Models, methods and madness

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A link on Twitter sent me to the first chapter of Mary Morgan’s book, The World in the Model: How Economists Work and Think, titled ‘Modelling as a method of inquiry (pdf).’ In the chapter she sets out a brief history of the use of models in economics and argues that economists use models not to uncover economic truths but as a practical form of reasoning or enquiry.

The early economists used words to write about a few general laws – Malthus being a good example – and only a handful used anything like a model. She cites Quesnay’s Tableau Economique as the main example. By the late 19th and early 20th century the use of models had become more frequent – Edgeworth, Marshall and Fisher are cited. But not until the 1930s did modelling come to be ubiquitously used in economics, according to Morgan.

I think this understates the earlier use of modelling. Cournot and Condorcet came to my mind as I read the chapter. I also happen to be reading Roger Backhouse’s History of Economics, and his chapters on the 18th and 19th centuries cite quite a lot of relatively formal modelling such as the introduction of demand and supply curves. However, the reason for counting differently may be that Morgan equates modelling with mathematical notation, and I disagree with this narrow definition. Maps are models – think the London Tube map – and a historical account of the causes of the 2nd world war is a model too. Modelling is an effort to encapsulate causal relationships as parsimoniously as possible in the face of the complexity and messiness of the world. Economists like to use maths – more than ever, according to this paper – and probably too much so. But the maths could almost always be written out in words. Either “C=a + bY + ε” or or “consumption is proportionately  related to income, above a necessary minimum and subject to random shocks”.

However, I do agree with Morgan when she writes: “Models function both as objects to enquire into and as objects to enquire with.” She describes them as a way of making informal inference – or, when applied econometrically, of formal statistical inference. Again, though, though, this dual function seems to me to characterise many disciplines. Nor do I think economists only use models, which would be madness, although some do over-use them and fail to distinguish between the model and the world. As John Kay put it, citing Alfred Korzybski, the map is not the territory. Apart from statistical methods, historical reasoning and experiments also have an important place in economics.

The book looks interesting. I have a teetering in-pile at the moment but might put it on the for-later list.

 

 

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Economics and Mr Spock

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In my own small tribute to Leonard Nimoy, it seems appropriate to recall a 1997 article I wrote in The Independent pointing to Mr Spock, along with Hercule Poirot, as the ideal rational economic man. Economists seem particularly keen on the two genres of science fiction and detective fiction I argue there, and both Noah Smith and I have revisited that theme.

Live long and prosper!

Live long and prosper!

For all who don’t know it, Star Trek: The Human Frontier by Michele and Duncan Barrett is a fabulous exploration of why the series and films say so much about humanity and western culture.

What would Galbraith think about Google?

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I’ve been grazing along the shelf of my old Penguin economics texts and stumbled on this quote from J.K.Galbraith’s (1952) American Capitalism: The Concept of Countervailing Power (in M.A.Utton’s Industrial Concentration): “The modern industry of a few large firms is an excellent instrument for  inducing technical change. It is admirably equipped for financing technical development and for putting it into use. The competition of the competitive world, by contras, almost completely precludes technical development.”

 

Galbraith is talking complete nonsense, of course. As this little textbook points out in the next paragraph: “The supposed antithesis between price competition and innovation is false: they are different forms of the same competitive process. Innovation is competition.” Many is the oligopolistic industry that has failed to innovate. As Will Baumol pointed out in his book The Free Market Innovation Machine, big firms tend to do incremental innovation, while radical innovation tends to come from small entrants.

This is the heart of the competition debate about Google etc. Will some new entrant come along an torpedo it in the search market, or has it through its scale effectively foreclosed new entry? Critics of the EU competition authorities’ assault on Google (including this week Barack Obama – but listen here to Martha Lane-Fox demolish him) point to its continuing record of innovation; but from another perspective, that looks like it leveraging its scale advantages into new markets, something dominant firms always try to do. I’m with Tim Wu, whose fabulous book The Master Switch argues that the opportunity for new entrants to cause upheaval in technology and communication markets has always been created by a regulatory intervention.

  

To be fair to Galbraith, this being one of his books I’ve not read, this summary suggests he was not relaxed about oligopoly power; however, he suggests the ‘countervailing power’ of organised labour is the way to control it. I’m all for workers having adequate bargaining power in the labour market but fail to see how that fixes a lack of competition in product markets. Google’s workers are very well treated. I wonder what Galbraith would make of these modern business titans?

Curiosity without borders

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Recently I got C.P.Snow’s The Two Cultures down from the shelf, to refer to for my essay with Andy Haldane in January’s Prospect. It was recently reissued with Snow’s own 1964 addition of a reflection on the reactions to his 1959 lectures, and with an interesting introduction by Stefan Collini. This week I read the whole thing again.

What people remember is the vicious personal attack on Snow by F.R.Leavis, itself seeming to be an examplar of the chasm between the scientific and literary cultures that Snow had described.The essay is more balanced than this Punch and Judy version suggests: Snow certainly does not suggest that scientific knowledge is superior in any cosmic epistemological ranking. Both frames of reference are needed: “The clashing point of two subjects, two disciplines, two cultures… ought to produce creative chances. In the history of mental activity, that has been where some of the break-throughs came.”

