The Value of Sim­ple Mod­els, with Exam­ples of Eco­nomic Dynam­ics

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Guest post by Geoff Davies

Many peo­ple, includ­ing many het­ero­dox econ­o­mists, under­stand that the neo­clas­si­cal equi­lib­rium approach to under­stand­ing economies is futile and mis­lead­ing [1], because mod­ern economies are far from equi­lib­rium. The neo­clas­si­cal pre­dic­tion of equi­lib­rium or near equi­lib­rium requires a string of patently absurd assump­tions. How­ever the devel­op­ment of bet­ter the­o­ries seems to be sig­nif­i­cantly hin­dered by a feel­ing that any super­sed­ing the­ory has to be thor­oughly quan­ti­fied before it can be use­ful, and a feel­ing that the neo­clas­si­cal the­ory has set a bench­mark for sophis­ti­cated math­e­mat­ics that must be matched before another the­ory can be respectable. Less fun­da­men­tally there seems to be a com­mon per­cep­tion that empir­i­cal insights can only be gained through elab­o­rate sta­tis­ti­cal treat­ments of obser­va­tions.

Here I offer some dis­cus­sion from my expe­ri­ence as a nat­ural sci­en­tist, and some exam­ples regard­ing the Global Finan­cial Cri­sis, to counter these hin­drances. Use­ful and rel­a­tively sim­ple mod­els can be con­structed that can imme­di­ately over­come major neo­clas­si­cal lim­i­ta­tions, for exam­ple by per­mit­ting non-equi­lib­rium behav­iour. The solu­tion of the math­e­mat­ics can be done using very stan­dard numer­i­cal inte­gra­tion meth­ods that are read­ily avail­able in com­mer­cial pack­ages. Math­e­mat­i­cal machismo is not required. There are also sit­u­a­tions in which the empir­i­cal les­son is obvi­ous with no analy­sis, as will be noted here.

I should be clear that there are cer­tainly many mod­ellers who oper­ate out­side neo­clas­si­cal con­fines, reported for exam­ple in Beinhocker’s excel­lent sur­vey of “com­plex­ity eco­nom­ics” [2]. The lessons offered here will not be news to them. Also some of them are con­struct­ing quite com­plex mod­els that are nev­er­the­less very instruc­tive, such as mod­els with many inter­act­ing adap­tive agents. This arti­cle is prompted by my read­ing of some het­ero­dox blog dis­cus­sions, and is addressed to any­one who may have some dif­fi­culty see­ing how to move beyond the neo­clas­si­cal approach. Nor are the mod­els here are offered as orig­i­nal inves­ti­ga­tions, though they may lead to such.

Read the whole piece on Geoff’s blog.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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