Models and Reality: How Did Models Divorced from Reality Become Epistemologically Acceptable?

Abstract

Economic models translate real problems to an artificial world, and calculate outcomes. The match between artificial worlds populated by rational robots, and the real world, is never assessed. Instead, models are judged on aesthetic grounds, involving conformity to preconceived principles of optimization and equilibrium. Despite methodological proclamations to the contrary, models are not judged by predictive performance. Economics models are formulated axiomatically, and never cross-checked against reality. Taking this (controversial) characterization of economic methodology for granted, this paper sketches trends in philosophy of science which led to a methodology which permits creation of mental models disconnected from reality. A key development was the separation of the observable phenomena from the underlying reality (noumena) which eventually allowed empiricist philosophers to jettison the underlying reality as part of what good models attempt to describe. The paper discusses contemporary methodologies for assessing models in economics and econometrics, and explains why these lead to models disconnected from reality.

Keywords

• Epistemology,Empiricism,Logical Positivism,Critical Realism,Economic Methodology

References

1. Alexandrova, A. and R. Northcott (2013). It’s just a feeling: why economic models do not explain. Journal of Economic Methodology, 20 (3), 262-267.
2. Bergmann, B. (2007). Needed: a new empiricism. The Economists’ Voice, 4 (2), 1-4.
3. Bhaskar, R. (2008). A Realist Theory of Science. London and New York: Routledge.
4. Blanchard, O. (2016). Do DSGE models have a future? Revista de Economía Institucional, 18 (35), 39-46.
5. Cooter, R. and P. Rappoport (1984). Were the Ordinalists wrong about welfare economics? Journal of Economic Literature, 22 (2), 507-530.
6. Evans, G. W. and S. Honkapohja, (2005). An interview with Thomas J. Sargent. Macroeconomic Dynamics, 9 (4), 561-583.
7. Friedman, M. (1953). The methodology of positive economics. In M. Friedman, Essays in Positive Economics. Chicago: University of Chicago Press.
8. Hands, D. W. (2012). The positive-normative dichotomy and economics. Handbook of the Philosophy of Science, 12, 219-239.

9. Hausman, D., M. McPherson and D. Satz (2016). Economic analysis, moral philosophy, and public policy. Cambridge University Press.
10. Hoover, K. D. (2004). Lost causes. Journal of the History of Economic Thought, 26 (2), 149-164.
11. Klamer, A. and R. E. Lucas (1983). Conversations with economists: New classical economists and their opponents speak out on the current controversy in macroeconomics. Rowman & Littlefield.
12. Kocherlakota, N. (2016, July 17). Toy Models. Retrieved March 11, 2020, from https://t.co/8dS85Nlpg9
13. Mäki, U. (2002). Fact and fiction in economics: models, realism and social construction. Cambridge University Press.
14. Mäki, U. (2009a). The methodology of positive economics: Reflections on the Milton Friedman legacy. Cambridge University Press.
15. Mäki, U. (2009b). Reading the methodological essay in twentieth-century economics: map of multiple perspectives. The Methodology of Positive Economics, 47.
16. Mäki, U. (2018). Rights and wrongs of economic modelling: refining Rodrik. Journal of Economic Methodology, 25 (3), 218-236.
17. Manicas, P. (1987). A history and philosophy of the social sciences. Oxford: Basil Blackwell.
18. Manicas, P. T. (2006). A realist philosophy of social science: Explanation and understanding. Cambridge University Press.
19. Morgan, M. S. (2012). The world in the model: How economists work and think. Cambridge University Press.
20. Pearl, J. (2008). Causality: models, reasoning, and inference (2. ed.). Cambridge University Press.
21. Putnam, H. (2002). The collapse of the fact/value dichotomy and other essays. Harvard University Press.
22. Reiss, J. (2012). The explanation paradox. Journal of Economic Methodology, 19 (1), 43-62.
23. Robbins, L. (1932). An essay on the nature and significance of economic science. London: Macmillan.
24. Rodrik, D. (2015). Economics rules: The rights and wrongs of the dismal science. WW Norton & Company.
25. Romer, P. (2016). The trouble with macroeconomics. The American Economist, 20, 1-20.
26. Solow, R. (2010). Building a Science of Economics for the Real World. In House Committee on Science and Technology Subcommittee on Investigations and Oversight.
27. Suppe, F. (2000). Understanding scientific theories: An assessment of developments, 1969-1998. Philosophy of science, 67, 102-115.
28. Willard, V. O. (1963). Two dogmas of empiricism. In M. Richard, Meanings as Species.
29. Zaman, A. (2010). Causal Relations via Econometrics. International Econometrics Review, 2 (1), 36-56.
30. Zaman, A. (2012a). Methodological Mistakes and Econometric Consequences. International Econometric Review, 4 (2), 99-122.
31. Zaman, A. (2012b). The Normative Foundations of Scarcity. Real-World Economics Review, 61 (26), 22-39.
32. Zaman, A. (2015). Deification of Science and Its Disastrous Consequences. International Journal of Pluralism in Economics Education, 6 (2), 181-197.
33. Zaman, A. (2018, July 26). Quotes Critical of Economics. Retrieved March 01, 2020, from WEA Pedagogy Blog Post.
34. Zaman, A. (2020, February 19). Facts and Values: Distinction or Dichotomy? Retrieved March 01, 2020, from WEA Pedagogy Blog Post.
35. Zaman, A., & Karacuka, M. (2012). The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature. International Journal for Pluralism and Economics Education, 3 (4), 366-414. Zaman, A., & Salahuddin, T. (2020). Causality, Confounding, and Simpson’s Paradox. International Econometrics Review, 12 (1).