In a working paper two students and I write:
Stevans argues that, “most academic economists are concerned with studying such obscure topics as backward induction among chess players and the existence of monotone pure-strategy equilibrium in Bayesian games.” Does “most” mean more than half? Eighty-percent? Is there a right amount? He is onto something, of course. As Paul Krugman has written in many places, economic confusion comes about because modelers have little conceptual notion of what it is they are trying to model. But this does not mean modeling qua modeling is wrong, or even mindless drudgery. There is modeling for modeling’s sake – the kind that perhaps should be scrutinized. And then: there is good modeling. Models are not just neat ways of illustrating sometimes complex ideas. They are essential.
Applying formal theoretical and mathematical techniques to economic history (referred to as “cliometrics”) has revolutionized the way we understand the history of slavery, transportation, agriculture and other areas without making those topics inaccessible. In defending the formalization of economic history, Nobel Laureate Robert Fogel famously stated that, “The belief that the older economic history is solidly grounded in fact is an illusion … it is permeated with untested covert models and subliminal mathematical assumptions.” Graduate education focuses on model building because models prevent us from saying whatever it is we want to say about the world. Writing down a model of human behavior and interaction is the only way we can understand whether or not what we are saying is logical – with propositions within the models and outside of them. Perhaps the crisis in modern economics is not that we build too many models, or that the models of academic economists are unnecessarily complex, but perhaps that we have yet to discover a model to help non-economists model the world themselves.
A student came to me the other day and mentioned, sort of out of the blue, that private agencies should not deliver water to cities, and that rural and suburban water ought not be priced because it would cause the poor to suffer. I did not push the issue. But this person, if asked what model of the world he was operating under, would very likely not have been able to offer one. And that is a problem, as we’ll elaborate on in the future. But he certainly was operating under a model – and I wonder how he’d defend it. The simple model? That the elasticity of demand for water is zero. If that were indeed true, then when private agencies charged market prices for water that reflected its true social cost, we’d only see transfers from customers to firms – and no economizing on water use at all. But we know that perfectly inelastic demand curves cannot exist, and we can also ask our student what conditions would have to prevail in order to generate such a curve in the water market. And he’d have seen that those conditions are extraordinarily unlikely.
So, while I am not a huge fan of fancy, technocractic model building, that does not mean I am not a strong supporter of logical and systematic explanations of behavior. To say that you can dispassionately look at facts, examine history or understand the social, political and cultural influences on people and that means you do not need an economic model to describe behavior is implausible. The point is, when making such judgments you are still using an economic model, it’s just that you are not articulating what it is. I have taken this to heart lately. It doesn’t make sense trying to reason with people, so what I do is simply ask questions about how they came to the positions they are taking.