When "Model" Behavior is Dysfunctional

Rigidity in a fluid reality, is a constraint on progress with rewards for the powerful.

Reading about the conflicts over banking in the 1820s and 30s, I’m struck by the rigidity of the positions that partisans took over the cause/effect dynamics of the economic system.  We now call such theoretical positions “models” and view them as simplifying abstractions which help us make critical policy decisions.

Or do they? 

A model is an intellectual “machine,” an imagined map of reality with much of the complexity of real life removed. We use it to predict and influence the future. If we accept the model, we will change things in the present to accomplish desired ends in the future. Make adjustments in interest rates, for example, to increase investment. But here’s the problem. We want our cake and eat it to. That is, we want to take steps in the present that cost us the least (and perhaps benefit us the most) and we want to justify them by claiming that they will benefit society in the long run. That depends of course on our having the “right” model.

Hence current partisan debates are often more about the models we ought to be using than about the realities that underlie them. This often results in our viewing the results in a biased fashion, so that if expected predictions appear to have occurred, the model is proved right, and the self-serving policy inputs that were made, worth repeating.

And there is an even more tragic outcome of reliance on particular models. They limit our present policy choices—when the model predicts that such “inputs” would result in bad outcomes. Many models teach us “that we can’t get there from here.” Such models “prove” that “excessive” moral hopes are mere eccentric notions.

Why such reliance on models, any models?

Well, they sound scientific and most of us don’t consider the extent to which they are reductionist, that is they eliminate relevant factors (by calling them exogenous) to the extent possible to allow both ease of comprehension and persuasive communication. Thus, they don’t just simplify, they oversimplify the world. While they give people a false security, it is at the price of narrowing our choices and limiting our productivity.

When we allow models to enact law and administer policy, we place constraints on innovation and rigidify a fluid economy.

By this we gain stability, but we lose opportunities.  Consider this particularly in patent and copyright law.  The law systemizes and limits the possible interactions between innovation ideas, viable products and commercial development.  The cost is less value production and more value taking (less real progress and more wealth transferred to non-productive individuals).  Cf. “Making and Taking in the Global Economy” by Mariana Mazzucato, pp. 202 to 206. 

[It is important in this context to point out that Dr. Mazzucato represents a school of economic thought that is unorthodox to some traditional approaches to the subject, although to some of us quite persuasive.  As many of you probably know, contemporary economists champion radically different understandings of macroeconomics and social reality.]

Can this be changed?  Models are powerful spells, cast by the most solemn and influential of men and women. They are offered to the general public as safe havens and battle proved truths.

We will always rely on clarifying analyses that sharpen our awareness of cause and effect. But they need not be sacred relics carried in processions of true believers. We can broaden our economic outlook and must learn to differentiate between reality and models of reality.  That will clear some of the deck and provide more space for new experience-based understandings, i.e. better models.