Economists are often mocked for using highly simplified models that do not reflect reality. The tone of this mockery got angrier after the 2007-2008 financial crisis, when critics argued that economists were blinded by a few highly mathematical models and an ideological belief in “free” markets.
In a new and compelling book “Economics Rules” Dani Rodrik, a Harvard economist, has come up with a defense of the economists’ toolkit – those maligned models. Rodrik argues that reality is so complex you have to simplify situations to be able to analyze cause and effect:
“Simple models of the type that economists construct are absolutely essential to understanding the workings of society. Their simplicity, formalism, and neglect of many facets of the real world are precisely what makes them valuable. These are a feature, not a bug. What makes a model useful is that it captures an aspect of reality. What makes it indispensable, when used well, is that it captures the most relevant aspect of reality in a given context. Different contexts – different markets, social settings, countries, time periods and so on – require different models. And this is where economists typically get into trouble. They often discard their professions’ most valuable contribution – the multiplicity of models tailored to a variety of settings – in favor of the search for the one and only universal model. When models are selected judiciously, they are a source of illumination. When used dogmatically, they lead to hubris and errors. ”
Prior to the financial crisis Rodrik was regarded by some economists as a bit of a maverick for the models he straddled. So he probably enjoyed writing this book.
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