Economic models as fables

PNM-logoDifferent knowledge disciplines mean different things by the verb “to understand”.   For economists and physicists, a domain or a problem is not understood unless and until it is modeled, and often only by a particular type of model.    For most economists, for instance, agent-based models do not provide understanding, because they only show sufficient and not necessary conclusions.    For mechanical engineers, understanding usually only comes from a physical prototype.  For computer programmers, understanding happens through and with the writing of a software programme for the problem.  For legal scholars, it arises with and from the writing of a narrative text reflecting on the problem and its issues.
Here is economist and game theorist Ariel Rubinstein on models in economics:

The connection between the models in economic theory and reality is tricky.  I do not think that many of us take our models seriously enough to view them as platforms for producing accurate predictions in the same way that models in the sciences are viewed.  When comparing a model to real data, we hope at best to find some evidence that  “something” in reality is close to the model’s prediction.  Experiments are used to verify assumptions and conclusions. Should we change a model if one of its assumptions is experimentally refuted?” [p. 871.  Rubinstein goes on to describe a case of a paper which was rejected because its experimental results conflicted with theory.]
As economic theorists, we organize our thoughts using what we call models. The word  “model” sounds more scientific than  “fable” or “fairy tale” although I do not see much difference between them.  The author of a fable draws a parallel to a situation in real life.  He has some moral he wishes to impart to the reader. The fable is an imaginary situation that is somewhere between fantasy and reality.  Any fable can be dismissed as being unrealistic or simplistic, but this is also the fable’s advantage. Being something between fantasy and reality, a fable is free of extraneous details and annoying diversions. In this unencumbered state, we can clearly discern what cannot always be seen in the real world. On our return to reality, we are in possession of some sound advice or a relevant argument that can be used in the real world.
We do exactly the same thing in economic theory.  A good model in economic theory, like a good fable, identifies a number of themes and elucidates them. We perform thought exercises that are only loosely connected to reality and that have been stripped of most of their real-life characteristics. However, in a good model, as in a good fable, something significant remains.
Like us, the teller of fables confronts the dilemma of absurd conclusions, because the logic of his story may also lead to absurd conclusions.
Like us, the teller of fables confronts the dilemma of response to evidence. He wants to maintain a connection between his fable and what he observes; there is a fine line between an amusing fantasy and a fable with a message.
Like us, the teller of fables is frustrated by the dilemma of fableless regularity when he realizes that sometimes his fables are not needed to obtain insightful observations.
Like us, the teller of fables confronts the dilemma of relevance. He wants to influence the world, but knows that his fable is only a theoretical argument.
 . . .
As in the case of fables, absurd conclusions reveal contexts in which the model produces unreasonable results, but this may not necessarily make the model uninteresting.
As in the case of fables, models in economic theory are derived from observations of the real world, but are not meant to be testable.
As in the case of fables, models have limited scope.
As in the case of a good fable, a good model can have an enormous influence on the real world, not by providing advice or by predicting the future, but rather by influencing culture.[Footnote:  I use the term  “culture” in the sense of an accepted collection of ideas and conventions that influence the way people think and behave.]
Yes, I do think we are simply the tellers of fables, but is that not wonderful?” [pp. 881-882]

Ariel Rubinstein [2006]: Dilemmas of an economist theorist. Econometrica, 74 (4): 865-883.

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