Friday, March 26, 2010

Economics And Models

David Brooks has an incoherent column today about the death of economics.  All approaches and methodologies for generating knowledge have strengths and limitations, yet Brooks seems unwilling to view economics through a context of trade-offs.  He observes that economics has been trending towards more complexity and asserts that this process will continue until the field of study becomes something akin to Zen Buddhism in eschewing all forms of simplification.  Just kidding.

Economics is best understood as a model-building discipline.  Models are essentially simplified versions of reality: their goal is to make sense of the world by sorting important details from unimportant ones.  They should be simple, fit well with reality, and identify some sort of causal mechanism.  There tends to exist a trade-off between a model's simplicity and its ability to fit well with reality (what we observe in the real world), and this is often the source of conflict: what is the optimal balance between simplicity and empirical validity?  At one extreme, if we add too much complexity into our model, it may become nearly as complex as the reality it seeks to model, telling us very little about any causal relationships.  Conversely, too much simplification might leave out important elements.

Brooks praises the study of history, viewing it as economics' final evolutionary destination.  This prediction betrays a serious lack of understanding about each discipline's goals.  History, for the most part, is not interested in model-building.  It is all about context and details; there is no rigorous attempt to simplify things down into a causal mechanism.  Of course the best description of a rare and influential event must include idiosyncratic details, but that sort of "rich, thick" description of a single case necessarily limits the ability to generalize, compare, and most of all predict. 

The addition of new complexities into economics is indeed a positive change---incorporating psychology better aligns assumptions with real-world observations---yet we must recognize that its models have reduced strength and analytical precision.  The addition and subtraction of complexity should be a careful, incremental process governed by empirical testing and changing methodological constraints.  The idea that economics will wildly careen towards history and philosophy, its simplifying assumptions flying off into the abyss, is foolish and misunderstands the purpose of social science.

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