Friday, July 14, 2006

The trouble with models

Well-researched feature in the Economist on the limitations of macro-scale economic models. In particular, the computable general equilibrium (CGE) models deployed by governments and macro-players like the IMF to demonstrate the economic benefits of whatever measures they're proposing. Unsurprisingly, as even the Economist accepts, the results depend heavily on the presuppositions of their authors:
Most empirical exercises confront theory with numbers—they test theories against the data; sometimes they even reject them. CGE models, by contrast, put numbers to theory. If the modeller believes that trade raises productivity and growth, for example, then the model's results will mechanically confirm this. They cannot do otherwise. In another context, Robert Solow, a Nobel prize-winner, has noted the tendency of economists to congratulate themselves for retrieving juicy plums that they themselves planted in the pudding.
In a recent article, Roberta Piermartini and Robert Teh, two economists at the WTO, urge modellers to “demystify” their creations, making it clear to their audience what makes their models tick. A failure to do this, they argue, “risks bringing a useful analytical tool into disrepute and may even induce unwarranted cynicism about the economic case for open trade.”

An interesting read, if still weighted by the paper's usual doctrinal bent: In countries not cursed by socialism or war, the market is left to decide what to produce and in what proportions...
I'm still slightly confused as to how such a nebulous thing as 'the market' can exist and dominate when, as this feature repeats, there's not even such a thing as 'society'.



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