But in economics, core and oft-used assumptions necessary to make many theories work, such as “everyone has perfect information,” are unrealistic not in the sense of stripping out real-world aspects that are noisy, but in adding properties that are not observed or even well-approximated in reality. Yet they are deemed valid and those who protest are referred to Friedman. Economists may argue that that isn’t the case, that the “perfect information” assumption simply serves to eliminate the role of bad information in decisions. But the sort of all-encompassing knowledge often posited to make a model work goes well beyond that. Similarly, “rational” economic actors are super-beings with cognitive and computational capabilities beyond those of the best computers, capable of weighing all that perfect information.
Friedman and his followers have a ready defense. The assumptions don’t matter; all that counts is that the theory “works.” Even though Samuelson wrote a harsh criticism of Friedman’s “unrealistic” assumptions, both wanted economics to be “scientific.” The sort of science they had in mind was what philosophers call “instrumentalist,” which judges a theory by its predictive power alone…
But it is actually difficult to prove anything conclusively in economics. In fact, some fundamental constructs are taken on what amounts to faith.
Tuesday 27 September 2011
Economists Defending the Use of Models ☀
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