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There is a problem with the simple economic models that don't claim to predict real world behavior because they capture only one aspect of reality (everything e

by ntoshev 10y ago

There is a problem with the simple economic models that don't claim to predict real world behavior because they capture only one aspect of reality (everything else being equal...). They are not really scientific because they are not falsifiable. Math works and it seems to reflect reality, but we have no epistemic mechanism to verify this. If we can do this eventually, then perhaps we can make our way to models that capture a larger fraction of the truth and can be tested against reality.

x5n1 10y ago
If you have big data about all transactions occurring in real-time, along with socioeconomic factors on all the actors, it is not difficult to verify models and see how well the relationship between their dependent and independent variables holds up in the real world.
- mjohn 10y ago
  That is a big if. Nobody has data for all transactions occurring in real time and nobody knows all the socioeconomic factors for all the actors. Even if you did have all of that data, you would still be missing a lot of data. For example, an important factor in economics is asymmetric information. An actor's decision may be optimal given the information available to them at the time even if the decision is suboptimal given perfect information. So for an even more accurate model, you would also need to have data on what each actor knows at any given point in time. Furthermore, an actor probably does not have the ability to calculate the optimal outcome given the information available and there are innumerable subjective factors in economic decision making. Big data will help you find some kind estimate, but it will not suddenly make economic modelling simple.
mjohn 10y ago
Economic models that don't claim to predict real world behaviour are like thought experiments (with more maths). Their purpose is to help people understand that small isolated part of the whole, because a model that includes all the complexities of the real world would be incomprehensible. Nonetheless, many of these models are still falsifiable. For example, the textbook model of the benefits of trade due to comparative advantage only contains two countries and two goods. Although extremely simplistic, the theory does have falsifiable predictions and there is good empirical evidence supporting the broad theory. But this simple model will not be able to accurately predict how much a particular country will benefit from free trade.

by ntoshev 10y ago

x5n1 10y ago

If you have big data about all transactions occurring in real-time, along with socioeconomic factors on all the actors, it is not difficult to verify models and see how well the relationship between their dependent and independent variables holds up in the real world.

mjohn 10y ago
That is a big if. Nobody has data for all transactions occurring in real time and nobody knows all the socioeconomic factors for all the actors. Even if you did have all of that data, you would still be missing a lot of data. For example, an important factor in economics is asymmetric information. An actor's decision may be optimal given the information available to them at the time even if the decision is suboptimal given perfect information. So for an even more accurate model, you would also need to have data on what each actor knows at any given point in time. Furthermore, an actor probably does not have the ability to calculate the optimal outcome given the information available and there are innumerable subjective factors in economic decision making. Big data will help you find some kind estimate, but it will not suddenly make economic modelling simple.

mjohn 10y ago

Economic models that don't claim to predict real world behaviour are like thought experiments (with more maths). Their purpose is to help people understand that small isolated part of the whole, because a model that includes all the complexities of the real world would be incomprehensible. Nonetheless, many of these models are still falsifiable. For example, the textbook model of the benefits of trade due to comparative advantage only contains two countries and two goods. Although extremely simplistic, the theory does have falsifiable predictions and there is good empirical evidence supporting the broad theory. But this simple model will not be able to accurately predict how much a particular country will benefit from free trade.