Tuesday, December 05, 2006

Views on economics and economic modelling

"All models are wrong, but some are useful."

In a post that rips into complex models (including economic ones), Megan attributes this quote to her advisor.

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In a rather technical (still accessible to outsiders) discussion of the contributions of Edmund Phelps, this year's Nobel winner in economics, Joseph Stiglitz takes a dig at a certain school of economics:

... [A] school of modern macroeconomics ... assumes rational expectations and perfectly functioning markets. In other words, individuals - usually assumed to be identical - fully use all available information to forecast the future in an environment of perfect competition, no capital market shortcomings, and full insurance of all risks. Not only are these assumptions absurd, but so are the conclusions: there is no involuntary unemployment, markets are fully efficient, and redistribution has no real consequence. But, while government policies, according to this school, are ineffective, that matters little. Because markets are always efficient, there is no need for government intervention. More perniciously, many supporters of this view, when confronted with the reality of unemployment, argue that it arises only because of government-imposed rigidities and trade unions. In their "ideal" world without either, there would, they claim, be no unemployment.