Just got to Paul Krugman’s criticism of Economics in the Sunday New York Times magazine. Members of the profession are excoriated for being beguiled beyond the bounds of decency by mathematics. Groan! Why do mid-life crisis always lead to proclamations that theory is dead? The militantly middle of the road columnist David Brooks has also joined in while promoting the behavioral cause. I suppose being middle of the road is hard since one has to avoid oncoming traffic in both directions.
These and other criticisms brought to mind Capra’s series of WWII films, `Why We Fight.’ They were conceived to convince an isolationist nation about the need to fight the Nazis. No, I’m not comparing the atheoretical unwashed to the Nazi’s. But it did inspire a desire to take up my puny cudgels in defence of mathematical modeling. Herewith, 3 of the usual objections to quantitative models and responses.
Objection #1: Not everything can be reduced to numbers.
True. But a great deal of importance can.
Objection #2: Workable Quantitative models cannot capture the complexities of real life.
So what? The question is not whether a particular quantitative model accurately represents reality but whether there is an alternative model that is more accurate. How do we know that a decision arrived at by what we are pleased to call instinct, intuition or experience has really acknowledged all the complexities of reality? Indeed, one of the beauties of quantitative models is their explicitness. Like Cromwell’s portrait they appear warts and all.
Simple quantitative models frequently provide profound qualitative insights into the process being modeled. Thus, one may wish to build a model not so much to decide what to do, but to test and refine ones intuition about what is going on.
Objection #3: Quantitative models ignore the context.
Yes. However, there is no law that obliges one to follow the recommendations of a quantitative model that is not appropriate to the context. Second, ignoring the context can be a good thing because the context of the decision is irrelevant. A quantitative model often captures the essence of a decision, say, the choice between a gamble and a sure thing. It does not matter whether the context is the stock market, a medical diagnosis or wildcatting. This allows for the transfer of insight from one setting to another.
The Leisure of the Theory Class 
2 comments
December 12, 2009 at 2:27 am
beau
You are fighting a straw man. Krugman has always praised the value of modelling in economics:
http://web.mit.edu/krugman/www/formal.html
December 22, 2009 at 10:59 am
Agent Continuum
The issue seems to be, why we model with closed, general equilibrium models with explicit microfoundations, i.e. why we hold ourselves and everyone else to this standard?
I think the answer is twofold. First, with enough free parameters and fudge-factors, you can get whatever result you want but it’s meaningless. Second, this standard is the natural response to a series of failures and disenchantments with previous standards and practices within the macro- field.
Is this standard costly? Of course. There’s a lot of stuff you’d want to say but you can’t say in that framework and it so happens that those are things that Krugman (and old style Keynesians want to say).
Both Keynesians and neoclassicals think that price- and wage-setting behavior is probably very important over the cycle. It’s just that Keynesians don’t allow themselves to be constrained by what they can say in a rigorous manner (see, for example, the pile of steaming Calvo they use and call it “microfounded”… phew!).