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An Eclectic Economist Explains Evidentiary Economics

Economics based on evidence rather than ideology and ignorance.

Model Behavior

by Dr. Doug Cardell

No, this is not an article about manners but something far more interesting. This article is about models like model cars or model airplanes but a bit more sophisticated. You might be surprised to learn that most of what people know, they don't really know; they have a simplification of what they are trying to know called a model. Most of life is beyond complete human understanding, so we simplify. Sometimes these models are mental constructs, sometimes, they take the form of graphs or equations, and sometimes they are physical representations like model airplanes or dolls. These models are more than useful; they are essential to our understanding of the world, but too often, we forget that they are simplifications and, therefore, not entirely accurate. Let's talk about dolls; most dolls are models of human beings. However, even the most accurately created, anatomically correct doll is an incomplete model. It is a simplified representation of a person. It might be great for seeing how clothes look on it or learning the basics of human proportions, but it is worthless for understanding the circulatory system. Anything modeled with complete accuracy in all aspects is no longer a model but a copy. As a copy, it loses its value of simplifying reality to make it easier to understand. Understanding the limited accuracy of models is important because virtually all human beings tend to extend their mental models beyond their effective range. They metaphorically look inside the doll and decide that humans are full of cotton. Sometimes people use models that don't capture the situation's reality. For example, John F Kennedy and others have used "a rising tide lifts all boats" to describe the idea that everyone benefits when the economy is doing well. But a rising tide lifts all boats equally, which is not true of an increasing economy because it doesn't reflect the differences in boats. A better nautical analogy would be a strong tailwind propels all boats. This metaphor (metaphors are models) captures the notion that the extent to which tailwind helps depends significantly on the boat. Small sails will not benefit a large boat as much as large ones will propel a small boat. If a rising tide is supposed to lift all boats and doesn't, then something is wrong with the tide, i.e., the system. So people are shocked when the promised economic benefit is not delivered equally and blame the system. If Kennedy had chosen the metaphor that a tailwind advances all boats but differently, then it would be clear that the problem is not with the wind or the system, just different boats, and no one is disappointed. In every area of human endeavor, the misuse of models has serious consequences. When I discuss these things, someone always brings up the "exact" sciences and claims that formulas in physics must be correct. The formulas (another kind of model) are like all models incomplete generalizations. Experts in the natural sciences using mathematical models are generally more successful than social scientists; however, even those mathematical models have failings, like the example of the doll. They are never entirely accurate because they are simplifications. The failure to thoroughly understand the present makes predicting the future impossible. Let's look at an example from physics (you don't need to know any physics to follow along). The equation, which is a mathematical expression of a model, predicts the speed of a falling object at a future time using the equation V = V0 + gt, where V is the velocity of the object at any time, V0 is the initial velocity, g is the acceleration caused by gravity and t is time. This formula appears simple enough; if one knows V0, g, and t, one can precisely calculate V. However, it is not nearly as simple as it appears. An engineer would quickly point out that this equation only applies at standard temperature and pressure in a vacuum. These conditions never exist in the actual world and provide only an estimated range of possible outcomes. In each set of circumstances, it may be possible to predict a ninety percent probability that a given object of a specific size, shape, and weight falling for six seconds in the air on Earth with an initial altitude of sixteen thousand feet with the barometric pressure being between 27.9 and 28.1 inches of mercury with the temperature being sixty-two degrees Fahrenheit will be falling between forty-five and forty-nine meters per second. Given such a simple formula, the non-engineer might wonder why the answer is uncertain. The engineer would answer that too many variables are not included in the formula to make a more precise calculation possible. For example, every cubic meter of air through which the object falls encompasses roughly ten septillion molecules in independent motion. Each of them interacts with the others and the object in unpredictable ways. To arrive at an absolute answer, one must, among other factors, be able to predict the position and motion of each of these septillion molecules. It must also account for unpredictable temperature and pressure changes as the object descends. The equation we began with is a terrific model. It perfectly explains the relationship between velocity, gravity, and time, but application to any specific situation will always be an approximation. At this point, people always ask about climate models and climate change. Climate models suffer from all the same problems as models in general. Is the climate changing? Yes. Do we know all the variables affecting it and the effect each of them has on the climate? No. Anyone who reads a lot of scientific journals can tell you that new research is published every day that discusses previously unknown factors. My previous article on climate change addresses some of these issues. Economic models are far less precise than those in the physical sciences because economics is the study of the individual choices and actions of about 8 billion people. As a result, economic predictions are no better than an educated guess. Since you use models in pretty much every decision you make, it is critical to your well-being to practice challenging your models. It is always essential to be aware of their scope and limitations when you make decisions. You wouldn't want to make an mistake like examining a doll and concluding that people are stuffed with cotton..

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