Chronic Murmuring

Economic Modeling

Paige and Miles have been in Nashville since Friday, allowing me the ability to finish my macro problem set at home. So, consider my silence online to be a signal of productivity! I managed to get through several chapters of Romer's Advanced Macroeconomics, which is surprisingly, an excellent book. I found a good quote which, I think, helps me understand why economic modeling, even when it is not realistic, is still valuable. This is a considerable realiziation for me, as for a while, this has been one of my chief complaints about all the mathematics that we use.

"...a general comment about modeling is called for. The Solow model is grossly simplified in a host of ways. To give just a few examples, there is only a single good; government is absent; fluctuations in employment are ignored; production is described by an aggregate production function with just three inputs; and the rates of saving, depreciation, population growth, and technological progress are all constant. It is natural to think of these features of the model as defects: the model omits many obvious features of the world, and surely some of those features are important to growth. But the purpose of a model is not to be realistic. After all, we already possess a model that is completely realistic - the world itself. The problem with that 'model' is that it is too complicated to understand. A model's purpose is to provide insights about particular features of the world. If a simplifying assumption causes a model to give incorrect answers to the questions it is being used to address, then the lack of realism may be a defect. (Even then, the simplification - by showing clearly the consequences of those features of the world in an idealized setting - may be a useful reference point.) If thesimplification does not cause the model to provide incorrect answers to the questions it is being used to address, however, then the lack of realism is a virtue."

So, I thought that was kind of interesting, and helpful. Economics, in general, seems to be about this kind of stuff. We will sometimes imagine a world in which there is only one good, and "consumption" is a determinant of utility, and that people only live for two time periods, in order to better understand what the effects of interest rates are on labor supply, or expected future wages are on one's present demand for leisure. My background is qualitative research, and I think I have kept wanting to do economics like an ethnographer. I wanted to give as detailed and as rich of a description of the real world as I possibly could. But now I am kind of seeing, and beginning to appreciate, just what it is that this math does. I don't quite get it, but the lights are beginning to dawn on me.