The need to ignore models that do not work

copernicus.jpg by David Paul Ohmer
Nobelist Krugman eviscerates macroeconomics:
[Via Climate Progress]

Here’s the conclusion of “How Did Economists Get It So Wrong?” a long, brilliant piece in the forthcoming NYT magazine by the leading progressive economist:

VIII. RE-EMBRACING KEYNES

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”

When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.

Read the whole damn indictment. Any politician, journalist or opinion maker who worships at the feet of the false gods of neo-classical economics is no better than Bernie Madoff (see “Is the global economy a Ponzi scheme?“).

[More]

A huge problem that we see again and again in so many areas is the need to continue using a model long after it has been shown to no longer reflect reality. An example would be the very complex epicycles that were developed to try and make the Solar system fit the views of Aristotle and Ptolemy.

Here, not only was the Earth at the center of the Universe, but every object orbited the Earth in perfect circles. Perfection of the model was more important than reality. So, as more data became available, the orbits had to remain circular, requiring some very complex adaptions to make the model continue to fit.

Even Copernicus did not fully correct the model. He still thought that all the orbits were perfect circles. He still felt that epicycles were important. In fact, the only really advantage he proposed for his system was soe simple math to explain how perfect circles could still provide a model for the data.

It took Brahe, Kepler, and finally Galileo to kill the geocentric model for good. Galileo’s identification of the phases of Venus was the killing blow for the Ptolemaic view and it happened 100 years after Copernicus.

People hate to change a model, even when it no longer works. Many economists need to realize that the orbits are not circular, that the world is not perfect and assuming anything involving humans can be reduced to simple equations may be a recipe for disaster.

Technorati Tags: ,