Wednesday, February 4, 2009

Criticizing economics – uhm, how really?

Ole writes about the pitfalls when criticizing economics. Take it one step back – how to do it? Soap is sticky compared to any economic model.

Take simplification: In first place, you cannot attack a model for being unrealistic in any particular aspect because of its need to be simple. I buy that.

But what does one mean by keeping it simple? “Stripping it from everything that is irrelevant for the question at hand” one might answer. Aha. But when undressing reality, how do I know when to stop? And how do I make sure that I can leave out something; that it doesn’t interact in any important way with what I mean to describe (To stay in the dressing room: taking off the belt might mean the trousers are on the floor)?

But it is not only that. If you point out that it is not only a simplification but also rests on wrong assumptions you are told that they are not wrong but heroic: needed to get at the very essence of what you are interested in. But, hello, are there any rules for those Hercules assumptions? I haven't seen them. Nobody seems to care about justifying assumptions. Rather, anything goes it seems as long as rationality is in place, assuring mathematics are on board. I see the point of using maths but I want to make sure that what I end up with is not to economic reality what the board game “Monopoly” is to real estate agents.

Take the pet I am supposed to keep watch over these days, the Cournot model; describing imperfect competition by few sellers that have some given capacity and decide on quantities to be put on the market. There is an itch, telling me that reality and Cournot do not always get along well. But how do I scratch it?

Do all other firm decisions not interact or interfere with the choice of quantity? Who am I to judge? Does it matter? And is it a mere simplification? Nope. One example: The model is requiring all the sellers to be perfectly informed and I don't think I need to make a case here arguing that production costs are business secrets. So it's not only simplifying, it is making assumptions that one knows are wrong. How to argue then that it still captures the essence of imperfect competition?

I don’t know, but it is argued. But if it is okay and necessary to have wrong/heroic assumptions, where does that leave the one wanting to criticize the model?

Imperfect competition means higher prices and less supply compared to the perfect competition case. The Cournot model says it is by restricting quantity taking the other suppliers' quantities into account that that happens, giving, at least theoretically (there are tons of info requirements on the researcher too) an idea of by how much the magnitudes change. Is the Cournot model just a straw man for "higher prices"? Does it not make any claim to be a description of how those prices are achieved?

My point is that 1) even with an MPhil in Economics (got that on paper) models are still mysterious monsters to me and 2) they don't tell me what type of monster they are, making it hard for me to decide whether to take the sword or the garlic to attack them.