Models, Who Needs Them?

There are many books that I've read that continue to influence my thinking. An important book for me is "Philosophy: Who Needs It?" by Ayn Rand. This book was important, not because I became a Randian. I didn't after that book nor "Atlas Shrugged". Instead, it was the first book I read that urge me to think about philosophy.

Before Rand, I was like most people, scoffing at philosophy, dismissing argument as "just philosophical." I, in all my infinite wisdom, didn't need to think of the mumbo-jumbo philosophy.

Rand's main argument in the title essay is that the question isn't whether to have a philosophy or not. Every person must have a philosophy of how to live their lives. It's unavoidable.

The options are to follow the philosophy that we absorb through life or consciously choose our philosophy. If we do the first, our philosophy might come indirectly from parents, friends, teachers, or celebrities. It might be whatever we pick up through our day-to-day.

Or, as Rand argues we should know what our philosophy is and why it is our philosophy. We can think deeply about the way we want to live our lives and work to pursue that. Instead of passively floating down the river, we can direct our philosophical boat in the direction we want.

The answer to Rand's question "who needs it?" We all do.

Economic Models

The same is true for models of the world, although I have economic models in mind for this post. For this post, I'm using the word "model" to mean a systematic way of analyzing economic questions. We can debate elsewhere the difference between models, theories, frameworks, etc.

If you don't want to talk or think about economics, you don't need a model. That's fine. Economics is not as fundamental as philosophy.

But I haven't met anyone yet who doesn't talk about economic issues. Every time you blame those greedy oil companies for high gas prices, you're using a theory of economics that you probably picked up without knowing. As Rothbard reminds us,

[i]t is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

After reading Rand, I realized I can passively pick up my economic analysis from newspaper or our humanities professors. Or I can pick the models I use and then do are best to understand how to apply them. Models push me to clarify my thinking. That's why economists love models and are insistent on being explicit about them.

Using models might seem odd to non-economists who aren't used to talking about or thinking about models explicitly. I know it was weird for me when I first studied economics.

Our love of models comes up in discussions with critical students, who usually invoke some heterodox economics. Complaints are levied against the common models, say standard consumer theory. "Individuals aren't rational" is one classic complaint. Sometimes Samuelsonian economists get annoyed at these complaints and ask "what's your model?" That is not because economists are evil jerks who want to crush any outside opinion. Every economist I've met is nice and willing to discuss models. We love that.

Instead, we are looking for what model the complainer has in mind. Only then can we judge whether it is a helpful way of looking at the world. If the model you use is "corporations are evil and cause all the bad in the world", fine. You should at least know that so you can decide for yourself whether that is a good model.

Models are just tools, nothing more, nothing less. The economist who insists on a model does so because he finds it easier to discuss a topic when it is clearer where people are coming from. Once a model is put forward, then we can talk about what are the costs and benefits of using it.

People cannot debate economics, nor any social science, without at least using implicit models. It's not only ill-advised, but impossible. One person asserts QE will cause inflation. He is using a model, probably not a good one. If a person says capitalism impoverishes Africa. He is probably invoking a poor model.

Since it's impossible to not use models, I want to know what model I am using. I hope the people I discuss economics with have the same goal. This is an idea I've been going on about all week on Twitter.

To be clear, the models don't need to be equations. A supply and demand graph is a model, and a damn good one. Sometimes equations help clarify a model. Sometimes they don't. Either way, I want to choose my models carefully to aid my understanding of the world.

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.

My advice to other: Don't be the "practical men" who Keynes is talking about. Figure out which models you use and only use the ones you want.

There are many references that explore the nature and role of models, specifically how economists use them. Some that people recommended by Erik Angner and Beatrice Cherrier are here, here, and Mary Morgan's book The World in the Model: How Economists Work and Think. Morgan's book is by far the most thorough examination of models that I've seen.

3 thoughts on “Models, Who Needs Them?

  1. Great post! Question regarding this "One person asserts QE will cause inflation. He is using a model, probably not a good one. If a person says capitalism impoverishes Africa. He is probably invoking a poor model."

    I can see why the second one is a bad model, but why the first one?

    Rich Levins, back in 1989 (when lots of people criticized mathematical models, not just the oft-shunned Austrians), wrote a fantastic short critique of mathematical modeling and offered a very simple alternative model:

    • For the QE example, I was merely thinking of the wrong predictions of inflation around the time of the financial crisis. Pop commentators were generally using a model that did not allow demand for money to change. Since there was a supply shock, inflation was bound to happen. It didn't, so they were using the wrong model to understand the situation.

      Obviously, models don't have to be wrong always. Certain models might be insightful at one moment, but not another.

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