Monday, July 18, 2011

The Power of Economic Models

I have spent some time on this blog talking about how economic models are not "all that" and how obsession with models can stultify analysis. The basic problem is this: what about factors that are not reflected in models? What do you do about those? There is always a risk that models, by being too influential and offering false clarity, can cause an excessive mental focus on particular factors when other factors not in the model are equally or more important.

But I want to be clear. Economic models are still very powerful and still useful in helping clarify thinking. A good example is this post by Paul Krugman today (who emphasizes that models do not necessarily have to be mathematical, although there isn't anything wrong with mathematical models as long as one does not become obsessed with the math as opposed to the real world that are the inspiration for the model). As one can see after reading Krugman's post, models can be helpful in clarifying thinking.

However, this very clarifying function is part of the dangers of models. Because models occasionally have the power to seemingly cut through the confusion, often in an eloquent way, there is a temptation to overuse them and rely on them excessively.

Basically, economic models can be extremely useful. But they are only one tool in one's intellectual toolbox and it should always be remembered that they are but one part in a larger argument. The problem is not economic models per se, the problem is obsession with economic models while losing sight of the bigger picture and everything that matters that is not within the models. That said, models can sometimes help you make an argument about what does and does not matter.