What he does say is that the culture of the humanities dominated public life at the time, in the UK more than in the US and USSR, and that people from that literary culture did not feel the need to know the basics of the culture of science and technology. He suggests the attitude descended from the “Luddite” rejection of the Industrial Revolution by writers such as Ruskin and Blake, whereas, as the essay puts it: “With singular unanimity, in any country where they have had the chance, the poor have walked off the land into the factories as fast as the factories could take them.”

 

Snow also points to the class-bound conservatism of the English (I mean English, not British) education system. It elevated the classics and literature as the appropriate subjects for the grooming of the elite via grammar and public schools and the top universities. Science did find its place, but was looked down on – certainly where it shaded into engineering and technology. Unlike Germany, France or the US, engineering was not a subject for a gentleman to study; this was more appropriate for the lower social orders.

This seems to me largely true, of the 1950s and 60s, and even now. Why else would successive British governments still feel the need to proseletyse for the ‘STEM’ subjects, if it were not that we had such a big gap with other countries to close? When you sit watching ‘University Challenge’ on TV and shout out the answers, I’m prepared to bet that the scientists can answer a few more humanities questions than vice versa. Our education system still forces young people to specialise absurdly early and absurdly sharply in either the sciences or the humanities. We still have an education system that allows far too many people to emerge saying, “I’m no good at maths,” which is like saying “I’m no good at thinking,” when it’s just that the symbols for getting thought onto paper or screen are different.

Snow insisted that the controversy missed the main point of his lecture, which was to underline the importance of scientific culture for economic development in poor countries. Here, though, his argument is – with hindsight – naively optimistic. “Since the gap between the rich countries and the poor can be removed, it will be,” Snow wrote. The scientific and technical knowledge being available, all that was needed was capital – a big task but a feasible one. Six decades later, it is clear that the gap can be closed but need not be. Electricity and indoor plumbing are very old technologies, as yet unavailable to very many inhabitants of poor countries, whereas mobile phones are a relatively new technology now available to and used by almost everyone in the world.

The missing element is what Snow described in his 1964 reflection as the third culture, the social sciences, and their perspective on “the human effects of the scientific revolution”. He blamed his English education, which meant he was “conditioned to be suspicious of any but the established intellectual disciplines.” 

I think the inhabitants of the culture of the humanities are broadly speaking at least as suspicious of the social sciences as they are of the natural sciences and technology: what they like about the social sciences are the historical and literary aspects, and what they dislike are the parts that use the scientific method, i.e.confronting human society with empirical evidence to test hypotheses systematically, even using maths. They often describe economists, for example, as suffering from ‘physics envy’. Maybe some do, but equations are just symbols for a prism on the world which might permit the testing of hypotheses. Even historians have models – hypotheses about causes and consequences – but they use words as their symbols, and sequences of events as their empirical evidence.

So I’m with Snow on the importance of crossing boundaries. He writes, “Unless one knows, production is as mysterious as witch doctoring.” Not enough people understand how things get made, whether cars or software systems. Not enough people understand how radio waves work or why epigenetics is worth getting your mind around. And not enough scientists read poetry, too. Here’s to curiosity without borders!

Advice from David Hume

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I delayed starting work this morning by re-reading my hero David Hume’s ‘Of the Balance of Trade’ from Essays, Moral, Political and Literary.

“How is the balance kept in the provinces of every kingdom among themselves, but by the force of this principle, which makes it impossible for money to lose its level, and either to rise or sink beyond the proportion of the labour and the commodities which are in every province? Did not long experience make people easy on this head, what a fund of gloomy reflections might calculations afford to a melancholy Yorkshireman ……. Any man who travels over Europe at this day may see, by the prices of commodities, that money, in spite of the absurd jealousy of princes and states, has brought itself nearly to a level; and that the difference between one kingdom and another is not greater in this respect than it is often between the different provinces of the same kingdom.”

Think northern vs southern Italy, and Milan vs Munich.

What matters, Hume argues here, is the “art and industry” of every nation – or province. The equilibrating flows can be blocked – “as any body of water may be raised above the level of the surrounding element” – but real is real and balances balance. If there is a large and persistent trade surplus in one area, and no exchange rate adjustments, the capital account consequence is inevitable.

Still, we are in for a deal more “absurd jealousy” before the Eurozone saga is over.

I have this Hume essay in the Essays volume but also in one of those fantastic old Penguin modern economics readings collections, International Finance edited by R.N.Cooper, published in 1969. The collection runs from Hume’s 1752 essay to 1967. There are tons of handbooks these days that aim to encapsulate the state of knowledge at the frontier (I say encapsulate but they are usually large tomes). It would be great to have the concise historical progressions once again – perhaps as web portals. Income distribution from Ricardo and Marx to Atkinson and Piketty. Financial bubbles from Jevons through Minsky to Farmer?