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I am sure those of you who defend markets based on the logic of supply and demand or on the logic of trade and comparative advantage have encountered this reaction. I get this regularly of course, even after I move from the models to dramatic illustrations of how they have worked in practice and even after I show piles of empirical examples of their application. Nonetheless, some folks simply dismiss an idea they don’t like because they heard someone, somewhere, criticize the positivist method for having to be unrealistic in its formulations.

If you want to learn more about the importance of model building and what it does and does not say about what we can know about the economic world, read anything by my excellent colleague Steve Landsburg. He’s got a nice chapter in his latest book, The Big Questions, on it too.

A common objection to free-trade, for example, (an article in the NYT last week about Apple and outsourcing sparked a good amount of chatter about this) is that “free-trade works on graphs and in equations” but that’s not the real world. I will not address that claim here. When you hear someone criticize an economic model/theory for not being realistic you can rest assured that the person has no idea what they are talking about. How so? Two major reasons I would suggest:

  1. Many basic economic models seem to support the idea that a laissez-faire approach to economic activity tends to produce good outcomes. Have you ever heard a critic of such models argue that, “hey, that’s what the model says, but in the real world, even more laissez-faire than the models suggest would be even better?” Nope. And you never will. Generally speaking, the only criticisms I encounter are those that object to a model that suggests a smallish role for government. Seriously, how many of these same criticizers have you heard say, “gee, maybe we shouldn’t tax emitters of pollution – after all, the Pigovian tax comes from a model, not from what we actually see in the real world?” Or how many of these same criticizers have you heard say, “gee, maybe we should ignore the theory of adverse selection, after all, the idea that insurance markets unravel comes from an unrealistic model that assumes information asymmetries that don’t actually exist in the real world, and so maybe we should rethink how we regulate the health insurance industry?” And so on. I think you get my point.
  2. That’s not exactly how these people behave in the real world and not how they respond to models that seem to suggest a world that they like better. Walk around today and ask people what they think about Global Warming. Ask them why we should increase taxes on carbon or perhaps scale back industrial civilization. Don’t just have them say, “because bad things may happen if we don’t.” Rather, ask them how they know this. Indeed, go one step further, ask them why global temperatures are not higher today than they are – after all, it was predicted that given the current levels and rates of emissions of carbon dioxide the planet would be hotter today than it is, and hotter in particular places than it is (such as the tropical upper troposphere). The entire global warming movement is based on totally unrealistic modeling. Note, that this does not mean I don’t believe them, I am raising a consistency point again. And the models indeed are unrealistic. We don’t even know how to model the impacts of water vapor, and we have to use calibration (and not theory) to figure out what feedback loops there are within climate systems, just to name a few of the uncertainties.

    But I’ve never heard a supporter of doing something about climate change condemn the models on the same grounds that they condemn economic models, particularly free trade. Furthermore, ask someone who favors economic stimulus in times of recession, or who wishes to argue that the 2009 stimulus should have been larger, or that we ought to do stimulus now, how they came to that decision and they’d have no choice but to say, “because our economic models tell us we ought to do so.” Seriously, there is absolutely no real world experience or evidence to confirm or deny any view on what economic stimulus actually does. Now, I like to argue from a microeconomic chain of logic about why it would be hard to believe that stimulus would be a good idea, but I have no serious real-world evidence to 100% make my case – nor do stimulus proponents. So, in the case of the proponents, their belief in stimulus has to be based on models. Never mind how utterly inconvenient that position may be given the complaint I encounter in the title of this post – I don’t think anyone who makes claims like this spends more than one iota asking themselves if they are making sense. Why? Because we are either so extraordinarily delusional, or that we so badly want to affiliate with a particular group or idea, that we just say what sounds reasonable and go no further.

To be honest, this state of affairs is perhaps the most depressing of all the aspects of having to be engaged in what people think is “serious intellectual discourse.” It’s not. Not because it’s not possible but rather because few people (myself perhaps included) really are interested in having it.

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2 Responses to “Well, that’s what your fancy economic model says, but what about the REAL world?”

  1. Harry says:

    Great piece, WC.

    Over the past week we have been blown by the wind of another great solar storm, and the IPCC has not made a peep about it.

    This morning I caught a commercial from GM promoting the Volt. The narrator explained unabashedly that We Made it Because We Had To. A great example of dramatic irony.

  2. Harry says:

    My model tells me that people who are for gun control want loose money. Hey, loose everything. Makes sense, huh?

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