Do Economic Models Need to Be Realistic to Be Useful?
“All models are wrong, but some are useful” is a slogan which is well-known among economists due to statisticians Box and Draper. But what does it mean? Should economic models be realistic in order to be useful?
Many philosophers of science and economists tried to answer this same question and, we should be clear from the beginning, no concluding answer has been found so far. Still, some important contributions have been made.
Mill’s Perspective
John Stuart Mill (1836), an English philosopher and political economist, concluded that everything holds as an approximation. In his view, errors arise — by part of economists — from trying to predict an actual result, while presenting a tendency.
It means that for Mill economic models hold “everything else being equal”, so that if we change just one variable— of the infinite number of variables that affect the economy — we should experience the same effect as predicted by the model. It is clear that a situation like this is very unlikely. Normally, many variables change at the same time and contribute together to fluctuations in the economy, and often those variations are difficult to foresee.
The Concept of Credibility
Another main point has been made by Milton Friedman, Nobel Laurate in Economics (1976), who argued that if the model works, meaning that it has a sufficient degree of accuracy in forecasting, then it does not matter whether it is realistic or not. The model works, therefore it is a good one. No matter what the premises are and how realistic they are.
Robert Sugden, Professor of Economics at University of East Anglia, concluded instead that in an economic model it is not relevant whether it tells the truth or not but whether it gives a description of how the world could be.
So what? It is all a matter of credibility. It is not important that assumptions of economic models correspond with any particular real-world situation but, instead, that they seem adequately representative of reality. So, if it seems credible, it is a good one.
Conclusion
As we have argued at the beginning, no final conclusion has been reached so far. But a more recent view has gained more and more prominence among economists. It is the idea that in economics we should rely as much as possible on experiments in the laboratory. It is an appealing concept as it moves the science of economics closer to other disciplines, such as medicine and physics, in which labs are widely used.
A major problem of this approach is evident, however, also to non-experts: how can we reproduce the economic system of a country (or more countries) in the lab? Obviously, it is not possible.
