In a sense, Rodrik is saying economic models are thought experiments in alternate universes. Those alternate universes are created from the different economic assumptions. The picture above has a collection of universes with positive, negative and zero cosmological constant; however, the assumptions in economic models of perfect competition or satiation of preferences (or transitive preferences themselves) create e.g. different Arrow-Debreu universes with different properties.
What it comes down to is that if you want to use your alternate universe model to address policy in our universe, you're going to have to:Information Transfer Economics
- Have fundamental theory that tells you when the assumptions are valid
- Empirically determine the assumptions are valid
- Prove that your model is independent of your assumptions
- Some combination of the above three
Thought experiments in alternate universes
Jason Smith
1 comment:
People are always going to look at what is happening, trot out a model and say, "Hey Look, this looks like it describes what is happening now" and then tomorrow somebody else will say, "Hey you were an idiot, that isn't what is happening, this is", and they'll toss yesterday's model in the bin and pull out something else.
When the inflation report or unemployment report comes out, everyone ignores the headline and immediately digs into the details to see what was rising and falling. Economies are weird things, where at different times, different things are important for different reasons. Different conditions for different real and financial products push and pull in all sorts of directions all at once. The more data and relations a model describes, the more plausible but more difficult to maintain and more backward looking and complicated to understand. The simpler the model the less real and useful but easier to work with.
Post a Comment