Wednesday, November 16, 2011

The “canonical model” and the importance of default models

A Google+ post from Al Roth alerted me to an interesting conversation at The Straddler with Raquel Fernández. She has some great ways of making some nice points, such as her statement that a:

problem [in economics] is that methodology frequently trumps the question. Once you have a way to model things, much of the research becomes very self-referential; that is, it becomes more about how the model  behaves and less about the question. I think the question really matters, but a lot of economists believe the methodology matters more than the question. And this leads to very elaborate models of very many things without much of an outside reality check.

Another interesting impression I get from her talk, which is not explicit and may be a misreading on my part, flows from this point and concerns the importance of default models: The “default” or “canonical” model of economics describes a perfect-competition well-functioning market. We know that this is an incorrect description of the world, but it frequently shapes our “gut reaction,” and because we understand it fully we feel more comfortable arguing about this model than about the world. As a result, economists who give policy advice are treated more leniently by fellow economists if their advice is consistent with the standard model.

[…] the people who go and give advice usually end up with a very bad rap in economics. I am amazed at how much hatred—and I will say hatred—Paul Krugman evokes from some fellow economists. But one of the reasons for this is that he says things for which there is not “scientific” support and which go against what these people believe is "good" economics. Now, people on the other side also say things for which they do not have "scientific" support incidentally, and they don’t get the same amount of hatred.[…]

Take the argument we’ve been having recently. Should we be trying to increase aggregate demand or should we be reducing the deficit? […] Well, a model is not going to give you the answer because it depends on whether you write the model in such a way that getting aggregate demand up is a good idea, or whether you write it in such a way that people are really worried about future deficits that are coming around the road and they won’t invest because they know that taxes are going to be high in the future.

These things are rigged into the model from the beginning when it’s such an unsettled question, and we don’t really have an exact science-based way to answer it, which is why we argue about history. […]

Economists don’t have to be free-marketers. But that ends up being the canonical model, and then everything else ends up being a departure from the canonical model, which you’ve then got to explain why you’re departing from. It’s not because the canonical model is right, it’s because you ask most economists and they’ll say, “At least we understand how that economy works very, very well. So you want to tell me that we’re going to move away from this one and move to something else, that’s fine, but you have to explain why you’re putting in all of these imperfections.” So it’s not that you can’t write those things down, it’s just that there is less of a standard way of doing it.