low.” The message of Manicas (1987) is central to understanding current methodology of social science, and leads to the possibility of a thoroughgoing revolution. However, reading and understanding this book requires background in history and philosophy which very few economists have. As a partial remedy, I have attempted to provide a coarse-grained and crude summary of some of the highbrow philosophical ideas which have driven the development of methodologies in the social sciences in general, and economics in particular. The goal is to explain how it became possible to think that it is reasonable to develop models without connecting them to external real world structures. We begin with a rough description of what this methodology is, based on an experiential view, rather than a theoretical perspective.
To read remainder of paper, see https://ssrn.com/abstract=3591782